Yo-Ho-Ho and No Exclusion: Louisiana Federal Court Gives Insurer “No Quarter” and Refuses to Apply Terrorism Exclusion for Act of Piracy Off Coast of Nigeria

The federal district court for the Eastern District of Louisiana in Johnson v. PPI Technology Services, Inc. (Case No. 11-2773, Rec. Doc. 305 (E.D. La. Dec. 17, 2013)) has scuttled an insurer’s attempt to avoid coverage for an act of piracy off the coast of Nigeria under the “Terrorism Exclusion” in a so-called Foreign Commercial Package Policy. The Johnson decision should be viewed as a jolly roger warning-flag to insureds and insurers alike to review their policies (hull, P&I, and general liability) regarding the applicability (or not) of terrorism/war risk exclusions to acts of piracy – particularly for companies working in the booming but dangerous oil fields off Africa, the haunt of modern day Barbary corsairs. The rash of recent piracy attacks on oilfield interests off the western coast of Africa has been widely publicized, but with a somewhat surprising dearth of litigation defining the potential liabilities for such incidents (at least in the United States). As such the Johnson decision is particularly important given the relatively scarce jurisprudence regarding insurance issues inherent in piracy events.

Johnson involved a 2010 attack on the Transocean High Island VII jackup drilling rig during operations off the coast of Nigeria in the highly productive Okoro field. http://mobile.reuters.com/article/idAFTRE6A728X20101108?pageNumber=1&irpc=932. Two American crew members were shot (one in the leg and one in the foot) when armed men boarded the rig and demanded money, and one of the Americans was then kidnapped and held hostage at the gunmen’s shoreside camp for ten days before being rescued. The two Americans sued their employer (oilfield service company PPI Technology Services, L.P., “PPI”) under the Jones Act and general maritime law, and PPI in turn sued its insurer (Insurance Company of the State of Pennsylvania, “ISOP”)seeking coverage for the crew members’ claims under its Foreign Commercial Package Policy. PPI and ISOP filed cross motions for summary judgment regarding ISOP’s duty to defend, and ISOP argued that coverage (and thus any defense obligation) was excluded under the so-called “Terrorism Exclusion,” which excluded coverage for bodily injury caused by:

the use or threatened use of force or violence against persons or property, or commission of an act dangerous to human life or property, or commission of an act that interferes with or disrupts an electronic communication system, undertaken by any person or group, whether or not acting on behalf of or in connection with any organization, government, power, authority or military force when the effect is to intimidate or coerce a government, the civilian population or any segment thereof, or to disrupt any segment of the economy.

Under this provision, the Johnson Court concluded that three elements had to exist to trigger the “Terrorism Exclusion”: “(1) use of violence; (2) that is undertaken by a person or group of persons; (3) that has the effect of intimidating a segment of the population or disrupting a segment of the economy.” p. 8. The court held that while the first two elements were clearly met, the third was absent. In this regard, the court ultimately rejected ISOP’s argument that the gunmen’s attack on the High Island VII (a) intimated a “segment of the population” – namely, the crew of the rig; and (b) disrupted a “segment of the economy” – namely drilling operations on the rig. Specifically, the court held (under the applicable Texas law, based on delivery of the policy in Texas to a Texas assured) that two reasonable interpretations of the “Terrorism Exclusion” existed – one favoring coverage, one excluding coverage – and thus the interpretation favoring coverage must prevail:

it is unclear whether the gunmen’s actions had the effect of intimidating a segment of the population and/or disrupting a segment of the economy. On the one hand, it is reasonable to determine that: (1) this was merely an act of a violent robbery and kidnapping for pecuniary gain, and (2) that it only had an effect on those present in the HIGH ISLAND VII, which is not a segment of the population. Conversely, it is also reasonable to determine that the gunmen’s actions were acts of piracy, which is an ongoing problem in some areas, and has the effect of chilling maritime activity in the waters on Africa’s coast, thereby affecting that segment of the economy. Further, such actions could intimidate all vessel workers in that geographic region, which group constitutes a segment of the civilian population . . . [B]oth of these interpretations are reasonable. Therefore, the Court must err in favor of coverage and find that the Terrorism exclusion does not relieve ISOP of its duty to defend based on the Fifth Circuit’s rulings that an insurer shall have a duty to defend when in coverage is in doubt.

pp. 7-8. It remains to be seen whether ISOP will appeal this decision, as the case is not set for trial until April of this year.

The Johnson decision will be extremely important to insureds and insurers alike in future litigation involving issues of piracy in the oilfields off the coast of Africa. In 2013 alone there were over 30 reported cases of piracy off the coast of Nigeria, and 2014 has already seen its first act of piracy (against a liquefied petroleum gas tanker off the coast of Gabon). http://gcaptain.com/gulf-of-guinea-sees-2014s-first-piracy-act/. Moreover, many Louisiana E&P and oilfield support companies are active in the African oilfields, which means that issues regarding insurance for pirate attacks will likely continue hitting close to home as they have in Johnson. http://www.nola.com/crime/index.ssf/2013/10/pirates_kidnap_americans_from_1.html.

In this age of the new Barbary pirates, and in light of the relative dearth of jurisprudence regarding insurance coverage for risks related to piracy, insureds and insurers would do well to check the language of their policies, by comparison with that in Johnson, to determine the potential scope of their coverage/liabilities.