The maritime news continues to be filled with articles about pirate attacks in the Gulf of Aden, while piracy also continues less reported in several other key areas such as Nigeria, the Philippines and Brazil. There has been some discussion, and perhaps confusion, about what support is available to shipowners in the event of a pirate attack.

To mitigate the risk, some shipowners are avoiding the area but at substantial additional expense, and others are using organised convoys or employing security staff for the vessel.

Marine Kidnap and Ransom insurance can play a key part in any shipowner’s risk management strategy because it covers the specific costs associated with piracy attacks, however there has been some misunderstanding regarding the detail of the cover.

Andrew Brooker, director at marine insurance brokers FP Marine Risks, says: “We are often asked what insurance protection is available to shipowners in light of the increased risk of piracy. Marine Kidnap and Ransom needs to be seen as a service that shipowners can draw upon that isn’t catered for by traditional hull insurance.”

Traditional hull insurance only protects the shipowner from loss or damage to the vessel as a result of piracy and is only designed to work in a reactive manner once the claim is made after the event.

In the absence of physical loss or damage, the ransom and associated costs would be considered a General Average expense and settled by all parties against their respective values. However, the legitimacy of these costs being claimed in GA has never been tested and could be disputed by the cargo parties’ insurers.

Given the amount of shipping traffic that transits areas such as the Gulf of Aden, statistically the risk of a pirate attack is quite low. However, when it does happen, shipowners are faced with a challenging range of issues they are unlikely to have encountered before.

Brooker explains: “Shipowners suddenly find themselves with a host of questions about how to move forward – how do they find the necessary help from specialist negotiators; how do they enter into effective communications with hijackers; how do they deal with threats to their crew, vessel and cargo; how do they raise and deliver the ransom?”

Marine Kidnap and Ransom insurance is designed to specifically meet the needs of shipowners in dealing with these issues. It also provides the security of having an insurance in place that ensures the shipowner receives priority treatment from kidnap negotiators and other personnel involved. It covers all the necessary related costs that are needed to secure the safe and quick release of the vessel, crew and cargo, including the ransom and its delivery.

Furthermore, if a shipowner were to declare General Average in an attempt to raise the ransom, it could jeopardise their commercial relationships.

Brooker says: “There is generally no deductible with Kidnap and Ransom insurance, so owners are not exposed to additional costs after the premium and our cover ensures the Kidnap and Ransom insurers do not seek to recover any aspect of the costs from cargo or charterer interests, thereby preserving those commercial relationships. It also has the effect of protecting the owner’s existing Hull & Machinery or War cover from a loss which exposes them to an increase in rating for the following year – in effect, Kidnap and Ransom insurance has no memory and will not seek to recover claims through increases in premium.”

Uniquely, there was no longer a vessel or cargo being held for ransom.   The captain was now the only hostage, but within a standard (UK or American Institute or Norwegian Plan) Hull and Machinery policy there is no specific cover for ransom payments made specifically for the crew. This is also the case for P&I policies.

A ransom is only covered by existing H&M policies in a General Average claim if the pirates do not specify the amounts for the separate release of the crew, cargo and vessel. This usually does not present a problem because the pirates tend to take the crew hostage as part of the vessel hijacking and effectively hold all parties to ransom for a single amount.

However, in this instance, the pirates’ demand for a ransom was only tied to the holding of the captain on the drifting lifeboat. It would therefore be difficult for a shipowner to recover an insurance claim for the ransom, when the hostage was being held away from the vessel itself. If the ransom was paid, the owner would have to submit the claim to their P&I Club, likely under the discretion afforded by the Omnibus Rule.

On this occasion, the US navy launched a successful operation and rescued the captain so we do not know how the situation may have unfolded had the shipowner entered into ransom negotiation talks.

Moreover, the recent attacks on the American-flagged Maersk Alabama and the two French yachts have seen the respective navies taking military action against the pirates to secure the release of the hostages, whereas previously ransoms were paid.

According to mainstream media, the immediate effect of this action appears to be retaliatory. From an insurance perspective, we are likely to see an increase in premiums for vessels transiting the area as the risk of violence escalates even further.

Unless the shipowner had specific Kidnap and Ransom insurance, any claim made to cover the ransom for the crew would only be at the discretion of the P&I Clubs’ board and only then if it was an International Group Club.

If any party is interested in learning more about what is covered under their existing Hull policies and what additional services Kidnap and Ransom insurance provides, please do not hesitate to contact any one of our shipping team to discuss further.

As we wrote in our opinion piece Piracy – How Covered are You?, the methods and style of piracy have moved on from its “traditional” routes where pirates would board ships and steal cash and equipment. This didn’t present any particular problems for insurers. The new method sees Somali pirates only interested in the ransom, demands for which have run into the millions of dollars, and it is the settlement of these ransoms that are likely to push premiums higher.

There are further fears that the Somali methods of hijacking will spread to other regions, including South East Asia and Latin America. Whilst this is possible, current circumstances suggest the need for a specific set of geo-political characteristics to make this work, i.e. a sea lane near land in calm waters without any issues as to sovereignty, a passive government or legislature, a lack of concern of that government of outside pressure to take action, and an inability of external governments to take action.

However, if other hot spots were to occur, then we would likely see a quicker shift of Piracy from the Hull to the War policies. Whilst there is the increase in premium to contend with, there is also the question as to who is going to pay for it.

It means owners and charterers should be paying increased attention to their War clauses and obligations under the charterparty, and account for the increases accordingly, irrespective of the anticipated trading pattern.

