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Background:

The practice of payment of Ransom in order to free a person who was kidnapped or goods which were stolen is known since the beginning of written history. Roman records show that even Julius Caesar was kidnapped by pirates and ransom had to be paid in order to secure his release. Throughout the middle ages history records mention payment of ransom to secure the release of people (such as Richard the Lion Heart) and property.

Even in modern times such payment is often required by pirates, who hijack ships (recent cases involve hijacking of ships near Somalia in the Gulf of Eden).

Several recent Israeli Court cases have dealt also with the relationship between the payment of Ransom by an insured and his obligation to mitigate his losses.

These cases involve occurrences where cars were stolen from Israeli insureds, and the car thieves demanded ransom in order to secure the release of the expensive vehicles. 

Legality of Payment:

As a matter of law, the payment of ransom to the car thieves is not a criminal felony. It is not considered as assistance of the theft itself and therefore the payment is not forbidden according to the Penal Code. It should be noted that the Prohibition of Financing Terror Law - 2005 (hereinafter: "Terror Law") prohibits even indirect financing of a terrorist organization and therefore, if members of such organization demand ransom of any kind, it is forbidden under the said Law.

Those who paid ransom in order to release their property approached their Insurers and requested that such payment will be covered by insurance.

Contradicting Court Rulings:

Several Court rulings have dealt differently with the question of payment of ransom by insureds.

In S.C. 1078/07, Avitan Avraham v. Israel Phoenix Assurance Co. Ltd. the Petach Tikva Magistrates Court dealt with the issue of payment of ransom. Following a car theft in 2006, the thieves approached the insured, a garage owner, and negotiated with him about the return of the car which was stolen from a repair shop. The expensive car was returned to the owner against payment of approximately $5,000 by the Insured.

Following payment of the ransom, the Insured approached his property insurer and claimed compensation for the costs he incurred in mitigating the damage as a result of the theft. The Insurer declined the payment, arguing that ransom is not an insured event, and a claim was filed. The Court denied the claim and stated that the economical factor (saving payment of full value of the car) may be one of the factors of the Insurer to pay the claim but there are others factors such as the fact that payment of ransom may increase the number of car thefts. The Court further reasoned that the Insurer has no way of checking whether such ransom is actually being paid (no receipt is issued). The Court concluded that it is the Insurer which should make the economic decisions of the means for mitigation of the loss and not the insured: "Mitigation of damage, in itself, does not entitle the insured to be automatically compensated for every expense he incurs."

In conclusion, the Court stated that:

"In view of... the moral and economical implications of collaborating with car thieves, I am of the opinion that the defendant should not be obliged to compensate plaintiff for the ransom paid." 

In another ruling, C.C. 5492/01 (Jerusalem), Herzl Michael v. Clal Insurance Co. Ltd. a car valued at about $150,000 was redeemed for a price of $21,000. The Insurer declined coverage stating that it has not been proven that the car had been stolen, and that ransom is not a reasonable means for mitigation of the damages. The Court denied the claim ruling that indeed it has been proven that the car was stolen and that ransom was paid, however it in order not to encourage more car thefts, ransoms should not be paid in order to mitigate such damages. The Court ruled that:

"Public policy does not comply with cooperating with perpetrators of the felony (whether this can be seen as a felony of its own or not) and indirectly assisting in the execution of the felony."

While in the Avitan and the Michael cases, the Court ruled in favour of the Insurer which refused to compensate the insured based on public policy allegation, in C.C. 4194/00 Tsimberg Steam Laundromat Ltd. v. Migdal Insurance Co. Ltd. et al. the Court ruled against the Insurer ordering it to compensate plaintiff for the ransom paid. The reason given for this different ruling is the fact that the insurance agent, acting as a representative of the Insurer, ordered the insured to pay the ransom. In view of this, the Court ruled that the insurance agent's instructions are actually considered as the Insurer's instructions and the latter cannot go back on its instructions and must pay the ransom.

Ransom in Marine Insurance:

The Israeli Courts have never addressed the question of payment of ransom to release goods stolen by pirates.

The Israeli Marine Insurance is a unique type of insurance and unlike other insurance branches, it is subject to the Ottoman Marine Trade Law of 1863 (hereinafter: "the Trade Law") and not to the Insurance Contract Law - 1981 (hereinafter: "the Insurance Contract Law"). Some of the provisions of the Trade Law have been repealed by the Transport of Goods by Sea Ordinance; however the sections relevant to General Average have not been repealed.

Payments of Ransom have, in the past, been considered as General Average. Section 245 of the Trade Law defines General Average, inter alia as:

"(12) Costs which arose as a result of a claim for return of the ship or the goods, while under arrests or after been taken, and are sued at that time by the captain;...

(14) And in general, and damage willingly caused in a case of danger, and which were causes as a direct result of the said danger, and any expenses similarly undertaken in order to preserve the general safety of the ship and the cargo for as long as the risks exists."

Adv. Hakahm Aharon Kadouri, in his book "Marine Insurance and Claims", also states that "monies which are paid to pirates in order to save the ship and the cargo from them, and provided that theses sums are given willingly for the purpose of saving the ship and the cargo", falls within the boundary of the definition of Section 245 of the Ottoman Law.

In view of this opinion, which seems reasonable, we can assume that the Trade Law applies to ransom payments, and thus these are not illegal in Israel.

We wish to comment that similarly to the UK law, according to which payments of ransom to pirates are not considered payments to terrorists (the first are allowed while the latter are illegal), also in Israel, such payments to pirates do not fall within the framework of the Terror Law (according to the definition of "an Act of Terror" therein).

Conclusion:

Although payment of ransom is not illegal, the Israeli Courts deem it as contrary to the public policy (except with regards to Marine Insurance). The Courts are likely to order an insurer to cover payment of ransom, only if such payment was carried our under instructions of an insurer or his representative (the insurance agent).