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CHRISTOPHER DUNN

PARTNER

MARK LLOYD

PARTNER

19 SEPTEMBER 2011

PIRACY – PRACTICAL ISSUES FROM A GLOBAL CARGO

PERSPECTIVE

PIRACY Q3 2011 – The current situation

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• Piracy remains a constant threat – 314 attacks reported to the IMB in 2011 up to 18th August 2011

• Naval presence in GOA has arguably resulted in a displacement of risk

• Monsoon season ending and vessels now being released

• A spate of quick releases earlier in 2011 but the average detention now back-up over 120 days

• Will this lead to an increased number of ATL/CTL claims? Are there more vessels with cargos that could deteriorate?

• Bight of Benin has seen a rapid rise in more serious attacks since November 2010 [reported attacks to end of August 2011 - 14 product tankers, 4 chemical tankers, 7 unspecified vessels and 3 – unknown. Of these 8 are hijacks with cargo theft, 9 armed robberies, 8 attempts and 6 unspecified)

• Salalah anchorage – see the “FAIRCHEM BOGEY”; attack off Aden – “BRILLANTE VIRTUOSO”

IS THE CURRENT PIRACY MODEL ALSO EVOLVING?

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• New piracy hotspots/change in tactics (again!)

• Recent attacks off Nigeria and Benin in the Gulf of Guinea with cargo

theft affecting a number of trading houses

• Reported attacks in large gangs/swarms

• Vessel damage – “Samho Jewelry”/”Brillante Virtuoso”

• Attacks at anchorage/armed guard pickup locations (Aden/Salalah)

• Crew and vessel and cargo being separated – “Leopard”/Indian and

Korean crew members

• Piracy prison sentences being handed down (Netherlands, Korea and

the US) and the impact on the “business model”

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RECENT LEGAL DEVELOPMENTS

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• Ransom not illegal under UK law (“Bunga Melati Dua”) but what about other jurisdictions

• Seaworthiness – still to be tested

• BMP4 – now in place, will this help?

CURRENT LEGAL ISSUES THAT APPEAR TO BE LIVE FROM A PRACTICAL CARGO PERSPECTIVE

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– ATL/CTL

– Unseaworthiness

– Time –v- Cost Negotiations

– Hull –v- War Policy Involvement

– K & R policies and the underwriters’ stance on payment

– Cash in transit insurance

– Public Policy and the changing stances of governments (see the position in for example Japan, Singapore, UK, US)

– Armed Guards

– Side payments

REGIONAL IMPLICATIONS

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• 15 years imprisonment and seizure of planes and ransom (US$3.6 million)

• PVI Position in Eritrea – “encouraging piracy”

• Curious regional position – unable to stop piracy, turning a blind eye to pirate activity yet seizing money/assets

• Somali Courts –TFG

and the imprisonment

and fining of individuals

involved in payment of

ransom

LOGISTICS ISSUES

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• Salamah Fikira problems in Mogadishu

• The public stance taken by The Seychelles

• Difficulties with Nairobi, Yemen and other regional

jurisdictions for arranging delivery

• Aden is deemed unsafe

• Salalah now a safe port of refuge?

• Side payments ashore

HOUSE OF LORDS SELECT COMMITTEE REPORT

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“Combating Somali Piracy: The EU Naval Operation Atalanta”

14 April 2010

Hostage taking and ransoms

82. We understand that skilled ransom negotiators can help to keep risk to life and vessels, as well as ransom payments, to a minimum. Where ship owners intend to pay a ransom to recover their vessel and crew, we recommend that they use experienced and effective ransom negotiators. Where insurance policies do not already insist on experienced negotiators, they should do so”

House of Commons latest consideration awaited

SENATOR KIRK’S REPORT – Ending Somali piracy against America and Allied Shipping

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• More aggressive policy

• Terrorism/wider political concerns

• Policy change – call for US/UN ban on ransom

payments

• Aggressive Rules of Engagement

• Economic, Judicial and Military Assistance

• Blockade

ILLEGALITY/REGULATION

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• Ransom payments are not illegal as a matter of English law

• Legality must be considered in light of more recent legislation and current public policy considerations

• President Obama’s Executive Order 13 April 2010 – the change in OFAC’s stance – is the US authorities’ position to change

• “pirate” vs “terrorist” or SDN’s. How does this impact on coverage?

• Global problem for Insurers as piracy has a global reach and causes multiple jurisdiction issues

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ARMED GUARDS ON VESSELS

• Position of for example the UK, Danish governments,

the EU and ICS and other organisations

• Legal problems on regulation/criminal law

• No vessels have yet been taken with armed guard

teams on board

• Policy implications

• Cost against non-armed alternatives

FUNDING GAPS AND HOW ARE PRACTICAL CONSIDERATIONS

AFFECTING DAY TO DAY HANDLING OF CASES

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• Consistency in approach from cargo markets

• Changing stance of US authorities to response to

notifications to OFAC

• Increased legality issues worldwide

• Difficulties in countries such as Singapore, Italy, China,

Japan . Is the US moving towards considering making

payments illegal?

HOW TO MOVE MATTERS FORWARD FROM A GLOBAL INSURANCE PERSPECTIVE

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• Coverage – at all? Subject compliance BMP?

• Armed Guards

• Increased exposure, ransom creep and “trophy” vessels

• P&I position

• Self – Insurance/a new mutual?

• Conditions precedent to cover?

• How can cargo (especially general cargo rather than bulk

commodity trades where cargo may be charterers/have

some control) influence matters

CONCLUSIONS

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• A “new normal”? The situation on the ground is constantly

developing

• Close eye on legislation (worldwide) and more potential

legality issues

• Ensuring consistency of approach of cargo markets

• Piracy is here to stay. Can or should it remain a standard

insured peril?