Tribunal considers whether Owners additional insurance against piracy risks was “necessary”
Owners’ additional insurance against piracy found not “necessary” and additional premiums unrecoverable
London Arbitration 4/13
The Tribunal considered whether it was “necessary” for Owners to take out additional insurance against piracy risks. The Tribunal adopted an objective approach towards the meaning of the word, and held that the additional insurance costs were not “necessary”. Accordingly, Owners could not recover this additional cost from Charterers.
Owners took out additional insurance cover against piracy risks (including loss of hire and kidnap and ransom), as the vessel was ordered by Charterers to sail through the Gulf of Aden, where there was known to be a high risk of piracy both at the date of the orders and the date of the charter.
Owners sought to claim from Charterers the additional insurance cost by relying on Clause 56 of the Charterparty and the BIMCO Piracy Clause for Time Charter Parties 2009 (“BIMCO Piracy Clause”). Although, Clause 56 provided for basic war risk to be for Owners’ account, the clause stated that any additional premium for trade to areas which is payable to Owners’ war risk underwriters to be for Charterers account.
Owners also relied on the following provision of the BIMCO Piracy clause, asserting that the additional insurance cover they took out was “necessary”:-
“…(iii) if the underwriters of the Owners’ insurances require additional premiums or additional insurance cover is necessary because the Vessel proceeds to or through an Area exposed to risk of Piracy, then such additional insurance costs shall be reimbursed by the Charterers to the Owners;…”
Owners relied on a dictionary definition of “necessary” as “indispensable” or “requisite”. They argued that “requisite” meant that it was “required by circumstances”, and the additional insurance in this case was required in circumstances where the vessel was ordered by Charterers to go through an area with a high risk of piracy.
There was also a mortgage over the vessel. Under the terms of the mortgage, Owners were obliged to insure the vessel against “usual marine risks”. Owners relied on their insurance brokers’ statement that insurance cover for trading in high risk piracy areas falls within “usual marine risks”.
The Tribunal held that, although it might have been “reasonable” from the Owners’ and mortgagees’ perspective to take out additional insurance, this did not make it “necessary”.
The ordinary meaning of “necessary” imported an element of obligation or inevitability, i.e. it was not sufficient for it to be reasonable to take out the additional insurance.
As to Owners’ argument that it was necessary because the mortgage required Owners to insure the vessel against “usual marine risks”, the Tribunal did not accept that the phrase was limited to the specific circumstances that arise, e.g. increased piracy risk in the Gulf of Aden. The phrase referred to everyday risks to which vessels were exposed.
This decision is an example of the objective approach taken by Tribunals in construing contractual provisions. Although the insurance brokers had different views on what “usual marine risks” meant, the Tribunal adopted an objective interpretation to the phrase and held it did not include the risk of trading in high risk areas.
This case is important for ship owners whose vessels may be ordered to high risk piracy areas. At the outset, owners should consider their specific circumstances and whether it would strictly be deemed “necessary” for them to take out additional piracy risk insurance, as this may affect the recoverability from charterers of any additional insurance premium.