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Pirates’ Treasure Hunt

 An eye patch, a parrot on the shoulder, and a distinctive accent personify a character, which has been a source of amusement to us all, however in reality, pirates have and continue to pose a real threat to maritime ventures. Although history marks the inexact years between 1650s and 1730s as a golden era for the pirates, nonetheless, piracy actually goes back to the first century BC were throngs had set up a realm in Turkey (known as Cilicia then) in an attempt to threaten the Roman Empire. Today, it is clear how the repercussions of piracy have influenced the development of insurance.

 The word piracy means “I attempt” in Greek, and  pirates have not limited their attempts to commercial ships (such as tankers, bulk carriers, and general cargo ships). In 2011, the World Shipping Council “WSC”1  reported 484 hijacked piracy attacks with only 45 of these attacks on traveling merchant ships. The coast of Somalia is notoriously famous for having a resilient presence of pirates; however, the WSC’s statistics for 2012 reported more than 51 attacks off Somalia (from 121 worldwide) and over 158 hostages taken off of Somalia.

So, besides Somalia which other major shipping routes raise the red flag?

According to Marine Insight’s publication on July 21, 2016, other designations than Somalia have had their fair share of pirate attacks. Notable destinations would be Malacca Straits, South China Sea, Gulf of Aden, Gulf of Guinea, Benin in Africa, Nigeria, and the Indonesia Indian Ocean. New channels are also on the rise with many cases left unreported. The International Maritime Bureau (IMB), founded in 1981, represents a central body for combating maritime crime. The following summarized statistics figures as per the IMB, sum up all attempted and actual piracy attacks during 2011-2015.

This raises the question: what really happens during the robbing (more commonly referred to as looting) process?

 The ICC2  (International Commercial Crime Cases) narrates the most recent piracy attacks, which clearly identify a trend that pirates follow. On average, 3-6 pirates would approach the cruising ship on board wooden boats, canoes, or fishing vessels to gradually make their way up to the engine room. Once, the pirates are on board, two scenarios prevail: the pirates either take what they can get their hands on and flee away, or try to take over the whole ship. Should the second scenario take place, the pirates’ leader would negotiate the proceeds with the ship’s captain at gunpoint or knife threat; as for the crew, they are simultaneously locked up in the steaming engine room most of the time. Further negotiations for ransom amounts, in exchange for the release of the crew and vessel, take place with other parties such as insurers, state officials, or the owner of the vessel. Sometimes, pirates use creative ways to demand their money. For instance, on November 19, 2008, Al Jazeera TV received an audio tape, from an alleged pirate, indicating terms for the ransoming of MV Sirius Star, which was carrying 2 million barrels of crude oil (worth at least USD 100 million) in the interest of Saudi Aramco Company3. The negotiations between the two parties finally ended on 9 January 2009 for an agreed ransom amount of USD 8 million in exchange for the ship and crew’s safe return at a pre-designated location in Somali waters.

Ultimately, we question how effective are the control measures in force to pre-empt pirate outbreaks?

 Preventive measures to combat piracy are set on several levels. To begin with, the US prides itself with the Naval Assets, spread across high-risk zone areas, patrolling for any piracy strikes or bases4 . Naval vessels sometimes escort commercial vessels or a fleet of vessels throughout their venture. On a smaller scale, the vessels traveling have some measures of protection of their own. For instance, vessels are equipped with built in high-pressure water hoses, spread across the vessel’s hull, to push away pirates. Other measures include alarms, cameras, sound guns, laser systems, foam, foul smelling liquids, sprout razor wire and electric fences fitted transversely across the ship’s hull.

 In the past, captains have been reluctant to hire armed guards on board- especially that the International Maritime Organization had only recently endorsed endorsed commissioning armed guards for maritime ventures in 20115. The presence of armed guards on board is either an extra precaution the captain/vessel owner opts for, or an explicit condition/warranty enforced in an insurance policy in exchange for a discount against the reduced exposure. Hiring an an armed force is costly with fees ranging from USD 30,000 to USD 100,000. At other times, ventures travel by considerably safer routes that do not necessarily need guards.

How can insurance contracts reduce the financial losses attributable to piracy?

 Marine Insurance is the oldest type of insurance with origins from the 14th century6. It branched from merchant law, and some of its core principles are from common law. Today, insurance provides cover for vessels and her cargo under specialist clauses.

  For cargo shipments, the most commonly adopted set of clauses are the Institute Cargo Clauses “A”, “B”, and the least onerous “C”- the “A” clause provides cover on all risk basis with 7 exclusions (common to all 3 clauses). Whereas, the “B” and “C” clauses provide a more restricted cover on named peril basis instead (of 12 and 9 enlisted perils respectively) with section “4.8” as an additional exclusion.

The drafting of each of the “A”, “B” and “C” clauses account for piracy. However, in a very limited way.

 Clause “A”, by virtue of being an all risk cover, covers all maritime perils, which include piracy as defined by the Marine Insurance Act 19097. However, the “B” and “C” clauses exclude piracy. The drafting of the wording in clause “A” does not define how wide the cover for piracy is, instead, the related exclusion (6.2) simply “excepts” piracy from the exclusion- thereby cancelling the effect of the exclusion for piracy only. Exclusion 6.2 is drafted as follows: “ Capture, seizure, arrest, restraint or detriment (piracy excepted in clause A only) and the consequences thereof or any attempt threat ".

