We previously reported on the judgment in the case of Masefield AG v Amlin Corporate Member Ltd [2010] EWHC 280 (Comm), [click here for our previous blog], concerning the interpretation of actual and constructive total loss under the Marine Insurance Act 1906 (the Act). At first instance, the court held that the capture of a vessel by pirates did not create an actual total loss of the insured cargo, as at the date of commencing proceedings, the insured could not be said to have been 'irretrievably deprived' as required under section 57(1) of the Act. For the insured to pass this objective test, it had to show that it was legally and physically impossible to recover the insured property. As there was a strong likelihood that the insured was going to recover its property through the payment of a ransom, it could not be said to have been 'irretrievably deprived' of its cargo.

On appeal, the insured argued that (1) capture by pirates created an immediate actual total loss, whatever the prospects of recovery might be; (2) the capture of the vessel, even with the intention of returning the property on payment of ransom, constituted theft; and (3) the law should not take into account the payment of a ransom as a reason for calculating the possibilities of recovery as there was no duty on an insured under section 78(4) of the Act to pay a ransom.

The Court of Appeal held that piratical seizure, where there was not only a chance, but a strong likelihood, that payment of a ransom of a comparatively small sum, relative to the value of the vessel and her cargo, would secure recovery of both, was not an actual total loss. The court held that there was no rule of law that capture or seizure was an actual total loss, although a vessel captured by pirates, in the absence of a policy of ransom, could amount to an actual total loss where the pirates escaped with the vessel for their own use and there was no prospect of finding or recovering the vessel or cargo. However, where there remains a chance of recapture, even such a seizure will not give rise to an immediate actual total loss.

The Court found that the insured's argument of theft also failed. For the peril of theft to cause an actual total loss, the test of being 'irretrievably deprived' has to be met. It had not been satisfied in this case. Further, in response to the insured's argument that the payment of ransom should not be taken into account, the Court held that "there is no universally recognised principle of morality, 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". The Court stated that there is no legislation against the payment of ransoms and the fact that there might be no duty to make a payment of ransom did not turn a potential total loss which might be averted by the payment of ransom into an actual total loss. Therefore, the fact that the shipowner paid a ransom defeated the insured's claim.

The Court of Appeal decision confirms the law as was previously decided by the High Court in 2010. This decision provides useful guidance to shipowners, cargo owners and their insurers on the issues arising from the piracy problems off the coast of Somalia.