The Lawletter Vol 37 No 3
In all areas of law, long-established principles must at times be applied to novel circumstances or technologies, with a result that is often predictable, based upon the general legal elements of the underlying legal claim. Such is the case with a threat in the world of international shipping—the hijacking and ransom of commercial vessels in the Gulf of Aden. This threat is not truly novel, but the danger, often romanticized in popular culture due to its remoteness to modern life, has after more than a century reemerged in recent years as a major threat.
Maritime insurance policies are often named-risk policies, and one major class of risk is termed "general average," a broad category encompassing losses to be proportionately borne by all parties interested in the venture, so long as the losses were occasioned by voluntary sacrifice of part of the ship or a portion of the cargo in order to save the vessel or the voyage in an emergency. An examination of two types of losses experienced during a pirate hijacking—payment of ransoms and consumption of fuel and supplies by pirates—signals what losses are properly compensable under the general average named-risk category of an insurance policy.
There are three requisite elements to prove a general average sacrifice: (1) the vessel must be in imminent danger; (2) there must be an intentional, voluntary sacrifice of property by the crew or owners to avert that peril; and (3) by that intentional sacrifice, the safety of the vessel, the remaining cargo, or the voyage must be secured. See Am. Afr. Exp. Co. v. S.S. Exp. Champion, 442 F. Supp. 715 (S.D.N.Y. 1977). These elements needed to prove a general average sacrifice were later codified in the York-Antwerp Rules, incorporated into many marine insurance policies today:
There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.
York-Antwerp Rules 2004 R. A(1) (emphasis added). Under Rule C(3), "any indirect loss whatsoever, shall not be allowed as general average."
Thus, in light of these well-settled elements of general average, we may examine the two classes of losses that often occur during piracy events. First, payment of ransoms is clearly covered as a general average sacrifice, as ransoms represent property (money) paid by parties interested in the maritime venture in order to secure the safety of the vessel and crew during a time of peril.
In contrast, the supplies and fuel consumed by the hijackers while the vessel is under the control of the pirates are, under these same elements, clearly not a general average sacrifice. Such consumption of rations and fuel by pirates, (1) while certainly made during a period of peril for the vessel, is (2) not an intentional and voluntary sacrifice by the crew or owner but a theft by the hijackers, and (3) such consumption does not operate to secure the safety and freedom of the vessel. Thus, losses realized by pirate consumption of provisions and fuel during the hijacking event would not be covered as a general average sacrifice. The U.S. Supreme Court acknowledged this important distinction over a century ago, back when piracy was a then-modern threat:
The distinction between voluntary and compulsory sacrifice is well illustrated . . . [by the example that] money voluntarily paid by the master to ransom the ship and cargo from pirates is to be contributed for [i.e., general average sacrifice]; but not so as to goods or money forcibly taken by pirates.
Ralli v. Troop, 157 U.S. 386, 393-94 (1895) (emphasis added) (citations omitted).