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Pirate attacks trigger armed guard coverage

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Insurers and brokers have begun to offer products that cover or facilitate the use of armed security guards onboard ships to defend against piracy.

But despite the persistence of pirate attacks, the shipping industry remains largely reluctant to put firearms on vessels, observers say.

Shipowners and their underwriters typically have been wary of arming merchant ships, due to a host of potential legal, logistical and safety problems. But in recent months, as pirates off the coast of Somalia have hijacked several ships and attacked scores of others, some insurance products have emerged that would cover the use of armed security personnel to ward off pirates.

“The attitude has changed but they never had this type of scenario before,” said Lars Gustafson, a New York-based senior vp at Marsh Inc.

Despite an international flotilla of naval ships shepherding merchant ships through safe-travel corridors, pirates off the coast of Somalia have hijacked 31 ships in 2009 and attacked 172, compared with 42 hijackings and 111 attacks in 2008, according to figures from the International Maritime Bureau's Piracy Reporting Center in Kuala Lumpur, Malaysia.

Senior officers in the U.S. and British navies separately have encouraged ship owners to consider the use of armed security personnel on board. The Danish shipping giant Clipper Group announced in November it was carrying up to six Russian marines aboard some of its ships transiting the Gulf of Aden near Somalia.

In April, an Israeli security team aboard the MSC Melody helped the Italian-flagged cruise ship evade a pirate attack in part by firing warning shots in the air. In November, the Maersk Alabama fended off a pirate attack when a security team on board fired back at approaching pirates. U.S. Navy officials said that security team was a private contractor.

The U.S. House of Representatives has passed a bill with a provision that would limit the liability of anyone using force to defend a U.S.-flagged vessel against piracy in accordance with guidelines established by the U.S. Coast Guard.

In October, broker Marsh Inc. began offering shipowners an anti-piracy package in cooperation with REDfour (Maritime Security Solutions) Ltd., a London-based maritime security firm. Under the arrangement, shipowners that employ REDfour for anti-piracy security can purchase kidnap and ransom insurance through Marsh, potentially with premium reductions of between 5% and 50% from Hamilton, Bermuda-based Hiscox Ltd. The security consultant can fortify a vessel before its voyage, install unarmed security personnel on board, or place an armed security team of former British military officers on the vessel.

Earlier this year, Daytona Beach, Fla.-based Brown & Brown Inc. began offering a general liability “wrap” policy that would cover shipowners for any liability connected to armed security personnel on board, in addition to covering the armed security officers' own liability. Katey Noonan, Brown & Brown's Seattle-based marine division manager, said the policy covers shipowners as named insureds for liability associated with armed security escorts.

Protection and indemnity clubs generally have been ambiguous about whether they would cover armed security and the general liability wrap policy is intended to cover the gap that would be created if P&I clubs denied coverage, Ms. Noonan said. One club seemed content with the idea of a general liability wrap policy on an account Brown & Brown almost wrote recently, she said.

“The (P&I) club was amenable to exclude the liability related to the guards so we could cover it on our end,” Ms. Noonan said. “A lot of clubs we work with have been amenable to do that and they're kind of happy that they can exclude that liability.”

Ms. Noonan and Mr. Gustafson said they thought shipowners' interest in armed security escorts was growing and that the main impediment is the cost.

“These people don't come cheap,” said Mike Ackerman, president and chief executive officer of the Ackerman Group L.L.C., a Miami-based security firm that works with Warren, N.J.-based Chubb Group of Insurance Cos. Mr. Ackerman said he will not put unarmed security personnel on vessels.

But other observers say reluctance to put arms on ships still is widespread.

“I would suggest there's still very much an underlying nervousness amongst both shipowners and their underwriters about employing armed security on vessels,” said Tony Pryce, London-based chairman and managing director of broker BMS Harris & Dixon Marine Ltd.

Critics say armed security creates more problems than it solves, escalating the violence of encounters with pirates, increasing the likelihood of injury to crew members and damage to cargo, and creating third-party liability if security officers harm innocent mariners or vessels. Even if the flag state permits firearms aboard merchant vessels, it often is difficult to get firearms through the ports where security personnel could board a ship, observers said. In addition, some private security contractors have questionable reputations, they said.

“It's difficult to assess in an efficient manner the skill and background and accountability of the people that you're entrusting with the safety and security of your ship,” said James Christodoulou, president and chief executive officer of Stamford, Conn.-based Industrial Shipping Enterprises L.L.C., whose ship, the MV Biscaglia, was hijacked by Somali pirates in November 2008.

Meanwhile, Somali pirates continue to venture farther offshore—a Greek-flagged supertanker was seized near the Seychelles, 800 miles off the Somali coast, in late November—expanding the piracy-prone area of the Indian Ocean. That means hired security officers must stay onboard merchant vessels for longer stretches, further increasing the cost to shipowners.

Mr. Christodoulou said his company employs unarmed security officers onboard their ships.

“Everybody's taking security precautions now that maybe a year ago they wouldn't have because it was just not perceived to be as great a risk as it is now,” he said.