Piracy: Piratical seizure versus Payment of a ransom. Last updated 11-Oct-2014

The great principle, therefore, on which all the cases of actual total loss depend appears to be this – the impossibility, owing to the perils insured against, of ever procuring the arrival of the thing insured. If, by reason of those perils, the assured is permanently and irretrievably deprived not only of all present possession and control over it, but of all hope or possibility of ever ultimately recovering possession of, or further prosecuting the adventure upon it, that is a case of actual total loss, independently of the election of the assured to treat it as such. Notice of abandonment would in such case be a mere formality because nothing remains to be abandoned…
Arnould"s Law of Marine Insurance and Average, 17th ed, 2008, para 28-03

Masefield AG v Amlin [2011] EWCA Civ 24

In the Court of Appeal the insured, the owner of two parcels of bio-diesel shipped onboard the Bunga Melati Dua, abandoned their previous claim for CTL and confined its claim to one of ATL, arguing that they were irretrievably deprived (section 57(1) of the Marine Insurance Act 1906) from possession of subject-matter insured in spite of ransom paid, which only amounted to submission to extortion. Moreover, such ransom was so undesirable from the point of view of the public interest and universal principles of morality, that it could be no part of an insured’s duty to preserve his property from loss by succumbing to a ransom demand. The court rejected this contention finding that payment of a ransom reflected strong likelihood that payment of a ransom would secure recovery of both, the vessel and the cargo.

Lord Justice Rix giving the only reasoned judgment was forced to acknowledge that his earlier statement in Kuwait Airways Corporation v. Kuwait Insurance Co SAK [1996] 1 Lloyd’s Rep 664 at page 687 saying that "in case of capture, because the intent is from the first to take dominion over a ship, there is an actual total loss straightaway" was too broad for the issue in hands and related only to a "capture in which there was an intention from the first to take dominion over an insured property". That statement was based on "wait and see" analysis delivered by Mr. Kerr QC in his was an arbitration award in Dawson’ Field (1972). Mr. Kerr said inter alia that:

"Wait and see" is therefore to some extent always an essential ingredient of a claim for a total loss in circumstances involving deprivation of possession, unless (perhaps) there is a deprivation within the terms of specifically enumerated perils such as "capture" or one can infer from the circumstances that there was a clear intention at the time of the dispossession permanently to deprive the owner of possession and ownership.

Presently learned judge adopted but clarified this analysis at para 56:

It was not an irretrievable deprivation of property. It was a typical "wait and see" situation. The facts would not even have supported a claim for a CTL, for the test of that is no longer uncertainty of recovery, but unlikelihood of recovery. That is itself recognised by the insured’s dropping of its CTL claim. There is no rule of law that capture or seizure is an ATL. The subject-matter is not amenable to a rule of law at all: it is all ultimately a question of fact. The typical case of capture, by a nation’s warship, subject to condemnation as a prize, is not an ATL, although it may mature into one. Piratical seizure, in the absence of a policy of ransom, may amount to an ATL, where the pirates escape with their prize for their own use and there is no prospect whatever of finding or recovering vessel or cargo: but where a chance of recapture remains even such a seizure will not give rise to an immediate ATL, and in any event that is very far from this case.

Thus payment of ransom in factual background of this case deprived the insured from claiming ATL (Actual Total Loss). This decision clarifies that ATL test should be based on whether "the assured is permanently and irretrievably deprived not only of all present possession and control over it, but of all hope or possibility of ever ultimately recovering possession of, or further prosecuting the adventure upon it" and is not triggered automatically upon the capture. It worthy to underline that under the different circumstances, i.e. should vessel has not be released so relatively fast (less then two months time) "wait and see" analysis might not be so helpful to the insurers side. As recent developments around piracy situation in the Indian Ocean shows, so called modus operandi of pirates is far from something settled. When it would be probably too risky for the pirates to keep a VLCC tanker in captivity for a long time but smaller vessels, as experience shows, can remain outside of the owners’ possession indefinitely long time or may be used by the pirates as mother vessels. In the later case the test that there was an intention from the first to take dominion over an insured property would probably be satisfied.

Read text of Rix LJ judgment here.

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