13 March 2024 (Lloyd's List) - THE return of Somali piracy means that shipowners trading in the region should obtain kidnap & ransom cover if they do not have it already, according to lawyers specialising in ransom negotiations.
On past precedent, payments to secure the release of crews being held hostage can run to double-digit millions of dollars, and while P&I clubs or war risk insurers may sometimes meet claims, there is no guarantee that they will do so.
There have now been at least 22 Somali pirate attacks since last November. Possible causes for the resurgence include redeployment of naval forces in the region, which for the past four months have been focused on countering Houthi attacks on merchant vessels in the Red Sea.
As many as five piracy groups are thought to be active in the Indian Ocean and Arabian Sea, with an estimated range of 1,000 nm from the Somali coastline.
A report from the EU naval force operating in the region earlier this month described the pirates as “scouting for targets in areas with favourable sea conditions for boarding”.
In the latest incident, bulk carrier Abdullah (IMO: 9132923) was seized on Tuesday while laden with coal en route from Mozambique to the United Arab Emirates.
According to the UK Maritime Trade Operations, the ship was boarded by 22 people from two craft, one large and one small, 600 nm east of Mogadishu.
Abdullah is managed by SR Shipping, part of a steel-making company called the Kabir group. Bangladeshi media outlets suggested that the ship had 23 crew members on board.
Bulgaria-owned bulk carrier Ruen (IMO: 6706400) was hijacked in December 2023, with the vessel still alongside in Somalia. Another ship, Lila Norfolk (IMO: 9281700), was briefly taken in January before the Indian Navy drove the attackers off the ship.
Somali piracy peaked between 2008 and 2012, sometimes recording hundreds of attacks a month. But the problem was suppressed for more than a decade, thanks to a combination of naval intervention, use of armed guards and improved conditions onshore.
During the Somali piracy crisis of the late 2000s and early 2010s, ransoms were typically paid by insurers, with lawyers at London shipping law firms developing expertise as intermediaries.
The insurance position for hijacked ships and cargo is fairly straightforward; property is at risk. Under the “sue and labour” clauses in many contracts, insurers are bound to meet the costs of policyholders’ efforts to avert or minimise loss, which it is their duty to undertake.
Where cargo is damaged because of a hijack — for instance, if its condition deteriorates over time — general average is usually declared. Shipowners and cargo interests are liable for GA contributions in the normal way.
Historically, the owners’ share of GA was usually regarded as a H&M risk. But in consequence of the last Somali piracy explosion, it is now largely seen as a war risk.
Unfortunately, humans are not always treated as favourably as the contents of a bulker’s hold.
Payment of ransom demands is not illegal under English law, although may be so in other jurisdictions. But insurers aren’t exactly queuing up to pay the claim.
Hull and machinery underwriters see their proper province as collisions and groundings, and war risk underwriters feel their cover is for the likes of missile attacks.
With ransoms, both would contend that no property is at risk, and direct assureds to liability underwriters such as P&I clubs, on the grounds that this is a crew risk.
P&I clubs counter that club rulebooks typically exclude all war risk. War risk cover includes not only war property cover but a “war P&I” element as well, defined as covering what clubs exclude.
Ironically, clubs are probably only on the hook where a seafarer dies in captivity- as occurred several times during the Somali piracy upsurge – because that is a loss of life claim.
In practice, many assureds will turn to their clubs — whose boards are of course made up of sympathetically disposed fellow shipowners — and ask to make a discretionary claim.
Frequently the request is approved. War risk insurers may also sometimes pay out. But the delays involved are less than helpful to the seafarers cooped up on board a ship alongside in a Somali fishing village, often in intolerable conditions.
The most obvious answer, according to Tatham & Co lawyer Stephen Askins — one of the doyens in the field of ransom negotiations — is to get kidnap & ransom insurance.
In recent years, with the perceived decline in piracy, it has become cheap. As a result, most shipowners trading to countries in Africa, emerging Asia and Latin America, have it.
Of course, a minority of shipowners will opt to self-insure, to cut costs. And yes, K&R cover will get more expensive if Somali piracy re-emerges to any extensive degree. But for now, Askins recommends it as the way to go.
“The risk used to be with hull, but in the last piracy pandemic, they shifted it to war risk. P&I tends to sit on the sidelines on this. With K&R policies, it’s easier to get the money moving,” he said.
“Pirates do read the internet and they’re pretty sophisticated. They do know insurance is involved with all this and they’re not stupid. Quite often they’re asking for ridiculous amounts of money.”
K&R — which is usually purchased for worldwide trading rather than on a per-transit basis — should be seen as a sensible risk mitigation measure. As a bonus, it will often provide cover against politically motivated detentions, too.
“You might as well have it, because stuff happens,” Askins concluded.
Reed Smith employment lawyer David Ashmore pointed out that shipowners have legal obligations to protect crews.
These include liability for costs incurred due to seafarers’ sickness and injuries at all times during their service, from commencement of duty until the point of deemed repatriation.
“They have a broad range of duties including to ensure compensation in cases of death or long-term disability resulting from occupational injuries, illnesses, or hazards," he said.
“This obligation is aligned with national law, the seafarers’ employment agreement, or collective agreements."
Ashmore said owners must cover the expenses of medical care, including treatment, necessary medicines, and therapeutic appliances.
They are also obliged to provide board and lodging away from home until the sick or injured seafarer has fully recovered or until the sickness or incapacity has been declared to be of a permanent nature.
Finally, in the event of a seafarer’s death on board or ashore during the period of engagement, shipowners are obligated to meet associated burial expenses.
Nicholas Woo, a partner in the shipping and international trade team at Birketts, pointed to the recent Supreme Court decision in Herculito Maritime v Gunvor International, known as Polar after the vessel at the centre of the case.
The tanker was seized by Somali pirates while transiting the Gulf of Aden in 2010. A ransom was paid for the vessel’s release and the shipowner declared general average, which was subsequently adjusted.
“The court decided among other things, that charterers and other parties in a contract cannot escape liability to contribute to general average when the insurer has paid ransoms for the crew,” Woo said.
“Another important finding by the court in that case is that where there has been a provision in the charterparty to sail via Suez, the owner cannot exercise general liberties to deviate round the Cape of Good Hope to avoid war risks.”
