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In brief - Wording of insurance clauses should be carefully checked

The rising number of piracy attacks near West Africa and South East Asia means that ship owners, charterers, carriers and importers need to consider this risk and possible consequences such as ransom payments and off-hire events in their insurance arrangements and charter agreements.

Shipping industry faces increased risk from piracy threat

Since the days of the fabled pirate Black Beard and dating back to the 13th century BC, the shipping industry has been threatened by the risk of piracy. The total cost of piracy on the global economy is reported at between $13 to $16 billion each year.

The Gulf of Aden (off the coast of Somalia) and more recently the West African coast and, in South East Asia, the Malacca Strait, the Singapore Strait and the Indonesian Archipelago are present "hot spots" for pirates where the number of attacks has increased dramatically in recent years. Some figures indicate that attacks off the coast of Indonesia have increased 700% in the past five years. (See Allianz Global Corporate & Specialty (AGCS), Safety and Shipping Review 2014)

Ransom payments can be substantial. As an example, in late 2011, Somali pirates captured the "Irene SL", a large crude oil carrier laden with cargo worth almost $200 million. A ransom of $13.5 million was reportedly paid to the pirates to secure the release of the ship, its cargo and 25 crew members who had been held captive for 57 days.

Piracy as defined in common law, the Marine Insurance Act and by the United Nations

At common law, piracy has been defined as "forcible robbery at sea, whether it is committed by marauders from outside the ship or from mariners or passengers within it. The essential element is that they violently dispossess the master, and afterwards carry away the ship itself or any of the goods, with a felonious intent." (See Republic of Bolivia v Indemnity Mutual Marine Insurance [1909] 1 K.B. 785)

It is also defined by the United Nations Convention on the Law of the Sea in Part VII Article 101 as including "any illegal acts of violence or detention, or any act of depredation, committed for private ends by the crew or the passengers of a private ship or a private aircraft, and directed on the high seas, against another ship or aircraft, or against persons or property on board such ship or aircraft…".

It should be noted that piracy is not always confined to acts against a vessel or its crew at sea. The Second Schedule of the Marine Insurance Act 1909 (Cth) under Rules for Construction of Policy includes rioters who attack a ship from shore in the general definition of piracy.

All-risks clauses may recognise piracy as an insured peril but not cover ransom or delay

In Australia, piracy is included in the definition of a "maritime peril" in section 9 of the Marine Insurance Act and is insured mostly under the marine clauses, rather than the War and Strikes clauses. Although an "insured peril" under standard hull insurance, care needs to be taken when insuring cargo and the like against the risk of piracy under an "all-risks" clause.

Traditionally pirates have predominantly focused on a ship's cargo and the contents of its safe which will (for the most part) fall for consideration under a ship's "all risk" cargo insurance. However, with the introduction and widespread use of containerised cargo, attention has shifted to hijacking of vessels and holding them, and their crew, for ransom.

Institute clauses generally do not cover loss or damage to cargo caused through delay, for example, when a vessel, its crew and cargo are hijacked, commandeered or held for ransom, even when the delay is as a result of piracy (as an insured peril).

Ransom payments may fall under allowable General Average disbursements

Although loss to a vessel or its cargo arising from acts of piracy may be covered by an "all risks" insurance clause, the wording of these clauses may not respond to pure ransom payments.

In the case of Metall Market 000 v Vitorio Shipping Company Limited (The Lehmann Timber) [2013] EWCA Civ 650, arbitrators in London and the Court found that both the capture of the vessel by pirates off the coast of Somalia where it was held for 42 days and a subsequent engine breakdown soon after its release were both allowable general average disbursements. Accordingly, as was held in the recent case of Mitsui & Co Ltd & Others v Beteiligungsgesellschaft LPG Tankerflotte MBH & Co KG (2014) EWHC 3445, the "Longchamp", in circumstances of piracy and ransom, it is possible to seek contribution from, for example, the ship's cargo (or its insurers), as part of the general average.

The rules governing general average (The York-Antwerp Rules 1994) are generally incorporated into contracts of carriage (for example, by bills of lading and charter parties). This version of the Rules is likely to be replaced by the 2016 version, recently amended at the CMI Conference in New York in May 2016.

Piracy, off-hire clauses, as well as detention and detour risks should be considered

In Cosco Bulk Carrier Co Ltd v Team-Up Owning Co Ltd (The Saldanha) [2010] EWHC 1340, the charter party did not contain any provision to take the vessel off-hire if it was hijacked or detained by pirates. Charterers were found to be liable for time charter hire for 69 days in which the vessel was detained by pirates, leading to accumulated hire charges in excess of $3.5 million.

Parties to charter parties should check their agreements and insurance arrangements to ensure that consideration has been made for piracy, particularly with respect to what comprises an "off-hire event".

When shipping perishable goods or where goods are being shipped under a time sensitive contract through a piracy prone area, consideration should also be given to seeking an endorsement or extension of the policy to take into account considerations of piracy, including the risk of detention or the requirement to detour from a set course in times of peril.

Shippers, carriers, charterers and importers should be aware of the risk and consequences of piracy

Shippers, carriers, charterers and the like should ensure that the wording of their clauses is right for them, the cargo being shipped and the risks associated with the contemplated voyage.

In light of the ever increasing risk of piracy in the South-East Asian region, it would appear to be of benefit to consider whether your insurance and charter agreements accommodate the risk of piracy and any consequential losses which may arise from that.

Importers should also consider the implications of delay caused by the capture and detainment of a vessel or by course deviation caused by acts of or the threat of piracy on their supply chain and logistics arrangements.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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