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Capture by pirates is not enough to make a claim for total loss

Submitted by jamil // January 24th 2012

In a significant judgment arising out of Gulf of Aden piracy, the Commercial Court rejected the proposition that capture by pirates automatically gives rise to a total loss of the insured property.

In Masefield v Amlin, the Commercial Court has confirmed, in the context of cargo insurance, that capture by pirates is not sufficient to found a total loss claim.

The "BUNGA MELATI DUA" and her cargo of bio-diesel were captured by pirates in the Gulf of Aden in August 2008. One month after capture, while ransom negotiations were progressing well, cargo owners tendered Notice of Abandonment indicating their intention to claim a constructive total loss ("CTL"). Notice was rejected by underwriters. Ransom was subsequently paid and the vessel and cargo were released. The assured, nevertheless, proceeded with a total loss claim.

The assured's primary argument, based on old authority, was that the cargo had become an actual total loss ("ATL") from the moment it was seized by the pirates. The assured argued that at that moment they had been "irretrievably deprived" of the cargo in accordance with sect. 57(1) MIA 1906. The Court rejected this argument.

Steel J found that, to be "irretrievably deprived" of the insured property, the assured must show that recovery of possession is legally and physically impossible. The pattern of Somali piracy incidents was that vessels and their cargoeswere released on payment of a ransom within around six to eight weeks of capture. The shipowners and cargo owners in this case both intended and expected their property to be released in such a way, as it eventually was. Therefore, upon capture, the assured had not been "irretrievably deprived" of the insured cargo. The old authority was held not to apply on the basis that the assured had lost possession of its property but not dominion over it or title to it. The piratical seizure alone was not enough to found an ATL claim.

The assured argued in the alternative that the seizure gave rise to a CTL as the cargo had been abandoned because an ATL appeared unavoidable. Steel J held that "abandonment" for the purposes of this provision means the abandonment of any hope of recovery. There had not been any such abandonment in this case as the shipowner and cargo owner expected to recover their property.

The Court also considered an argument raised by the assured that the payment of a ransom was contrary to public policy and therefore the fact that a ransom would secure release of the vessel and cargo could not be taken into account when considering whether the vessel was irretrievable for the purposes of the
ATL claim. Steel J held that, while the payment of ransom may perpetuate and encourage piracy, it was not contrary to public policy because ransom payments are not illegal in England and are often the only option if crew members are to be taken out of harm's way.

The Court also cited with apparent approval the principle laid down in Royal Boskalis Westminster NV v Mountain (1999) that ransom payments are recoverable as a sue and labour expense.

All in all, the decision is a welcome one for insurers. If the Court had held that Gulf of Aden piracy incidents automatically gave rise to total loss claims for vessel and cargo, then the risk of piracy could quickly become uninsurable with dramatic consequences for world trade. The reassurance that ransom payments are not contrary to public policy should assist owners in the recovery of contribution to ransom payments in general average from other interests at risk, principally cargo.

This article was first published in Insurance Day on Friday 26 March 2010

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