Sea Transportation: Send Lawyers, Guns And Money

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January 5, 2009: As if shipping companies don't have enough problems with pirates off the Somali coast, now they have lawyers insisting that a precise count be made of pirates engaged in each successful attack. That, it turns out, will determine which of the multiple insurance policies larger ships carry, will have to pay.

It works like this. Two types of insurance can cover the costs of a pirate attack. Normally, marine insurance covers acts of piracy. But that was for attacks that amount to robbery or mugging (when a few pirates get aboard at night and get away with whatever they can grab, or come upon crew members, who they rob). However, according to a regulation established in 1986, if twelve or more pirates are involved, the act becomes a "riot", and thus an act of war. That means the separate war risk insurance will pay the bill. Chances in the regulations in 2005, shifted some of the piracy risk from war risk insurance, although not every insurer has accepted this. However,  the "riot rule" could be argued in court if two insurers (one issuing a maritime loss policy, and the other a war risk policy to the same ship) found themselves in a position to make the other guy pay off on a large ransom.

Meanwhile, the Somali pirates have developed an infrastructure of agents and advisors that enable them to negotiate large ransoms for hijacked ships, and deal with all those lawyers. The ship owners have assembled their own teams of negotiators, lawyers and other specialists. When a ship is taken by pirates, the owner calls in the insurance company, which then engages professional negotiators. The insurance company and the shipping company will spend $300-500,000 on negotiators, lawyers and cash transportation specialists to carry out the deal. Of late, the negotiations have taken about two months, and a ransom of one or two million dollars is usually paid. Some ransoms being currently negotiated may be much larger, thus sending the lawyers looking for an escape clause for the insurance company they represent.

The insurance companies are less concerned with possible court battles, and more interested in developing new policies to deal with the unique situation off Somalia. For example, some insurance firms are offering a special policy for ships that must pass close to Somalia. This policy covers "business interruption" losses. With captured ships spending months moored near a pirate base, the owners can lose over a million dollars in lost income and wages for the captive crews. These ships cost thousands of dollars a day to operate, and bring in even more when they are carrying cargoes. The new insurance policy pays for those losses. Even the smaller fishing boats find this kind of insurance attractive, because, despite the pirate risks, the valuable catches to be had off the Somali coast (illegally caught, it should be pointed out, because there is no Somali government to tax foreign boats that take fish in Somali waters) are so profitable, that the extra insurance costs are worthwhile. The crews are less enthusiastic about this business model, and bonuses must be paid to them to compensate for the risk.

 

 


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