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In harm’s way

Why kidnap and ransom coverage rarely ends up in court
By Jean-Claude Rioux
June 12 2015 issue

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Stories about piracy and kidnapping are more interesting than stories about the law of insurance. Perhaps the only way to get insurance mentioned in a Hollywood film is to have the hero appear as a hostage negotiator retained by an insurance company pursuant to a kidnap and ransom policy. However, you really can buy this stuff. Typical coverage clauses might read as follows:

We will pay you for Extortion/Ransom Moneys paid by you or a Covered Person(s) resulting directly from the following incidents occurring during the Policy Period:
1.      Kidnap or alleged Kidnap of a Covered Person(s); and
2.      Extortion upon you or a Covered Person(s)

There will likely be an incident response clause in which the insurer will promise to pay for the customary expenses of independent security consultants retained by the insured, with the proviso that the insurer must approve the firm retained. If you authorize someone to have custody of the ransom money, and that person runs off with the ransom money, that will most likely be an excluded loss. There will also be a clause requiring the insured to make every reasonable effort not to disclose the existence of the insurance.

Why do we never see these cases in our courts? Part of the reason is likely that insurers take this kind of thing very seriously, and don’t often take off-cover positions on this kind of insurance. Another part of the reason is that the kidnappers are likely happy to release their hostages in exchange for large sums of money. I suspect, if you want to be in the kidnapping business over the long term, you should be very pleased to be able to negotiate the release of your hostages in exchange for a large payment, and you would most likely want to get a reputation for acting reasonably when there is a significant amount of money on the table.

These sorts of issues do make it into the law reports every now and then. In Masefield Ag v. Amlin Corporate [2010] EWHC 280 (Comm), the tanker ship Bunga Melati was seized by pirates in the Gulf of Aden. The pirates took the ship into Somali waters and opened negotiations. The plaintiff in the lawsuit was a cargo owner who had some bio-diesel on the ship. The cargo owner gave the insurers a notice of abandonment, and took the position that the cargo was an actual total loss as soon as the ship was taken by the pirates. The ship owners successfully negotiated the release of the ship, cargo and crew only 11 days after the plaintiff delivered the notice of abandonment. The court found that there had been a relatively large number of seizures by Somali pirates between 2007 and 2009 and that in every case, the ships and crews were released after payment of a ransom. Since the Somali pirates’ practice made it likely that the cargo would be recovered (and it was in fact recovered) the court held that the cargo was not a loss and found that the insurer did not have to pay.

In response to an argument that payment of ransom to pirates is contrary to public policy, the court noted that, while payment of ransom does encourage piracy and kidnapping, if people and property are to be taken out of harm’s way, often the only option is to pay the ransom, especially when diplomatic and military intervention is either not practically possible or might endanger the hostages. The court noted that kidnap and ransom coverage is a long-standing feature of the insurance market, but also noted that kidnap and ransom coverage could be recovered as a sue and labour expense. It’s a usual term (express or implied) of many kinds of insurance that the insured person must do anything a prudent uninsured person would do to minimize the loss, including legal action (the “sue” part) or doing work and incurring expenses (the “labour” part). In other words, even if my employees and property are taken by pirates or kidnappers, and the employees are insured people or the property is insured property, or both, and the prudent thing to do is pay a ransom to get everyone and everything out of harm’s way, I can pay the ransom and recover the money from my insurers.

In Canelhas Comercio v. Nicholas Wooldridge [2004] EWHC 643 (Comm.), the court considered a case in which Canelhas, the managing director of a company that cut and polished emeralds, was kidnapped along with his wife, his mother and his son. The kidnappers explained to Canelhas that it would be best if he were to go to his company’s offices, collect his entire stock of emeralds, and deliver them up in exchange for the safety of his family. Canelhas delivered up the emeralds and claimed for the value of the stock under his “all risks” commercial insurance policy. The defendant insurer argued that policy was not a kidnap and ransom policy. The court found that an “all risks” policy could cover kidnap and ransom.

What is the moral of the story?  If you’re doing business in a dangerous part of the world, talk to your broker.

Jean-Claude Rioux is a lawyer with Flaherty Dow Elliott & McCarthy.

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