Shipping And Insurance Update - Piracy

Is a vessel, or cargo, lost immediately when it is captured by pirates? This and other issues relevant to piracy and the payment of ransom have been considered recently by the Court of Appeal in Masefield v Amlin [2011] EWCA Civ 24.

The facts

On 19 August 2008, the chemical / palm oil tanker 'Bunga Melati Dua', together with her crew and cargo, was seized by Somali pirates in the Gulf of Aden during a voyage from Malaysia to Rotterdam.

Two parcels of bio-diesel carried on the vessel were insured by the defendant Underwriter under an open cover contract that covered loss by both piracy and theft. About a month after the seizure (while negotiations for the release of ship and cargo were continuing) the claimant cargo owners tendered a Notice of Abandonment to the Defendants, which was declined. Within about 10 days of the Notice of Abandonment a ransom was agreed with the pirates and paid. The vessel, crew and cargo were subsequently released and arrived at Rotterdam on 26 October.

It was common ground that both theft of cargo and the capture or seizure of the cargo by pirates were insured risks under the cargo insurance. The Claimant sought recovery of about US$7 million under the policy for the total loss of the cargo, that sum being the net loss after allowance for the proceeds of disposal of the cargo at Rotterdam.

The issues

The claimant cargo owners argued that capture by pirates created an immediate actual total loss ("ATL"), whatever the prospects of recovery might be. In addition it was argued that the law would not or could not take account of the payment of a ransom as a relevant, legitimate, reason for calculating the possibilities of recovery. Therefore, since the cargo had not been recovered by the time proceedings were deemed to have been commenced, the insured was entitled to succeed.

The insurers did not accept that capture by pirates created an immediate ATL and submitted that the cargo was not irretrievably lost when there was a good chance of negotiations for payment of ransom bearing fruit. It was argued that payment of a ransom was neither illegal nor against public policy, and therefore there was nothing to prevent the prospects of recovery by payment of a ransom from being a relevant and legitimate factor to take into account.

Section 57(1) of the Marine Insurance Act 1906 ("the Act") provides that there is an actual total loss ("ATL") where "the subject-matter insured is destroyed, or so damaged as to cease to be a...

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