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Published : May 27, 2010 | Author : annalex
Category : Miscellaneous | Total Views : 5514 | Unrated

Ann Thania Alex Pursuing LL.M in NALSAR

Marine Insurance against Piracy Vs. Reinsurance Companies

Marine insurance and Piracy
Marine Insurance can be connoted to be the most vibrant branch coming under the canopy of insurance laws. This may be attributed to reasons that are far from cogency to the most coherent ones, which includes the discovery of trade routes and their role in the expansion of global trade, the insecurity faced at multitudinal levels during the course of sea trade, concerns about the heavy investments made for a successful sea trade, the generally anticipated scale of attacks that may be faced by a vessel etc. These different facets could be summed up as contributing to the necessity of developing an encompassing law for the protection of interests of ship owners’, and buyers’ and sellers’ of cargoes, that are transferred through the sea. Marine insurance business could be considered in the broad spectrum as:

the business of effecting contracts of insurance upon vessels of any description, including cargoes, freights and other interests which may be legally insured in or relation to such vessels, cargoes and freights, goods, wares, merchandise and property of whatsoever description insured for any transit by land or water or air or all the three. The same may include warehouse risks or similar risks in addition or as incidental to such transit and includes any other risks which are customarily included among the risks insured against in marine insurance policies[2].

Marine insurance is essentially categorized into hull and cargo policies. The former refers to the insurance on ships and the latter refers to the insurance on goods in transit.

Piracy at sea can be considered to be as old as the evolution of maritime trade and navigation. Mark Bruyneel in his web article suggest the below given reasons as the causal agents for increased instances of piracy. They are: -

1. Economic motives and technological improvements resulting in smaller crews on larger vessels thereby making the ships much more prone to attacks.
2. A ship is usually protected or defended in international waters by the country or state whose flag it flies which in the recent days are often the flags of convenience. This makes it more problematic and intricate to use diplomatic pressure on countries from which pirates operate.
3. The decreasing budgets of naval forces and decreasing priority on policing the high seas and the tendency to avoid diplomatic conflicts.
4. Due to the remoteness of the coasts from the home ports of the ships the governments tend to ponder and act less over the incidents.
5. In some cases governments seem to be involved in the pirate activities which could be better termed as state sponsored piracy as was alleged against China recently[3].

2. Legal Understanding of Piracy
Essentially, piracy could be understood with reference to Article 101 of the United Nations Convention on the Law of the Seas[4] which states that:
Piracy consists of any of the following acts: (a) 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: (i) on the high seas, against another ship or aircraft, or against persons or property on board such ship or aircraft; (ii) against a ship, aircraft, persons or property in a place outside the jurisdiction of any State;

(b) any act of voluntary participation in the operation of a ship or of an aircraft with knowledge of facts making it a pirate ship or aircraft;
(c) any act inciting or of intentionally facilitating an act described in sub-paragraph (a) or (b).

Three aspects could be inferred from the above said definition namely; (1) piracy is limited to crimes committed against private property or citizens (2) the act must occur in international waters (not within the states territories) and (3) greed must be the motivating factor behind the crime[5].

According to international law, piracy takes place outside the normal jurisdiction of a state, without state authority, and is private, not political, though acts of unlawful warfare, acts of insurgents and revolutionaries, mutiny, and slave trading have been defined as piracy by national laws of various countries or by special treaties[6]. Federation of American Scientists opines that

Today's piracy is more than a nuisance to commercial shipping. It affects maritime traffic in vital shipping lanes………Attacks on oil supertankers hold the potential to ignite environmental disasters. Attacks by pirate craft may invite military reprisals, [and there is a continuing problem off the coast of China with what amounts to state sponsored piracy by some official Chinese craft][7].

Moreover, piracy activities are improving not only in relation to the cargo ships, but also with reference to pleasure ships like yachts etc[8]. Further the altitudes of marine piracy are steeply increasing which would make it apportunate to refer to it as “maritime terrorism”[9].

However, the piratic activities are not to be treated with disgust for the reason that in many situations, innocent activities which were carried out from the point of view of sustenance were continued to the extent that they culminated in dangerous activities like piracy. The situation in Somalia would be the striking example in this regard. The different phases of disintegration and anarchy as existed in Somalia were utilized by many countries which were capable of exploiting. Some European and Asian countries took advantage of the chaos in Somalia and sent their commercial fleets to fish in Somali waters. Other European countries sent to Somalia thousands of drums of toxic waste, including nuclear waste, to be dumped at sea. Without a coast guard to monitor and prevent such illegal activities, Somali fishermen began organizing and arming themselves to confront waste dumpers and to collect fees from foreign vessels taking fish out of their waters.

