US SDN Laws Put Insurers in a Bind

A review of the implications for the London marine insurance market of President Obama's Executive Order on the prohibition of ransom payments.

On 12 April, US president, Barack Obama, prohibited payments to specially designated nationals (SDNs) engaged in acts directly or indirectly threatening the peace, security or stability of Somalia. His order identified piracy and armed robbery at sea as such acts.

While the scope of the order is not certain, pirates as a class are not designated SDNs. However, it may be impossible to determine whether the ultimate beneficiary of a ransom payment may be an SDN. Thus, the order prohibits the payment of ransoms to Somali pirates in certain circumstances.

Clearly, President Obama cannot directly legislate for the London Market (or non-US insurers outside the US) and the order applies only to US individuals, US entities and assets within the US.

The order does not automatically change the English law position, confirmed recently in Masefield AG v Amlin (2010), that ransoms are neither illegal nor contrary to public policy. (See "Capture by Pirates is not enough to make a claim for total loss"). In addition, for UK interests, the approval of the Serious Organised Crime Agency can be sought under the Proceeds of Crime Act 2002. The UK Government could impose similar legislation to the order, having previously followed the US in relation to Islamic Republic of Iran Shipping Lines (whether the UK will also follow the US in relation to the draft Iran Refined Petroleum Sanctions Act remains unclear).

In the absence of UK prohibition, the implications of the order under English law policies can be illustrated by two examples.

Consider first a US owner who pays a ransom in breach of the order. Would the illegality of the payment in the US give English insurers a defence to a claim for indemnification? Questions may arise under s.41 of the Marine Insurance Act 1906, the implied warranty of legality. However, the warranty most probably applies only to lawfulness under English law. Further, as the insured peril precedes the illegality, s.41 may not provide an insurer with a defence.

Taking a second scenario, consider a US insurer who insures a vessel that is hijacked. The assured may not be subject to the order and may have lawfully paid a ransom. Can a US insurer refuse to pay an assured's claim on the basis it would face penalties in the...

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