By Nick Riddle
In 2010 the response of the insurance industry to the threat of piracy was confused; it lacked coherence and consistency. Part of that confusion resulted from the wording of the clauses drafted by the Institute of London Underwriters that still form the basis of the conditions applicable to most hull and machinery insurance policies underwritten in the London market against both marine and war perils. Under these clauses the risk of piracy was covered as a marine peril and thus specifically excluded from war risks coverage. At the same time, other conditions in common use, such as the Norwegian Plan, included piracy as a war risks peril.
In an attempt to bring clarity, Marsh has published new Marsh War and Strikes clauses (8/9/10), which are the result of a two year project involving ship owners, key insurers and insurance lawyers. These new clauses incorporate a variety of benefits including bringing the piracy peril firmly within war risks coverage.
The activities of Somali pirates highlighted the ambiguity of the clauses. An example of this is that while piracy is excluded from the Institute War and Strikes Clauses, ‘loss of or damage to the vessel caused by any terrorist or person acting maliciously or from a political motive’ is included in the coverage. Could it be proven that the ransoms were funding political activity, loss of or damage to the vessel would be covered as a war risk. If the motivations of the Somali pirates were considered to be for personal financial gain, however, then ships would not be covered, at least under war risks.
Many insurers now require that the peril of piracy is moved from the marine hull policy to the war risks policy as part of renewal discussions, regardless of the original policy conditions. The payment in war risks policies of an additional premium when ships are considered to be at high risk is one of the reasons for this decision.
The London insurance market’s Joint War Committee retains a security consultant to provide advice on maritime war risk issues. The committee compiles a list of areas of perceived high risk for the insurance community under the guidance of this advisor. Each war risks’ insurer therefore can make an informed decision whether to issue the necessary notice of cancellation to individual insureds to impose an additional premium to reinstate cover on ships trading into particular zones (known as “listed areas”).
With the greatest concentration of naval ships deployed to combat piracy operating in or close to the Gulf of Aden, the pirates have shifted their focus further east, meaning commercial shipping is now statistically more vulnerable in Indian waters than it is in Yemeni waters.
The Joint War Committee has subsequently extended the area of perceived enhanced war risk eastwards to within 12 nautical miles of India’s west coast and southwards to Latitude 12º S. The operators of any ship operating in the Indian Ocean north of a line drawn from the top of Madagascar to the bottom of India now needs to notify its war risks insurers and may be required to pay an additional premium to ensure coverage is uninterrupted.
Some war risks insurers discount rates for voyages through the listed areas if they are satisfied with the piracy prevention measures in place and / or if kidnap and ransom cover is purchased with an appropriate limit. Marsh has achieved reductions of up to 50% to the war risks additional premium for a ship trading via the Gulf of Aden that is separately covered for kidnap and ransom (K&R), and more if an armed security team is on board.
The average duration of hijack by Somali pirates is now over four months before ships are released, and the average ransom paid is reported to have more than doubled over the last 12 months. Increasingly, where flag state regulations allow, ship owners are employing armed security firms to accompany their ships. Despite fears of escalated violence, this has proved an effective deterrent.
We are now beginning to see the use of motherships in copy-cat attacks by pirates operating outside the Indian Ocean. Many waters where pirates are active are already included within the listed areas, including Nigeria, the Malacca Straits and the seas around the Sulu Archipelago. War risk insurers will continue to keep a close watch on developments there and elsewhere.
We have also seen the first instances of Somali pirates kidnapping the crew but leaving the ship and cargo behind. This changes the dynamic considerably. If the ship or its cargo is neither damaged nor seized by the pirates, the cargo insurers will be less directly involved, but may still be required to contribute to the payment of a ransom under general average. War risks insurers may still participate if an insured ship owner has a liability to pay a ransom. Most war risks policies today include an extension covering a ship owner’s liabilities as a result of war risks limited to the ship’s insured value (known as war risks protection and indemnity or “war risks P&I”), but this will depend upon the interpretation of any extension in place.
Although it may be assumed that in these circumstances the ship’s liability insurers, covering among other risks a ship owner’s legal liability as an employer of crew, would become directly involved, this may not be the case. Protection and Indemnity (P&I) clubs provide marine liability cover for the great majority of world shipping, but specifically exclude liabilities as a result of war risks, which is why “war risks P&I” is an important extension to war risks policies.
The P&I clubs jointly issued a briefing that addressed this issue in June 2009, summarising responses to frequently asked questions relating to piracy. This made it clear that liability to pay a ransom is not a risk expressly covered by the clubs and, in the case of one club, is an express exclusion.
The briefing also noted that liabilities ‘arising from a piracy incident which involves the use / engagement of “weapons of war”’ may be excluded from P&I cover. Beyond possibly excluding liability in respect of kidnapped crew, this could potentially extend to exclude pollution, wreck removal and cargo liabilities.
The 2009 briefing also recognised that the conditions of club coverage had no definition of “weapons of war”, but did stipulate that “something more than guns / rifles / conventional ammunition would be needed to trigger the exclusion”. The use of rocket propelled grenades by pirates would appear to be ‘something more than guns’, but this was not addressed by the clubs.
If a trend develops where pirates seize the crew, but leave the ship and its cargo behind, the P&I clubs may face pressure to reconsider their position. However, they are likely to suggest ship owners look first to the war risks policy and any war risks P&I extension in place. This highlights the importance of ensuring war risks coverage is properly drafted and placed with insurers that will not seek to avoid a proper claim.
Even greater levels of security can be achieved by purchasing K&R insurance, which may have the added benefit of allowing for a discount on war risks coverage. As well as ensuring the ship owner has the financial means to pay a ransom, K&R insurance also puts in place a support structure necessary to secure the release of kidnapped seafarers.
The K&R market has evolved rapidly in 2010. One previously committed insurer withdrew from the market as a result of claims’ experience. Another long established market participant has increased premiums to the extent that it has virtually priced itself out of the market. Remaining insurers are focusing on the preventative measures put in place when costing each submission. Fully equipped “citadels” with communication to the outside world and the capability to shut down engines, the employment of guards (particularly on ships with a freeboard less than three metres) and the use of razor wire on ships with freeboard of four metres or less, to provide layers of defence, will all help a ship owner secure reasonable terms. The ship’s age and the operator’s history of pirate attacks are also factors that certain underwriters consider.
A number of the insurers providing K&R insurance also offer loss of hire or earnings cover for the period a ship is held by the pirates. This can be arranged for either the ship owner or the charterer dependent upon where the risk lies as determined by the charter party conditions. Normally this is packaged alongside K&R insurance, but some insurers will provide it on its own.
The P&I briefing in June 2009 highlighted issues relating to the provision of indemnities in respect of consequential loss and obligations to provide insurance cover if contracts are agreed with maritime security providers. These consequential liabilities and obligations may fall outside P&I cover, and the employment of security firms may potentially trigger the P&I “weapons of war” exclusion. Before entering into these contracts, ship owners should seek guidance from their P&I and war risks insurers to minimise the possibility of restrictions to cover.
Nick Riddle is Senior Vice President at Marsh Limited