War risk or cargo case?

The Maersk Tigris seizure resurrects insurance coverage issues. When Iranian Revolutionary Guards seized the American-owned container ship Maersk Tigris late last month in the Strait of Hormuz, they further inflamed US-Iran relations while reviving fears of traversing this vitally important sea-lane. Their action also resurrected the old issue of war insurance coverage for shipping in this volatile region, but with a new twist: “Is it really a cargo case or an act of war?” asks one maritime lawyer not directly involved in the case. The answer leans toward cargo, but a definitive answer won’t come quickly. While the ship and its crew were released after a week, the case itself will likely to keep the insurance industry, ship owners, shippers and quite possibly the courts in multiple jurisdictions banging heads for sometime to come.

There are potentially two types of insurance at play: One is specifically war risk coverage. The other is more general and called “Protection and Indemnity” insurance, usually referred to as “P&I.” P&I insurance covers a number of third-party liabilities, everything from passenger injury and oil pollution to, say, wharf damage. According to an association Web site, 90% of ocean-going ships are handled through 13 P&I clubs, each club a non-profit mutual association acting as a kind of reinsurance pool. Most clubs are located in Britain. War Risk War risk coverage is far more specific. As the term suggests, it is related to acts of war. While kidnapping and ransom insurance is a separate category as well, some forms of hijacking, piracy and acts of terrorism can also be included in this type of coverage, subject to the specific policy and policy determinations by a governing body of insurers. (The Somali Coast is considered a war risk zone, for example.) Separate insurance clubs handle this coverage. Some are based in Britain, others in Scandinavia. War risk coverage, in fact, was commonplace 30 years back when ships were routinely being sunk during the Iran-Iraq war. (Iranian insurers even offered their own coverage.) This case isn’t nearly as clear-cut. “If it’s a legitimate cargo claim, then P&I is applicable. If not, this may fall into war risk,” said the lawyer. James Kraska, professor at the U.S. Naval War College’s Stockton Center for the Study of International Law and an authority on law of sea issues, leans in favor of P&I. First, he emphasized, the Strait isn’t a war zone. And, while the seizure in his view was unlawful and disturbing, it wasn’t an act of war, even if the Iranian navy fired a warning shot. This doesn’t make the Iranian actions justified. “Iran is unpredictable and doesn’t necessarily apply international standards to what it does,” said Kraska. Of course, there’s a lot about the dispute that remains unknown, and that includes the governing insurance policies. “The devil is in the details,” Kraska said. In 2005, a Maersk ship carried ten containers belonging to an Iranian oil services company to Dubai. When after 90 days no one claimed the containers, Maersk disposed of the cargo. The Iranian company, Pars Talaee, subsequently sued and in February won a $163,000 appeals judgment in an Iranian court. Maersk said it agreed to the payment, but didn’t know that the court tacked on a $3.6 million fine as well. On April 28, ocean-going Revolutionary Guards forced the ship, the Maersk Tigris, into Iran’s Bandar Abbas port. It’s Complicated This is where the story begins to get complicated. The ship is actually owned by the American private equity firm Oaktree Capital, while managed by Germany’s Rickmers Group. It is under charter to the Danish Maersk. So, the Iranians seized property that Maersk doesn’t really own. But where the incident gets really tricky is that the Iranians didn’t “arrest” the ship in port, which is standard in such disputes, but rather at sea. The Strait itself is also unique. It’s 21 miles wide at its narrowest point, but as a coastal waterway it is governed by international convention allowing transit passage. Iran has in the past threatened to block the sea-lane and boarded British and French vessels ostensibly for environmental checks. The whole Pars Talaee case itself may have itself been more clear-cut if the Rotterdam Rules, the multinational convention dealing with maritime cargo liability and responsibility, was ratified. On the other hand, Iran is not a signatory to the convention.