International security efforts have increased, but their presence is having minimal impact on what is unquestionably a lucrative crime.

Somali pirates are making ransom demands of up to USD10million, threatening the crew and warning the shipowners that they will ground the ship if their demands are not met.

Understandably, the safety of the crew and the release of the vessel take priority. However, whilst the affected shipowner does what is necessary to secure the release of the crew and vessel, cargo owners can be significantly affected.

The cargo is often more valuable than the vessel itself, yet in the event of a hijacking, cargo owners may not be alerted to the situation and are unlikely to be involved in the subsequent negotiations and ransom payment.

Recent hijackings have lasted between seven and 100 days; 58 days is the average duration of a hijack in Somali waters. Cargo owners can see disastrous delays particularly affecting any seasonal or other time-critical cargo, and in the worst case, deterioration or material damage to the cargo itself.

We are also witnessing an increasing number of shipowners attempting (some successfully) to recoup a share of the paid ransom from cargo interests in General Average.

Given the cargo is more often of significantly greater value than the vessel it is being carried on, ship owners will seek to recover the significant majority of the ransom payment and any other general average charges from them.

Irrespective of the ultimate position, shipowners are likely to have a prima facie right to demand general average security and we would expect owners to exercise their lien over the cargo in order to obtain that security where they consider it necessary to do so. Unsurprisingly, we are also aware that cargo interests are attempting to resist the claim in General Average.

What action can Cargo Interests take to protect themselves?

It would appear critical to establish a protocol for communications with shipowners in the event of an incident.

In addition, we suggest cargo interest obtain confirmation from shipowners regarding adequate Hull and Machinery, P&I, and War Risks insurance for the voyage in question.

There is specialist Marine Kidnap and Ransom Insurance available which provides not only cover for the ransom payment but, arguably more importantly, access to specialist security consultants who will assist in negotiations for any ransom payment. We recommend that cargo interests check with the shipowners to see if they have purchased this cover.

We are also witnessing collaboration between the parties involved in the voyage (charterers, owners and cargo interests) to purchase this cover for all interests.

Please see our separate news article on Marine Kidnap and Ransom Insurance for details or contact us to discuss your requirements further.

To keep up to date with reported piracy incidents and to learn more about prone areas, please visit http://www.icc-ccs.org/prc/piracyreport.php

Whilst attacks in the Malacca Strait and Indonesia have dropped by over 50% in the same time, the Somali coast and Gulf of Aden have seen a drastic rise from only 2 incidents in 2004 to 44 in 2007.

The data available for 2008 shows that between January and September there were 50 attacks off the coast of Somalia, 32 hijack incidents and over 260 crew members held hostage.

The pirates have hijacked vessels from over 20 countries, including Germany, Japan, Malaysia and France, and members of the crew are predominantly from the Philippines and Malaysia.

The pirates targeting vessels near the Gulf of Aden and Somali waters are predominantly local fishermen and disaffected youth from Puntland, a semi-autonomous region in the north east of Somalia.

They threaten to kill the crew and run the ship aground from the outset, and make ransom demands of between USD2m to USD10m for which they leave little room for negotiation.

Ten countries have sent in military forces to the waters surrounding Somalia and the Gulf of Aden to try and prevent further attacks, but with little success.

It is argued that as long as the issues internal to Somalia remain unresolved, piracy in the area will continue.

Avoiding the area entirely will limit a shipowners exposure to the risk of piracy, but it is also a costly and time consuming alternative.

Marine Kidnap and Ransom Insurance, on the other hand, ensures that if a vessel is captured and a ransom demanded, the shipowner is able to respond quickly and with the support of experienced crisis-handling professionals to ensure the safety of the crew and expedient release of the vessel.

The Cover

In summary, the Marine Kidnap and Ransom Insurance covers the following:

1. The ransom that has been paid

2. The loss in transit of the ransom

3. The fees and expenses of security experts who specialize in advising clients on how to handle crises such as kidnap-for-ransom

4. Additional expenses including those for an independent negotiator; a public relations consultant or interpreter; reasonable costs of travel and accommodation of the assured; plus all other reasonable expenses incurred subject to the insurer’s approval.

5. Legal Liability to cover settlements or awards, fees and judgments imposed upon and paid by the assured as a result of an action for damages brought by or on behalf of any insured person, or his / their legal representative or shareholders, as a result of the kidnap. Defence costs incurred by the underwriters are payable in addition to the limit for legal liability.

What would you do without insurance cover?

Without the necessary Kidnap and Ransom insurance, shipowners understandably find themselves unsure about how to proceed in the event of a hi-jacking.

They need to consider how to enter into effective communications, how to handle the demands and threats made by heavily-armed pirates, how to advise family members of the situation and how to raise and deliver the necessary ransom to guarantee a swift and successful release.

Most, if not all, owners would consider it an unprecedented strain on finances, resources and expertise to manage the crisis effectively.

However, with adequate Marine Kidnap and Ransom Insurance you have the necessary support from experienced professionals as soon as you need it.

They have the ability and know-how to advise you through every stage of the negotiations and release, their costs being covered by the insurance.

In addition, the insurance also covers the ransom itself along with a wide range of ancillary, but necessary, expenses that may be incurred either during and/or after the successful release of the crew and vessel.

The above information is intended solely as a summary of the cover – for full details regarding the conditions of cover, exclusions and definitions, please email or telephone your usual FP Marine Risks contact or call the Hong Kong office on +852 2544 3410, the London office on +44 (0) 207 397 4920 or email info@fp-marine.com