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Kidnap & Ransom Insurance – General Average

Jagan - November 22, 2018 - 0 comments

  1. Kidnap & Ransom Insurance (“K&R”) was originally developed to protect individuals when they visited high risk areas. However, given the spate of piracy attacks on vessels with the pirates holding the crew members to force Owners to pay ransom, this cover was extended to cover such risks. The author had recently seen a post on LinkedIn on K&R in which clarifications were sought as to whether Owners were precluded from declaring General Average if they had appropriate K&R cover. This post considers whether Owners are indeed entitled to seek recovery even if they were covered under a K&R policy.
  2. In the recent past, owners made payment of ransoms to pirates for the release of their crew and vessel together with property (cargo) on board. Subsequently, Owners sought contributions from the other participants by declaring General Average1. Invariably, if the vessel is to be traded in difficult areas (where the risks of piracy exists), it may be a requirement under the charter party that Charterers reimburse the costs of any K&R Insurance taken by Owners to cover to such risks. Alternatively, if the Owners trade for themselves and have indeed taken a K&R Insurance, they would generally factor this in the freight rate which they would offer to the cargo interests2. The question would therefore be is if the Owners have a K&R policy which triggered to respond to the payment of any ransom’s demanded by Pirates, does this preclude Owners from seeking contributions from other parties?
  3. K&R policies are issued by specialized insurers dealing with this product. We have checked with one of the Brokers3dealing with this product and who have commented as below:

    1. Premium quoted by K&R Insurers depends on the following factors listed below:
      1. Trading area
      2. Speed of the vessel
      3. Freeboard
      4. Type of cargo
      5. Type of Vessel
      6. Whether the Vessel would have Armed Security on board during transit
      7. Vessel Hardening measurers
      8. Limit of Indemnity (generally the limits sought is for a limit of USD 5 million but in certain cases, this may be as high as USD 10 million).  
    2. Premium: This can range from as low as USD 700 for trading in Indian Ocean to USD 1,000 for trading in Gulf of Aden and USD 10,000 or so for trading in West Africa (depending on the size / cargo etc). These premium figures are ball-park figures and one must check with their Brokers and who would be able to seek quotes based on the risk.
    3. K&R cover can be arranged on either per transit or per fleet basis per annum, subject to Owners complying with BMP44/BMP55wherever applicable. The coverage in general includes:
      1. Ransom payment.
      2. Loss of ransom in transit.
      3. Additional Expenses (negotiator, delivery of ransom, public relation consultant, legal advice, forensic analyst, crew wages/salary, traveling & medical expenses, etc.).
      4. Accident cover for Insured persons.
      5. Legal Liabilities to the Insured including any defense costs.
    4. The reason for the take up of this policy was the difficulty faced by Owners when a vessel was hijacked. Hull or War Insurers lacked the expertise to assist in the negotiations with the Pirates and therefore there was a need to look at Insurers who not only provided cover but also assisted in the negotiations and delivery of the ransoms.
    5. In the event, Owners do not have K&R Insurance, the Owners as the “father” of the voyage would have to deal with the issues at hand including engaging experts to negotiate with the Pirates, arrange for delivery of the agreed ransom, etc. Subsequently, Owners could declare GA so as to seek contributions from the other parties who benefited from this exercise. Collection of GA Bonds / Guarantee and adjusting the GA is a long-drawn process and therefore having a K&R policy circumvented this arduous task.
  4. Assuming that there is indeed an incident in which Owners have been paid/reimbursed by a K&R policy for the ransom, are they (Owners) entitled to seek contribution from other parties?
    1. Invariably K&R policies makes it a requirement that Owners keep the terms of cover confidential. This being the case, we believe that K&R Insurers may not wish to disclose the actual ransoms paid such that even if there is an entitlement, they would prefer to maintain secrecy and loose the entitlement.
    2. Even if Owners still wish to pursue for the costs paid by the K&R Insurers, given the fact that invariably Owners are reimbursed by the Charterers for the premium spend for the K&R insurance, it is submitted that the Charterers should therefore be entitled to the benefit of the K&R. We make this comment on the basis that a subrogated insurer, unless a separate statutory right exists (which is the case in some jurisdictions), stands in the shoes of the insured and therefore do not have any better right. With respect to other parties who have not directly contributed (but may have contributed indirectly by paying say a freight rate which would include a component to cater for the K&R costs), it is submitted that Owners are not prevented from seeking contributions, irrespective of the fact that they may have received reimbursement from the K&R Insurers. In this case, the excess amounts received by Owners (amounts exceeding their loss) would be held in trust for the K&R Insurers.
  5. The K&R cover may not cover all costs associated with a piracy attack. It is submitted that Owners can certainly seek contribution for the costs allowed under the York Antwerp Rules61974/1994/2016 but which do not fall for consideration under the K&R policy. However, these costs are generally not significant such that it may not warrant separate attention and therefore Owners may bear these costs by themselves7. However, should these costs be significant, it is submitted that Owners are then entitled to seek contributions from the other participants in the voyage who benefited from the General Average Sacrifice / Expenditure.
  6. In conclusion, Owners right to seek reimbursement for the “ransom spend” would depend on the conditions of the K&R policy and whether the premium spends were directly reimbursed by the other parties. It is also submitted that instances of General Average arising from such incidents would decrease if a K&R cover is available to deal with the payment of ransoms. Accordingly, it would be appropriate for parties involved in such voyages to consider K&R cover, particularly when the premiums appear to be at reasonable levels.
  1. See article on “Piracy – Does it give rise to a claim for General Average?” by a very well known Average Adjuster, Raymond T C Wong.
  2. Unless the Owners are compelled to quote below their costs due to the prevailing freight market conditions
  3. We thank Mr Arun Prassad Natarajan, Partner – JLT Specialty Limited, Dubai for the information provided on both the premium levels together with his comments on K&R cover.
  6. The contracts of affreightment will generally incorporate the York Antwerp Rules to deal with the adjustment of General Average. The latest edition of York Antwerp Rules is 2016 and with the earlier editions being 1974/1994 & 2004 (which has not found favour with Owners).
  7. In The Longchamp decided by the English Supreme Court, the ransom paid by Owners was for a sum of USD 1.85 million. The other costs which the Owners sought reimbursement were with respect to media expenses of USD 20,640 and crew wages of USD 160,000 (see Para 10 & 11 of the judgment) i.e. approx 9% of the total expenses and which is not very significant compared to the ransoms paid.

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