Thus what was initiated as a legitimate fight against foreign exploitation and unnecessary interventions on sovereignty turned into a criminal enterprise when everyone discovered its lucrative potential.

The purpose of this article is to essentially develop an understanding about the claims that could be entertained by the insured against the insurers in situations of attacks by pirates. In other words the article would be looking into the delimiting lines which pertain to marine insurance against piracy. As a concluding note the author would also be looking into the ramifications of the liability of the reinsurer in the present context of increasing number of sea piracy activities.

3. Insurance Coverage for Piracy
The intention behind covering piracy in the hull and cargo claims is to prevent the stunting of trade and trade routes for reasons like barbaric activities. The understanding of the term piracy and pirates has gone far ahead to include passengers who mutiny and rioters who attack the ship even from the shores[10]. The widely recognized hull and cargo clauses cover the issues of piracy[11]. According to the Marine Insurance Act, 1963 (India), the term "pirates" includes passengers who mutiny and rioters who attack the ship from the shore.

Anyhow, piracy is excluded from the paramount war exclusion clause of ITCH[12] and IVCH[13]. The test to be applied in this regard is that of proximate cause whereby the loss that has been incurred should not have been caused by barratry or piracy. However, any loss caused by seizure, even if the seizure were to result from a barratrous or piratical act, is not excluded from the war exclusion clause.

There may not be a situation wherein the clause of ‘piracy’ as such may stand deleted from the marine insurance policies. But the situations demand that the insurers should increase the costs of insurance on account of piracy, especially relating to notorious routes of the times like Somalia, Indonesia, Philippines etc.

4. Marine Insurance for Piracy- Practical Situations Involved

“The three components of maritime industry most affected by piracy are the shippers (manufacturers that own the cargo), carriers (companies that own the vessels), and insurers of the ships and cargoes”[14]. Traditionally and theoretically marine insurance is to cover all maritime perils towards which the insured had taken the policy. Generally the maritime perils refers to the perils which includes the;

“perils consequent on, or incidental to, the navigation of the sea, that is to say, perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seizures, restraints and detainments of princes and peoples, jettisons, barratry and any other perils………which are either of the like kind or may be designated by the policy”[15].

The term "perils of the seas" refers only to fortuitous accidents or casualties of the seas. It would not include the ordinary action of the winds and waves. In the event of happening of a contingency for which the insurer has insured himself, the burden of proof is on the insured to prove that the ‘insured perils’ were the proximate cause that has resulted in the causing of losses. Likewise the Court will also look into whether it was a lawful marine adventure with an insurable interest for the insured. Even then sorting out the differences between the insurer and the insured in situations of loss is not an easy task. To add oil to fire, this has gathered unimaginable heights, after the onslaught of piracy related problems, thereby prompting the insurers and the reinsurers to make the limiting lines more rigid and vivid. This could be understood by referring to the different suggestions made by the insurers and the reinsurers following the live instances that have been happening lately.

4.1. Practical Complexities Involved
After the Somalian incident, there have been undesired results in the insurance sector like increase of marine insurance costs for vessels traversing the Somalian waters from 5 -10% for each call due to the added danger. Since piracy is increasing and profits of shipping companies are decreasing, freight charges are also likely to increase. Even if ships do not proceed through the Gulf of Aden route, it would result in increased charges because of the increase in the voyage duration and fuel consumption[16]. It is advisable for a typical ship passing through the Somalian waters to have, insurance coverage[17] against piracy and other perils, which would provide for hull and cargo insurance, war risks[18], protection and indemnity[19] and kidnap and ransom[20]. However the pertinent question is, in the present condition wherein global financial meltdown is having its cumulative effect along with piracy on the global trade; whether the insurance companies would be in a position to take up such stake holding policies and responsibilities to pay the guaranteed sum of insurance. The above mentioned happenings are making the concerned authorities more responsive to the entire issue. For instance, the plight in Indonesia has led to the declaration by the National Ship Owners Association for all the foreign vessels traversing the area to take piracy insurance[21]. However our understanding of the entire issue would not be complete unless we deliberate the ultimate effect caused by the same on the insurance and reinsurance business, as it determines the actual sustenance of the system.

The practical difficulties should be analyzed at the backdrop of the present scenario where carrying out of marine trade without insurance and reinsurance is not conducive. Though in early times reinsurance was brought in to curb the wagering practices that were manifested in the form of insurance, as per Marshall’s view later on it was employed as a means of speculation on rise and fall of premiums[22]. Marine reinsurance which was something of a necessity at one point of time is now considered to be a necessary evil, which could not be done away with. Further the maritime business world is all the more dependent on marine insurance than that it used to be before. Thus in the absence of effective insurance and reinsurance facilities, global trade will come to a stand still, especially when there are other threatening factors which prevents its growth.

