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Piracy on the High Seas – Where are Insurers Going with Kidnap and Ransom Insurance?

Don't be alarmed, we're taking over the ship.”
 
The words of a Somalian pirate capturing another ship in the Gulf of Aden? Hardly. Those were the words of America’s favorite pirate, Jack Sparrow, as he prepared to commandeer the Interceptor. Of course, Walt Disney Productions did not need to purchase Kidnap and Ransom or other maritime insurance during the creation of the three Pirates of the Caribbean movies, but real-life shipping companies are faced with those decisions as piracy continues in the Gulf of Aden region.
 
More than 20,000 ships pass through the Gulf of Aden region annually, and last year pirates attacked 111 ships in the Gulf. Approximately 40 percent of those attacks resulted in pirates capturing the ships and demanding ransoms, with the typical ransom in the neighborhood of $3 million. Already this year, there have been more than 80 attacks and at least 15 successful hijackings. Although the U.S. Navy’s successful rescue of the captain of the MV Maersk Alabama captured our attention, that operation will likely have little if any impact on the level of piracy in the region.
 
The business model of Somalian pirates is to capture hostages, not cargo. Many large cargo ships and their cargo are worth $100 million or more, but cargo is impossible for a small group of pirates to move and sell. Capturing the crew and holding them as hostages is much more profitable, especially as long as insurers can charge insurance premiums that permit them to make a profit while paying a small number of ransom claims.
 
Maritime shipping companies have typically carried insurance to cover damage to their ships and to cover theft and damage to cargo. Such policies might exclude coverage for piracy and war risks, with coverage available for war risks with the payment of additional premiums, often depending upon the specific route of a ship. Thus, piracy might or might not be covered under typical maritime policies, and claims for the payment of ransom are especially questionable. Into this void, insurers have responded by creating specific Kidnap and Ransom policies. Such policies reportedly cost $30,000 and cover ransom claims up to $3 million, but many such policies prohibit insureds from disclosing the existence or costs of such insurance, as well as the resulting payment of ransom claims. Insurers fear that information about the existence of Kidnap and Ransom policies will encourage increased piracy. (So, if you are a pirate, represent pirates, lobby for pirates, or have business relationships with pirates, stop reading this article now and delete your browser cache!)
 
Kidnap and Ransom policies or riders for the maritime shipping industry first began to appear in significant numbers in late 2008. Thus, there has been no litigation involving the interpretation of such policies or the payment of claims. So what legal issues might arise in the future between insurers and insureds if piracy continues to increase?
 
After the hijacking of the Maersk Alabama, President Obama said that pirates should be held accountable, and many persons began to call for increased military action and the arming of crew members of cargo ships. Might an increased military response, while possibly proper government policy, create litigation between insureds and insurers? The Somalian pirates so far have not sought to harm crew members, but firefights between the military and pirates carry additional risks of harm to hostages. An insurer might take the position that crewmembers who are hostages under a Kidnap and Ransom policy have become victims of war or terrorism if military conflict arises, thus creating a potential legal dispute as to whether the Kidnap and Ransom policy is still applicable, especially if a war risks or terrorism exclusion exists.
 
The arming of crew members creates additional questions. Some commentators have expressed the concern that the arming of a cargo ship crew might cause that ship to be classified as a warship under international law or marine rating rules. Insurers who issue maritime or Kidnap and Ransom insurance are not in the business of insuring warships. In addition, many local governmental units and state governments have restrictions on the possession of deadly weapons. While not directly applicable to the coverage of a Kidnap and Ransom policy, if a cargo ship, with an armed crew to repel pirates, enters a port in a city or state that prohibits or restricts the possession of weapons, and then one of those weapons is used against any person, will there be any insurance coverage for the owner of the ship, or will the violation of the state or local gun law negate coverage? Or will federal law preempt the local or state gun law because the ship is in navigable waters?
 
Another issue that has just surfaced is whether crew members can sue their employer for failing to provide them with a safe work environment if their ship is hijacked. The Chief Steward of the MV Maersk Alabama has filed a lawsuit under the Jones Act, claiming that Maersk Lines created a hazardous work environment by not preventing the hijacking of the ship.
 
Attorneys who represent marine shipping companies and attorneys who represent maritime insurance companies may be faced with issues such as those outlined above if piracy continues to dramatically increase as it has in 2008 and 2009. In the meantime, it will be useful for legal counsel to begin to understand the applicable lingo.
 
Will Turner: “We're going to steal a ship? That ship?
Jack Sparrow: “Commandeer. We're going to commandeer that ship. Nautical term.”