On 26 November 2014 the British Home Secretary introduced the Counter-Terrorism and Security Bill (the Bill) to Parliament, part of which deals specifically with prohibiting the payment of insurance claims in respect of payments made in response to terrorist demands.
The insurers of Piracy, Kidnap and Ransom, and extortion policies will be particularly affected.
The Payment of Ransoms at Common Law
The new Bill, if enacted, will alter the present position at common law.
At common law, until now, the payment of ransoms has not been prohibited, as was recently considered in detail and confirmed by the Court of Appeal in Masefield AG v Amlin Corporate Member Ltd.,1 a case concerning the hijacking of a vessel off Somalia by pirates. The court surveyed the state of previous authority, industry practice and government policy, noting that:
There is something of an unexpressed complicity: between the pirates, who threaten liberty but by and large not the lives of crews and maintain their ransom demands at levels which industry can tolerate; the world of commerce, which has introduced precautions but advocates the freedom to meet the realities of the situation by the use of ransom payments; and the world of government, which stops short of deploring the payment ransom but stands aloof, participates in naval operations but on the whole is unwilling to combat pirates with force …. In these morally muddied waters, there is no clearly identified public policy, no substantially incontestable public interest, which could lead the courts, as matters stand at present, to state that the payment of ransom should be regarded as a matter which stands beyond the pale, without any legitimate recognition.
Some commentators have speculated that the payment of ransoms has, since 2010, been illegal by virtue of the Bribery Act 2010. In fact, the Bribery Act does not expressly prohibit the payment of ransoms. The Court of Appeal in Masefield noted, with specific regard to the Bribery Act 2010 that: “the payment of a ransom in response to threats to life or liberty is not prima facie a bribe, done for the purpose of obtaining an improper advantage.”
There was nevertheless some uncertainty in the market about the position. The UK government has now moved to end that uncertainty, at least in relation to demands related to terrorism.
New Offence – Insurer Making Payment in Response to Terrorist Demands
The Bill, when passed, creates a new criminal offence, to be inserted into the Terrorism Act 2000, as follows:
S. 17A Insurance against payment made in response to terrorist demands:
(1) The insurer under an insurance contract commits an offence if
(a) the insurer makes a payment under the contract, or purportedly under it,
(b) the payment is made in respect of any money or other property that has been, or is to be, handed over in response to a demand made wholly or partly for the purposes of terrorism, and
(c) the insurer or the person authorising the payment on the insurer’s behalf knows or has reasonable cause to suspect that the money or other property has been, or is to be, handed over in response to such a demand.
The government’s Explanatory Note says:
With kidnap and ransom insurance the expectation that a ransom payment might be reimbursed might create an environment which facilitates the payment of terrorist ransoms. The provision in this Bill would make clear that insurers may not reimburse ransom payments made to terrorists. This provision would create a new offence which would explicitly prohibit the reimbursement of a payment which they know or have reasonable cause to suspect has been made in response to a terrorist demand.
Government guidance published with the Bill states that “insurance contracts” includes “reinsurance contracts”
Note that the Bill does not prohibit payment in respect of any demands, but only those made wholly or partly for the purposes of “Terrorism”. Terrorism is defined in the Terrorism Act 2000 as the “use or threat of action designed to influence the Government or to intimidate the public or a section of the public; and is done for the purpose of advancing a political, religious or ideological cause”. Certainly this definition would capture most of the activities of ISIL, the IRA, Al Qaeda, but could also capture the activities of lesser known organisations engaged in direct action in the fields such as animal rights, religion, environmentalism and politics.
The Bill does not prohibit the making of payments in respect of ordinary non-terrorism related criminality. So, for example, the indemnification of insureds in respect of ransom or extortion claims made for purely private gain would fall outside the ambit of the new offence.
In some circumstances those demanding the monies may have mixed motives, or motives that are difficult to determine. This has been contemplated by the draftsman, and the Bill envisages that an offence can be committed even where the demand is made only partly for the purposes of terrorism.
The offence will only be complete if the insurer or person acting on its behalf “knows or has reasonable cause to suspect that the money is to be handed over in response to such a demand.”
It will be for courts to decide whether insurers should have had such “reasonable cause” to believe that the demand in question was made wholly or partly for the purposes of terrorism. It would be very unwise for insurers to turn a blind eye to information suggesting possible terrorist involvement so as to be able to pay a claim. Given the serious consequences of committing the new offence, insurers would be well advised to proceed with a high degree of caution when paying any form of ransom or demand.
If insurers believe that the claim they are faced with has no connection with terrorism, and wish to make payment, it would be wise to commission detailed research and opinion from authoritative experts in order to verify the same, before doing so.
Ignorance of the law, or of the details of the underlying facts, will not necessarily be a defence.
Corporate and Personal Liability
Section 17A(2) makes clear that where an offence has been committed by a company, and such offence is “proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of (a) a director, manager, secretary or other similar officer … that person, as well as the body corporate, is guilty of the offence and liable to be proceeded against and punished accordingly.”
Insurance company managers and officers can therefore commit an offence merely by consenting to a payment in response to terrorist demands, or even by allowing such a payment by neglect.
It will therefore be vital for insurers to train claims staff, managers and directors on the importance of the new Bill. Without training, the risk of staff inadvertently allowing illegal payments to be made is elevated.
Sentencing and Punishment
The maximum prison term is 14 years and/or a fine. The court may also order any sum paid by the insurer to the insured to be forfeited to the Crown.
S. 17A , which creates the new offence, will have extra-territorial application, in common with terrorist financing offences under the Terrorism Act. Government commentary on the Bill says that: “arrangements made to conduct financial transactions outside the UK are liable to be caught.”
By preventing claims payments in respect of demand related to terrorism, the Bill will in many cases create a mismatch between coverage appearing on the face of policies and coverage that is in fact available.
It would be prudent for insurers to review and amend their policies so as to make clear that the policy will not pay for demands connected with terrorism.
Unless and until such policies can be so amended, brokers should take care to advise their clients that the coverage available under piracy, kidnap and ransom, extortion and similar policies may in practice be restricted by the new offence.
- The Bill, if enacted, makes absolutely clear, for the first time, that insurance claims cannot be paid in respect of payments demanded in whole or in part for the purposes of terrorism.
- This new offence carries the risk of fines and imprisonment of up to 14 years.
- Managers and officers can be personally liable.
- Ignorance of the offence, and/or of the facts surrounding a claim will not necessarily be a defence to prosecution.
- It is therefore essential that insurers train their staff, management and officers about the Bill.
- Policy wordings should be reviewed.
- Brokers should alert their clients to the effect of the Bill, and make clear to their clients that policies cannot respond to demands related to terrorism.
The UK government believes that the expectation that a ransom payment might be reimbursed creates an environment that facilitates the payment of terrorist ransoms.
Notwithstanding that, the risks of kidnapping and ransoming of staff, piracy and extortion by terrorists or quasi-terrorists is a significant and legitimate concern of businesses of all sizes, and indeed of private individuals. The new Bill, if passed in its current form, will limit the scope of such insurance cover available.
Whilst the proposed new offences may be well intentioned, unintended consequences will likely include the increased reluctance of businesses to send staff, vessels, aircraft and assets to many parts of the world, with possibly serious knock on effects for international trade and commerce. Given that the demand for these special risks is likely to continue, one effect of the proposed law will be to drive the underwriting of these products to overseas jurisdictions, beyond the reach of UK authorities altogether.
It is not clear if the UK government has considered all the implications, and the insurance community may wish to consider making representations to Parliament to express their views.