5. Threats in the Realm of Marine Insurance with Special Reference to Interests of Insurers and Reinsurers

The impact of recent piracy activities have raised the level of loss expectancy of the insurance and reinsurance firms which is actually resulting in a growing reluctance towards contracting into marine insurance with the cargo owners and ships. This can also be considered to be one of the well founded reasons for divesting of insurance into other new areas like nuclear insurance. It not only leads to the decline of the insurance business in the marine industry but also hesitation from the traders to be part of the maritime trading system. Another significant move was reflected in the recent actions and suggestions by Lloyds that piracy in sea should be considered to be part of war perils rather than marine perils, to protect the rights of the insurers and the insured involved and who are expected to grant great sums as insurance. Yet another threat is the increasing rates of premium in marine insurance to improve the claims of the insurers and to effectuate their standing before the reinsurers. Understanding of the legal and practical difficulties associated with marine insurance and piracy seems to be like opening a pandora’s box and a total hassle free condition is next to impossibility. Anyhow the different delegations and think tanks have contributed certain inputs which if implemented positively can regulate the issue of piracy to a very great extent and thereby preserve the interests of the insurers and reinsurers in a better manner.

5. Conclusion and Suggestions
The following are some of the ideal situations that could be suggested to tide over the problem of piracy.
Ø In order to strengthen the stake of insurers and reinsurers in this issue, there should be a systematic revival of the international legal regime, as is existent against piracy.

Ø International guidelines are to be developed to protect piracy in the ports also because 70% of the piracy activities take place in ports[23].

Ø The analysts are of the view that provisions in the United Nations Convention on the Law of the Seas are not strong enough to deal with situations of piracy that may happen within the territorial waters of a state, especially that of a failed state (eg. Somalia) which has no mechanism in place to curb the situation. Therefore legal improvements are to be made in that regard.

Ø The observations made by the Maritime Safety Committee (MSC) of the International Maritime Organisation (IMO), in its 86th session at the London Headquarters, from May 27th to 5th June, 2009 speaks about revised guidance for combating piracy (refers to the activities beyond the state territory) and armed robbery (refers to activities within the state territories) against ships. “The guidance to shipmasters and crew includes a new annex aimed at seafarers, fishermen and other mariners who may be kidnapped or held hostage for ransom, based on the current United Nations guidance on “surviving as a hostage”[24].

Ø The IMO meeting agreed on discouraging the carrying and use of fire arms by sea farers for personal protection or protection of their ships. This is so because the presence of arms with the seafarers would improve the possibility of the armed and piratical attacks being carried out in an extensive manner against the ship and people on board the ship. The Safety Committee has also agreed on making amendments to the Code of Practice investigating into the crimes of piracy and armed robbery against ships[25].

Ø “The resolution[26] adopts the Code of Practice for the Investigation of the Crimes of Piracy and Armed Robbery against Ships. It urges Governments to take actions, as set out in the Code of Practice, to investigate all acts under their jurisdiction of piracy and armed robbery against ships, and to report to IMO pertinent information on all investigations and prosecutions concerning these acts. It also urges all Governments responsible for ports, anchorages and sea areas to inform IMO of specific advice available to ships on the subject of piracy and armed robbery against ships for promulgation by the industry to such vessels[27]”.

Further, there has been a general awakening at the global level. Institutions like International Maritime Bureau and International Maritime Organisation are championing the widened understanding of piracy. United States have initiated high tech war on pirates in the Gulf of Aden[28] whereas anti piracy centre with satellite detection technologies have come into place in Kenya[29] and anti piracy drive coordinating naval patrols have been initiated between Singapore, Indonesia and Malaysia[30]. But what should be realised is that, the different problems in relation to piracy are associated between themselves and therefore they should not be compartmentalised to hinder the overall growth of a mutually dependant legal regime at the international level.

