Piracy trends prove need for K&R protection

Risk managers for shipping companies are grappling with the newly heightened risk of maritime piracy, which has grown in the past 3 years. By one estimate, 270 seafarers are being held hostage in the Somali region, the Los Angeles Times reports. Maritime piracy (defined by the United Nations as a "war-like act by a non-state actor," including robbery or criminal violence against a vessel/crew) often includes kidnapping. The International Maritime Bureau reported Somali pirates seized 815 crew members in 2008, showing the attack on the Maersk Alabamawas not an isolated problem.

Kidnapping occurs more frequently than many people realize:

• Kidnapping has increased in Afghanistan, Mexico, Pakistan, the Philippines and Venezuela. The majority of kidnap incidents occur in Latin American countries.
• Hundreds of expatriates have become victims of kidnapping in the past three years. Clayton Consultants Inc.'s Kidnap Risk Brief for 2008 reported the kidnapping of 172 foreigners in Nigeria in 2007.
• In central Asia (specifically Afghanistan and Iraq), kidnapping has spiked.

Kidnapping is more widespread than suspected because only an estimated 10 percent of K&R incidents are reported. Businesses and financial institutions can be targets for ransom demands ranging from thousands to millions of dollars. While firm estimates are hard to come by, in many cases the ransom is paid and the victim released.

While the U.S. military rescued the Maersk Alabama captain taken hostage by pirates, rarely are governments involved in kidnapping situations. Organizations typically are alone in trying to resolve such a crisis. Insurance and the services it pays for are often the only available resources.

Two examples illustrate the range of organizations that face K&R exposures:

Case 1: Non-government organization. This human rights organization with annual revenues of more than $50 million focuses on housing, health care and economic development. Its staff works on site at locations in the Middle Eastern countries of Iraq, Jordan and Burundi. From there, those employees fan out to countries as close as Lebanon, Egypt and Turkey, and as far away as Mexico and Guatemala. Staff traveling to Rwanda and Nigeria is particularly at risk.

Placing this K&R risk with the proper insurance coverage took a comparison of three markets. The domestic broker that served the client, and the client's executives, were not aware of the necessity of the coverages and the profound risk that the organization faced from kidnapping. The client purchased a comprehensive policy with coverage for evacuation, kidnapping and disappearance. Premiums totaled approximately $20,000 annually.

Case 2: Independent church. At the other end of the spectrum is an independent church that does missionary work in Europe, Africa and Central America. This religious organization with 65 employees works from a U.S. location. Its mission trips are short, typically a couple of weeks in length, and it sends groups of 10 to 20 employees at a time. The K&R policy limits are a relatively modest $500,000, but a key benefit for this faith-based community organization is that its coverage includes unlimited benefits to pay an emergency response team to negotiate the safe return of kidnapped employees. Premiums totaled less than $2,000 annually.

Organizations cannot afford to deny the threat that kidnap and ransom poses to their operations and employees. It is essential to ensure that mechanisms are in place to safeguard against these risks.

When trying to place K&R coverage, most knowledgeable insurance agents and brokers seek quotes from multiple markets, including markets in the United States, Lloyd's and other insurance centers. That can be done through partnering with an intermediary that has access to those markets and who can bring greater expertise to the client than what would be possible alone. Policy wording and coverages can be explained by an intermediary familiar with K&R. It's our experience that an international organization's executives often are personally concerned with the issues surrounding K&R, and frequently ask a lot of questions.

When an insurance broker is advising a client about the coverage they need abroad, it is important to understand the unique risks of the region and the growing concern of K&R events. If the broker fails to advise a client properly, the broker might incur legal liability if a lawsuit is later filed against the client. For example, the ship's cook from the Maersk Alabama has reportedly filed a lawsuit against the ship's owners for failing to provide "appropriate levels of security."

Like other specialty coverages, K&R often is provided to a client via a partnership between the retail insurance broker and an intermediary. Brokers who use an intermediary as an expert in K&R cover tend to reduce their own errors and omissions exposure.

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