Marine Insurance: Recovery Under Cargo Policy Where Ransom Paid

In a recent case the court has held that payment of a ransom was not contrary to public policy and would be taken into account when assessing whether a cargo owner had been deprived of an insured cargo and suffered a loss.

Following the hi-jacking of a vessel (the Bunga Melati Dua) carrying cargoes of bio-diesel, Somali pirates demanded a ransom which was agreed and paid by or on behalf of the ship-owner. As a result the vessel, cargo and crew were released. The cargo owner, Masefield, claimed an indemnity under its cargo policy, which covered loss by both piracy and theft, for the actual or constructive loss of the cargoes. Under the obligatory cargo policy, declarations totalling over US$13.3m had been made in relation to the cargo. On disposal of the cargo, after recovery, it was valued at just US$7m. Masefield argued that payment of the ransom (US$4m) should not be taken into account when determining whether it had been irretrievably deprived of the cargo, because such a payment was contrary to English public policy.

The court held that Masefield had not been irretrievably deprived of the cargo. The claim for a total loss, whether actual or constructive, had not been made out. The test for deciding whether an insured has been "irretrievably denied" is an objective one and has to be determined on the facts. If it is legally and physically possible to recover a cargo then an insured has not been irretrievably deprived. This is the case even if recovery of the cargo can only be achieved by disproportionate effort and expense. In this case:

The contemporaneous correspondence and the information in the public domain showed that all interested persons (including Masefield) were fully aware that the cargoes were likely to be recovered. This was entirely consistent with the unchallenged expert evidence. Other vessels seized by Somali pirates had been promptly released following negotiations over a relatively short period. In fact the vessel and cargo were safely recovered only 11 days later after payment of the ransom. The fact that the pirates were holding the ship to ransom did not alter this analysis. There was no "clear and urgent reason" to categorise the payment of the ransom as contrary to public policy:

The payment of a ransom is not illegal as a matter of English law. Circumstances have arisen in the past where legislative action has intervened to make such payments illegal; the courts should refrain from entering into the same field...