Kidnap and ransom insurance is one of the most valuable yet underutilised insurance policies in your company's insurance portfolio.
Kidnap and ransom (K&R) insurance has been around since the early 1900s, but has come to prominence because of the increased piracy in the waters surrounding the Horn of Africa. However, as the risk of piracy has declined, in part from the increasing prevalence of armed guards on board vessels passing through dangerous waters, kidnapping and extortion events have shifted back onshore. The primary motive for most kidnappings remains financial: the extortion of a ransom from the victim's family, employer or government.
As Australian businesses increasingly operate overseas and conduct business internationally, K&R insurance is taking on increased importance for Australian businesses.
What do kidnap and ransom insurance policies do?
There are a number of different K&R insurance policies on the market, all of which are designed to provide indemnity against financial loss arising from the perils of kidnap, extortion, detention and/or hijack. While often written as an adjunct to wider forms of crime and extortion insurance, K&R focuses on the physical threat to persons in cases involving abduction and/or extortion under threat of violence. Some policies may cover a specific territory, while others have worldwide application.
The legality of ransom payments
K&R policies will often exclude the payment of a ransom that may breach trade and/or economic sanctions, prohibitions or restrictions, be they United Nations, European Union or ones imposed unilaterally by an insurer's country of domicile, such as the United States. The purpose of these clauses, often called "sanction clauses", is to protect the Underwriters from a situation where they are obliged to make a payment under the Policy, where it would be illegal for them to do so by virtue of the operation of such a sanction.
Some sanction clauses are worded so as to provide insurers with the right to terminate the contract of insurance, while other clauses provide that the contract of insurance will be suspended or simply will not operate if a claim, or potential claim, is rendered illegal due to a trade sanction. The most common approach is simply to exclude any claim the payment of which would be illegal or place the insurer in breach. The insurer will usually have the burden of proving that such an exclusion applies, if it wishes to avoid payment.
While these exclusions are problematic, since there is no way to determine in what future scenarios they may or may not apply, all insurers appear to be equally intransigent in refusing to remove them. If paying a claim really would place an insurer in breach of a trade sanction which was binding upon it by application of local law, it is likely that the doctrine of contractual frustration also would apply to preclude payment.
Additionally, many countries, such as the United States and Australia maintain explicit policies against paying ransoms. Recently, the British Government introduced an amendment to its terrorism legislation which was designed to prevent payment of ransom to terrorist organisations and insurers who fund such payments may face criminal prosecution. It remains to be seen what effect this will have on the K&R market more generally.
K&R insurance and your business
While coverage for the actual cost of a ransom may be problematic, there are other benefits to this class of insurance. If a high-profile individual in your business was kidnapped or detained while travelling internationally, what would you do? To whom would you turn for help? The resolution of such a situation is fraught and complicated and, thankfully, something which businesses do not face on a regular basis. Negotiations and other arrangements need to take place, be managed expertly and as quickly and effectively as possible. For companies that require it, it is important to have the necessary policies in place which can assist in times of crisis.
If properly negotiated, K&R policies can provide:
- access to experienced response consultants who can advise on possible options, negotiation strategies and liaise between the relevant parties, including authorities. For many insureds, the real attraction of the cover is not the loss indemnity provision but rather access to the services of high-end specialist security and crisis management firms which the insurers can mobilise rapidly in the event of a claim;
- reimbursement of ransom, "facilitation" and other payments (to the extent it is legal);
- reimbursement of legal costs;
- emergency medical evacuation; and
- the payment of additional expenses such as travel and accommodation costs, medical fees, rest and rehabilitation expenses, lost revenue, lost salaries, additional security costs, personal financial loss of Insured persons and other reasonably incurred expenses.
What you should do about kidnap and ransom insurance
If you believe your business would benefit from K&R insurance, speak to your broker about arranging appropriate cover. However, this should be undertaken discretely as many policies contain a condition that the company should use its best efforts to restrict knowledge of the existence of K&R insurance. You should ensure that those covered are unaware of the policy (to the extent it is possible), unless and until it is needed. A K&R policy is something that hopefully your business will never use, but when called upon, can represent a useful resource.
When reviewing potential policy wordings it is important to make sure that:
- the policy has worldwide application, if possible, not just to countries classified as "high risk";
- the definition of covered/insured persons is sufficient for your company's purposes; and
- the ancillary benefits described above are all included and are provided in addition to any indemnity for actual ransom costs. The policy must deliver those benefits, even if payment in respect of ransom costs themselves is illegal or excluded.