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Piracy Concerns and Cargo Insurance

The high-profile piracy attacks and subsequent media coverage on the VLCC MV Sirius Star, carrying 2 million barrels of crude oil, and the Ukranian RoRo ship MV Faina, carrying tanks and weapons, brought the issue of piracy in Somalia and the Gulf of Aden to the attention of the general public in late 2008. These incidents propelled modern piracy into the limelight and renewed the United Nations (UN) focus on the issue.

However, prior to these high-profile events, both the marine and insurance industries have been aware of the problems, in the region, and have been consistently monitoring piracy globally. Specifically, the Joint War Committee, who represents underwriters writing war and related risks within the London market, included Somalia on its list of areas of enhanced risk for war, strikes, terrorism, and related perils in 2005, and added the Gulf of Aden in May 2008.

More than 20,000 vessels pass through the Gulf of Aden annually, including about four percent of the world's oil supply. Piracy has been growing quickly in the area with over one hundred ships attacked in 2008. This compares with fewer than twenty-five raids in 2007 and just five in 2004, according to data sourced from the International Maritime Bureau's Piracy Reporting Centre.

The alternative to the Gulf of Aden is the Cape of Good Hope, which not only adds several days of travel time, but would also cost a large container ship about $1 million in fuel, crew, and lost opportunity costs. In comparison, the insurance market penalty for a large container ship travelling through the Gulf to the Suez Canal may only amount to a few hundred thousand dollars. In a depressed freight market, costs are a major concern that could influence ship owners to take more risk than may be necessary, although notably, some ship owners have already directed their slower, higher-risk vessels to travel around the Cape, rather than risking passage through the Gulf.

The costs directly related to piracy traditionally have been considered a marine peril, covered by a cargo insurance policy for the goods being shipped and a hull and machinery policy for the vessel itself. Ship owners with routes in volatile areas occasionally purchase additional Kidnap and Ransom coverage (K&R). Without K&R insurance, an injury or death to a crew member likely would be covered by the ship owner's Protection and Indemnity insurance, although many ship owners prefer the more tailored coverage provided by the K&R market.

What is not traditional are the multi-million dollar ransom payments for release of the crew, vessel, and cargo, that pirates are demanding, rather than the historic pay-off of just stolen cargo. This along with onboard cash and equipment raises concern for underwriters from more than just monetary perspective. While ransom is not a new concept, it is today complicated by the war on terror, which precludes underwriters from funding any payments that could benefit terrorist activity. There have been suggestions that if ransom is linked to terrorism, a claim for ransom costs by a cargo or hull owner would need to be declined. However, in our experience, claims against cargo interests for contribution to ransom, which are generally part of a declaration of a general average, have not been denied to date.

One benefit of the increased publicity of the Gulf of Aden piracy is that the United Nations (UN) is looking to finalize agreement to an accord where signatories agree to arrest, investigate, and prosecute actual or suspected pirates. The agreement provides for the rescue of ships under attack and seizure of pirate vessels. It also covers possible hot pursuit into another country's territorial waters and shared operations such as nominating officers to embark in the patrol ships or aircraft of another signatory. Up until this agreement was finalized, unless threatened, military vessels in the region were only able to monitor the activities of pirates when in another country's territorial waters and could not fire upon pirate vessels except in self-defense.

The UN, however, does caution that despite the support of various states and regional countries, much of the improvement will be tied to improvement o land in Somalia, where there has not been a functioning central government since 1991. Also, given the success of the Somali pirates there is a concern that piracy in other regions will escalate.