NEWS / ARTICLE

PIRACY UNDER MARINE INSURANCE POLICY

July 19, 2010 In light of the recent piracy incidents in the Gulf of Aden, insurers have been put again on a standby position in order to protect themselves against any possible claims brought by the assured under their marine insurance policies. Whilst obtaining a marine insurance policy - whether for a vessel or for cargo - remains the only reasonable precautionary measure to secure your interests against a peril, it is still doubtful whether the same would suffice in case of an incident involving piracy. How far the assured is protected against a piracy incident is not merely determined by the insurance policy, it is rather an imperative subject to the law governing marine insurance policies and how that law classifies piracy as an insured peril. Under English law, historically the position of piracy as an insured peril was tentative. For a period of time piracy was rather considered as a war risk and hence excluded from the list of insured perils under the standard marine insurance policy. A separate war risk cover was required. However, recently the position appears to have changed with the risk of piracy now regarded as a marine risk and hence covered under the Institute Clauses 1983. However, even though piracy is an insured peril, the onus to prove the act of piracy for successful recovery remains with the assured, in particular to establish that the act occurred was piracy and not terrorism, i.e. that the persons committing the act did so exclusively for their own material benefit, rather than pursuing a political, ideological or religious scope. Further, recovery by the assured becomes more intricate when the vessel is simply hijacked. The distinction between hijacking and piracy is roughly based on whether violence is used against the person (piracy) or whether force is used only to gain possession over the property (hijacking) and is important as in a recent case involving the hijacking of a vessel by pirates, the assured claimed an actual total loss under his marine insurance policy but the court dismissed the claim on the basis that even though the pirates had seized the vessel, the insured had still not been irretrievably deprived of it and was expecting its recovery due to ongoing negotiations with the pirates for the ransom.

Another important principle to be kept into consideration while claiming from the insurance is the duty under which the ship-owner has to mitigate its own losses. He must in fact demonstrate that he has performed his best endeavours to avoid harsher and further consequences of his losses. In this sense a payment of ransom by the insured to recover the vessel might be considered as an attempt to mitigate the loss, and when the assured successfully mitigates his loss by paying a ransom, the same could be simply recovered under the sue and labour expenses clauses contained in the insurance policy. Under UAE law, the matter becomes however more complex, as there is more ambiguity in the relevant provisions governing the recovery of losses due to perils of piracy. UAE law demands that a special agreement is entered into for the inclusion of acts of piracy under an insurance policy in accordance with article (381) of the UAE Maritime Commercial Law, Federal law No. (26) of 1981. Only where such a special agreement is in place the liability of the insurer can be triggered by an act of piracy. The controversial question remains whether such a special agreement is to be interpreted as a special cover equal to the war risk insurance, in which case the intention of the UAE draftsman could be interpreted as to include the piracy incident within the war risk insurance cover. However, it is to be noted that Article (382) of the UAE Maritime Commercial Law lists down exclusively all war risks and refrains from expressly including acts of piracy. The only possible remedy would therefore be to classify a piracy incident as a hostile operation occurred by authorities whether recognized or not, an option which most probably the assured would not go far with in the ordinary piracy case. Similar to the approach under English law, under UAE law the assured still has to demonstrate that he has done his best endeavours to mitigate his loss. Therefore, any ransom payments could be recoverable as expenses incurred to avoid an insured peril or to limit the extent of the damages, according to article (378) of the UAE Commercial Maritime Law. It is therefore evident from the above that although the shipping market has welcomed the inclusion of acts of piracy within the catalogue of insured perils, both common law and civil law jurisdictions have been reluctant to allow for an all too easy recovery of such claims. On the other hand piracy shall be an insurable peril, as otherwise its consequences would be catastrophic on world trade.

Nicola Kneizeh