To conclude, the problem has wider ramifications than that it used to assume and could be resolved only by relating it to relevant areas like law of the seas, state responsibility, international trade law etc along with insurance. Thus the protection of the rights of the insurers and the reinsurers, to carry on with a successful business could be ensured to the fullest only if there is the successful maintenance of a cordial balance between the different affected spheres. The essential task is therefore the achieving of those ends, that are proclaimed and yet to be proclaimed. [31]
2 Info About Insurance, Viewed on 4 November, 2009. ( http://www.infoaboutinsurance.com/Marine_Insurance.shtmll ).
3 “M.Brunyeel”, Modern Piracy, Viewed on 9 November 2009 ( http://home.wanadoo.nl/m.bruyneel/archive/modern/index.htm ).
4 Piracy and Armed Robbery against Ships, ( http://www.imo.org/Facilitation/mainframe.asp?topic_id=362 ), Viewed on 4 November, 2009.
5 “Cindy Vallar”, Piracy and the Law: Modern Piracy –part 2, 1 September 2000, Viewed on 5 November, 2009 ( http://www.suite101.com/article.cfm/pirates/44213 ).
6 Encyclopaedia Britannica, Viewed on 5 November, 2009 ( http://www.britannica.com/EBchecked/topic/461493/piracy ).
7 Federation of American Scientists, Pirates, viewed on 9 November, 2009 ( http://www.fas.org/irp/world/para/pirates.htm ).
8 “Miles Costello”, Shipping Insurance costs soars with piracy surge off Somalia, The Times, 11 September 2008, Viewed on 5 November, 2009 ( http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4727372.ece ).
9 International Union of Marine Insurance Issues New Piracy Warning, The Insurance Journal, 11 December 2008, Viewed on 9 November, 2009, ( http://www.insurancejournal.com/news/international/2008/12/11/96213.htm ).
11 “R. Schwarz”, marine Insurance- Ship Piracy Insurance News, , Viewed on 4 November, 2009
( http://ezinearticles.com/?Marine-Insurance---Ship-Piracy-Insurance-News&id=1809404 ).
12 Ibid.
13 Institute Time Clauses (Hull).
14 Institute Voyage Clauses (Hull).
15 “Dana Robert Dillon”, Piracy in Asia: A Growing Barrier to Maritime Trade, 22 June 2000, Viewed on 10 November, 2009, ( http://www.heritage.org/Research/AsiaandthePacific/BG1379.cfm ).
16 Section 2 (e) of Marine Insurance Act, 1963, Viewed on 10 November, 2009 available at ( http://www.commonlii.org/in/legis/num_act/mia1963170/ ).
1710 Undesired Results of Somali Piracy, 5 December 2008, Viewed on 10 November, 2009.
( http://www.marinebuzz.com/2008/12/05/10-undesired-results-of-somali-piracy/ ).
18 “Peter Hodge”, Insurance for Ships in Somali Waters, The Strategist, 16 August 2009, Viewed on 10 November, 2009, ( http://kotare.typepad.com/thestrategist/2009/08/marine-insurance-pirates.html ).
19 Ibid, “There are two main types: war risk liability, which covers people and items inside the ship, and war risk hull, which covers the ship itself”.
20 id., P&I clause provides the ship owner with insurance “against third party liabilities and expenses that may come from owning or operating ships, e.g., collisions with other ships, claims from injured crew”.
21 id, K&R “covers the cost of dealing with a pirate hijacking - it indemnifies the assured for ransoms, and pays for crisis response, hostage negotiations, ransom drops, legal advice and so on. Traditional cover meets the price of ransom but not the extra costs - a ransom will be around 25 - 30% of the total cost of dealing with a pirate attack”.
22Indonesia to Require Piracy Insurance, Insurance Journal, 12 July 2001, Viewed on 10 November, 2009, ( ttp://www.insurancejournal.com/news/international/2001/07/12/13044.htm ).
23 REINSURANCE LAW, (John S. Butler and Robert M. Merkin eds., Kluwer Publishing London) A.2.1-01 – A.2.1-03.
24 Supra n.14.
25Global: IMO Maritime Safety Committee (86th Session:27 may-5 June 2009), 17 June 2009, Viewed on 9 November, 2009, ( http://www.cargosecurityinternational.com/channeldetail.asp?cid=4&caid=10947
26 Resolution A.922 (22), adopted on November 29, 2001.
27 Ibid.
28 22nd Assembly: 19 – 30 November 2001, Resolutions Adopted, Viewed on 9 November, 2009. ( http://www.imo.org/newsroom/mainframe.asp?topic_id=144&doc_id=1973#922 ).

29 America’s High Tech War on Pirates, The New ForeignPolicy.com, 23 February 2009,Viewed on 10 November, 2009. http://blog.foreignpolicy.com/posts/2009/02/23/hunting_somali_pirates_yankee_style
30 Anti Piracy Centre Opens in Kenya, 5 May 2006, ( http://news.bbc.co.uk/2/hi/africa/4978506.stm,) Viewed on 10 November, 2009).
31 Anti Piracy Drive in Malacca Straits, 20 July 2004, Viewed on 10 November, 2009 http://news.bbc.co.uk/2/hi/asia-pacific/3908821.stm

Authors contact info - articles The  author can be reached at: annalex@legalserviceindia.com

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