 It is important to stress that just waiving an exclusion under a named peril policy (such as the “B” and “C” clauses) does not mean it is covered as cover is limited to the named perils respectively enlisted (In contrast, waiving an exclusion in an all risk policy means it is covered). Just like the “B” and “C” clauses, the Institute Bulk Oil clauses (IBOC), which is on named peril basis for crude, refined, and vegetable oil shipments- also “excepts” piracy just like the ICC “A”. However, because the “IBOC” is on named peril basis, piracy remains excluded. Last but not least, some may question whether the War clauses may cater for piracy? However, the Institute War Cargo Clauses will only cover losses of capture, seizure, etc… attributable to war and civil war (as denoted by section 1.1) with absolutely no account for losses from pirates.

 When covering the actual vessels, the 2 most commonly adopted Institute Time Clauses are known by reference: “Cl 280” (for any loss or damage attributable to maritime perils), and “Cl 284” (for a loss that is only equivalent to the vessel’s value- i.e.: total loss only). Both these clauses are on named peril basis, and piracy is covered under peril 6.1.5. However, the insured should carefully read their policy, as some insurers may delete this peril from cover. Should this be the case, then the insured must make sure that they also have the Institute War and Strikes Clauses Hull in force without removing peril 1.2 (capture, seizure, etc…), which is not solely intended for war as in the Cargo War Clause & includes piracy. Recent trends have shown that some policyholders nowadays choose to delete the piracy peril in the hull clause whilst keeping it under their war policy as an economical way of balancing premium.

 As for Protection and Indemnity insurances, these policies do not define or exclude piracy- the main cover granted is for the injury of the crew, pollution, general average, etc… Effectively, the cover aims at any legal liability falling on the policyholder with no guarantee for piracy.

What is the insurance product that directly caters for Piracy and Ransom Demands?

 Kidnap and Ransom indemnifies the policyholder for any attempt of kidnap and is not limited to piracy only. For piracy, the traditional marine clauses may overlap at times with the K&R policy, however, only K&R can meet the costs to be incurred and provides crisis management services during a piracy outbreak.

 Many markets provide indemnity for piracy ransom demands and the incurred expenses during the ransom process; some policies may sometimes be wide enough to cover expenses such as funeral expenditures, consultant fees, post- trauma psychiatric cases, etc.… (Depending on the wording).

 Some of the lead markets in K&R insurance are AIG, Hiscox, Travelers Syndicate, Tokio Marine Syndicate, etc... In parallel, specialist brokers such as Willis &, AON have also targeted this line of business and have achieved exemplary premium figures by return. The reason behind these skyrocketing figures is the increased demand and the profitability of K&R insurance during recent years. The number of claims is low in comparison with the accumulated premium. The premium charged for each policy serves for only one marine venture/voyage and varies with the speed of the vessel. Commonly the premium charged for high-speed vessels on average varies between $5,000- $10,000 per transit and around $10,000 to $20,000 on average per transit for slower vessels8. Some ships have even tried to take on longer routes than pass through the canals in an attempt to be cost-effective. However, these pro-longed routes proved to be the exact opposite where the cost of fuel was not justified.

With the extensive development of insurance policies covering piracy, the benefits, did not only bring some sense of comfort to policyholders, but, were also felt on a wider scale through insurance tax payments, new job opportunities, and most importantly a safer shipping & maritime industry.

 While the economies of different countries have had their fair share of piracy, how do the laws of different countries divulge?

For illustration, the ship may be under an American flag, carrying containers manufactured in Japan, which hold commodities made in China, with an Indian crew on board capsized in Arabian waters- all these countries have their own set of regulations; how do we move from there?

 The UN convention on the Law of Sea (UNCLOS) and the Convention for the Suppression of Unlawful Acts against the Safety of Maritime Navigation (SUA), and other independent different state local jurisdictions have agreed that prosecuting pirates is an international issue9. Whereby, any state, which might have links to pirates or not, may prosecute pirates in their domestic courts on the condition that their penal code criminalizes piracy. In 2011, the UN had further called on all countries to treat piracy as a criminal act.

 Although most of us have only seen pirates in movies, these men of the sea pose a significant threat to maritime ventures, the crew, and the economy. So, we ask ourselves, how do these pirates make money from confiscated ships? Do they have access to the black market? What about the crew & ships that were never found? Some ships, referred to as “Ghost Ships”, floated back on shores either completely empty or just missing the crew-ie: the cargo was still on board with no signs of struggle. History marked several ships were only the crew had disappeared-, vessel Mary Celeste (1982) is one of them10. Many other vessels disappeared at the Bermuda Triangle, where some link this area and these mysterious disappearances to supernatural and paranormal phenomena. However, despite this evolving belief, scientists do not identify any extraterrestrial beings in areas such as the Bermuda, and solely blame these disappearances on human error.

At the end of the day, we try to work with what we have; K&R insurance may be a solution when pirates strike, however, it does not put an end to piracy.

 7 Reference Book of Marine Insurance Clauses 12th edition

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