THE CITY LAW SCHOOL LLM IN INTERNATIONAL COMMERCIAL LAW DISSERTATION SUBMISSION FORM NAMED COPY NAME STUDENT NUMBER DATE FABRIZIO ANDRÉS GARCÍA 130016192 13/08/2014 BACIGALUPO DISSERTATION TITLE "Piracy and Marine Insurance: Assessing modern piracy, the applicable law, the insurance implications of piracy and the effects in the maritime community." DISSERTATION SUPERVISOR MARK AWARDED PROFESSOR. CHRISTOPHER PARSONS. STUDENT DECLARATION I CONFIRM THAT THE WORK I HAVE SUBMITTED IS MY OWN UNAIDED WORK. I CERTIFY THAT I HAVE NOT PUT MY NAME ANYWHERE ON THE SUBMITTED WORK, EXCEPT THIS COVERSHEET. SIGNATURE………………………………………………….. REMEMBER – TWO HARD COPIES & AN ELECTRONIC COPY OF THE DISSERTATION MUST BE SUBMITTED OFFICIAL DATE STAMP The School seeks the consent of students to use their work for demonstration purposes in future years. If you object to the use of your dissertation for such purposes please tick here: "Piracy and Marine Insurance: Assessing modern piracy, the applicable law, the insurance implications of piracy and the effects in the maritime community." Student: Fabrizio Andrés García Bacigalupo Course: LLM – Maritime Law Supervisor: Professor. Christopher Parsons. Word Count: 21,556 TABLE OF CONTENTS 1. INTRODUCTION ............................................................................................................. 1 2. MODERN PIRACY .......................................................................................................... 3 2.1. General Definition ......................................................................................................... 3 2.2. Piracy High risk areas. ................................................................................................. 4 3. MARINE INSURANCE AND PIRACY, LAW CONSIDERATIONS. ................................. 6 3.1. Law principles............................................................................................................... 6 3.2. Marine Hull Insurance Cover ........................................................................................ 6 3.3. War and Strikes Hull Insurance Cover .......................................................................... 7 3.4. Insurance of the Cargo ................................................................................................. 8 3.4.1. Insured and uninsured peril in the same event. ..................................................... 9 3.5. Hijacking for ransom. .................................................................................................... 9 3.5.1. General facts. ........................................................................................................ 9 3.5.2. Potential overlaps with piracy. .............................................................................. 10 3.6. Total loss and detention. ............................................................................................. 12 3.7. Ransoms' recovery. .................................................................................................... 13 3.7.1. Sue and labour and General Average .................................................................. 13 3.8. Legality and Illegality. ................................................................................................. 16 3.9. Public Policy considerations. ...................................................................................... 17 4. MORAL HAZARD AND PIRACY .................................................................................. 18 5. MARINE KIDNAP AND RANSOM (K&R) INSURANCE ............................................... 20 5.1. Concept ...................................................................................................................... 20 5.2. Marine K&R insurance preliminary issues. ................................................................. 21 5.3. Marine K&R Insurance Market ................................................................................... 22 5.3.1. K&R policies' market comparison. ....................................................................... 23 5.4. The P&I Clubs’ position. ............................................................................................. 25 6. COSTS OF RANSOMS ................................................................................................. 26 6.1. Issues ......................................................................................................................... 26 6.1.1. Limited Data ......................................................................................................... 27 6.1.2. Defective piracy reports. ...................................................................................... 27 6.2. Ransoms’ direct costs. ............................................................................................... 27 7. THE DESTINY OF RANSOMS' MONIES. .................................................................... 29 7.1. Distribution of the ransom. ......................................................................................... 29 7.2. Financiers of Piracy. ................................................................................................... 30 7.2.1. How the cash for the operations gets into Somalia. ............................................. 30 7.2.2. Piracy investment schemes. ................................................................................ 30 7.3. Low-level pirates. ....................................................................................................... 32 7.4. Local Communities. .................................................................................................... 33 8. ADDITIONAL CRIMINAL ACTIVITIES FINANCED BY PIRACY PROCEEDS. ............ 34 8.1. Crimes while moving the proceeds. ............................................................................ 34 8.2. Various crimes. ........................................................................................................... 36 8.2.1. Militias' financing and on-land kidnappings. ......................................................... 37 8.2.2. Human smuggling and trafficking. ........................................................................ 38 8.2.3. Piracy and Khat. .................................................................................................. 39 8.3. Piracy and terrorism. .................................................................................................. 40 9. RANSOM PAYMENTS AND MARINE K&R INSURANCE CONSEQUENCES AND IMPLICATIONS. ....................................................................................................... 42 9.1. Positive considerations. .............................................................................................. 42 9.1.1. Proven tool for attacks resolution. ........................................................................ 42 9.1.2. Kidnap and Ransom model modification without a clear replacement solution is risky. .............................................................................................................. 43 9.1.3. Deterring ransom payments will not reduce piracy attacks. ................................. 43 9.1.4. Ransoms prohibition resulting in more violence and terror. ................................. 44 9.2. Negative considerations. ............................................................................................ 45 9.2.1. Insurance of violence, terror and death on sea. ................................................... 45 9.2.2. Pirates' performance enhancing. ......................................................................... 46 9.2.3. Illegitimate sub-employment. ............................................................................... 46 9.2.4. Lawless power concentration. .............................................................................. 47 9.2.5. Limitless ransom payments. ................................................................................ 48 9.2.6. Legitimation of ransoms. ...................................................................................... 49 10. ANALYSIS AND CONCLUSIONS ............................................................................... 50 11. BIBLIOGRAPHY ......................................................................................................... 59 1. INTRODUCTION “So far as harm is concerned it is true that payments of ransom encourage repetition, the more so if there is insurance cover: The Somali piracy is an eloquent demonstration of that.” David Steel J. at the Bunga Melati Dua.1 From a weight perspective, over 90% of goods are currently carried by sea2 which represents around 93,000 merchant ships, 1.25 million seafarers, and almost six billion tons of cargo moving across the sea. Since the end of the Second World War, the sea based trade has doubled every decade.3 Recently, the world's community has been a witness of the re-emerging and flourishing of one of the oldest crimes against sea trade, marine piracy; and consequently the birth of new relations between marine insurance and piracy. This document will address the concept of modern piracy, particularly the relation between piracy and marine insurance, analysing the negative and positive aspects of the payment of ransoms, marine Kidnap and Ransom (K&R) insurance, and the effects in the maritime community. Accordingly, several factors will be considered: the high piracy risk areas, the legal and