Kit Chaskin and Noel Paul, Reed Smith LLP, Chicago
On June 9, 2011, alleged FARC guerrillas in Colombia kidnapped four employees of the British oil company Emerald Energy, a subsidiary of the Chinese petrochemical company Sinochem. Colombia police reported that the Emerald Energy workers were kidnapped for ransom.
In March, Colombian troops rescued more than 20 oilfield workers kidnapped the day before by suspected leftist rebels. These headlines reflect disturbing trends: incidents of kidnapping for ransom are increasing around the world, and the oil and gas industry appears to be a regular target.
The threat of kidnapping to oil and gas companies is not isolated to Colombia. In early 2010 a group of about 40 men reportedly attacked a convoy of British contractors working for Netco Dietsmann, a Dutch-Nigerian joint venture maintenance company. The group was traveling to work at a power plant outside the capital of Rivers State, Nigeria, Port Harcourt (Igbo: Diobu).
Indeed, incidents of kidnapping have increased significantly over the past decade in the oil-rich southern Niger Delta, where politically militant groups and armed criminal gangs have used kidnapping to target workers in the oil industry to extort money and political benefits, according to IKV PAX Christi, a human rights group that analyzes kidnapping data.
The Caribbean nation of Trinidad & Tobago, where natural gas supplies are in abundance, also experienced a surge in kidnappings. Several other energy-rich countries are among the top 10 countries with the most kidnappings as of 2006; Among them: Mexico (#1), Iraq (#2), India (#3), South Africa (#4), Brazil (#5), and Venezuela (#8).
As the threat of kidnapping for ransom grows, businesses with international operations increasingly are turning to kidnap and ransom insurance (K&R insurance) to hedge this risk. Although a majority of companies carry K&R insurance for corporate employees, many are unaware of conditions to coverage that can present ethical and financial dilemmas in the midst of an incident. Most K&R policies reimburse policyholders for ransom payments, pay for crisis-management consultants, and indemnify insureds in the event they are held liable for an employee's death or injury. Understanding how these provisions work in the heat of the moment can save precious time and ease anxiety.
Recent history
The practice of kidnapping for ransom spiked in Colombia in 1995 and reached its apex in 2000, when Colombia saw 3,706 incidents of recorded kidnappings. Beginning in 2003, however, the number of kidnappings in Colombia fell dramatically, with only 687 recorded incidents in 2006. IKV credits this decline to increased military efforts to combat the paramilitary groups and the country's peace agreement with rebels.
As the aforementioned rankings show, however, kidnapping is no longer a predominantly Latin American problem, but a global enterprise. 25,000 incidents of kidnapping worldwide were reported in 2006, but estimates put the actual number closer to 100,000. Countries such as China do not report statistics, and most kidnappings go unreported because of privacy concerns or distrust of local authorities.
The inclusion of Afghanistan and Iraq among the top 12 countries with the most kidnappings is not surprising, given the armed conflicts and breakdown of law enforcement in these countries. What may surprise many observers however is the inclusion of India and Brazil, which have benefited from millions in foreign investment and undergone massive development over the past decade.
As energy companies gain greater access to supplies in these countries, as well as in Russia and across West Africa, the vulnerability of their employees to kidnapping for ransom will become an increasingly pressing issue for risk managers.
Types of kidnapping
There are two main types of kidnapping: classic and express. Classic kidnapping generally requires the involvement of many accomplices to scout potential targets, guard the victim, negotiate with the victim's employer or family, pick up the ransom payment, and arrange for an escape. These operations generally require a significant investment of capital. Express kidnappings, alternatively, generally last from a few hours to a few days and involve a smaller financial investment. Express kidnappers often will hijack a victim's automobile and force them to drive around a city for several hours withdrawing cash from ATMs.
A new phenomenon in Mexico and elsewhere in Latin America is called "virtual kidnapping," which involves a form of identity theft. The "virtual kidnapper" generally obtains confidential information about a person and contacts that person's family alleging that they have kidnapped them. No kidnapping has actually taken place, but the "virtual kidnapper" convinces the family otherwise based on his knowledge of the confidential information. Unfortunately, the family often pays the ransom before consulting with experts.
Another new form of kidnapping involves wrongful detention in which the insured unwittingly violates a local law or is tricked into doing so, and is detained by government agents or law enforcement against their will. Wrongful detention is not currently covered by most K&R insurance, and presents a challenge with respect to FCPA compliance. Companies operating in countries where wrongful detention is a significant risk should consult with their broker or K&R insurer about ways to mitigate these risks.
The risks of kidnapping to corporations
As would-be kidnappers have expanded their targets beyond senior executives to include mid-level managers and even contract employees, companies have worked to better educate employees and their families to avoid predictable routines, learn evasive driving, or rely more on armed security.
The need to educate and protect employees is not only a moral obligation, but is legislated by statute and law. US employment statutes (Title VII, OSHA, etc.) generally only apply to activities in the US or controlled from the US. Companies often include provisions in employment contracts, however, to avoid being subject to the vagaries of local jurisdictions, thus obliging themselves to a heightened duty of care. This is distinct from torts or crimes committed against employees by third parties or even governments.
The law imposes a duty of care upon employers to safeguard employees' security. Employees endangered on the job may allege that their employer violated that duty of care. An employer's policies and procedures with respect to employee safety, therefore, likely would fall under intense scrutiny in the event an employee is injured or killed by kidnappers while on the job.
Public companies also have significant obligations to their shareholders with respect to mitigating the likelihood of kidnapping and responding effectively when it takes place. A company's duty of care to its shareholders can be implicated by precautions the company takes to protect the security of key employees in particular. They also have a duty of disclosure to shareholders of information that could have a substantial effect on the company's value.
In the event of a kidnapping of a key employee, the corporation must determine whether to disclose the kidnapping to its shareholders, while considering the demands of kidnappers and requests for confidentiality. K&R insurance can provide a second-layer of security after other risk-mitigation techniques, but policyholders need to better understand its terms and conditions.
K&R insurance
As of 2005, 60% of Fortune 500 companies carried K&R insurance for corporate employees. Premiums on K&R insurance can be relatively low because of the slight—but growing—risk of kidnapping to most companies. Because the coverage often is sold as part of a company's liability package policy, buying K&R insurance for many companies can be a "tick-the-box" exercise. K&R insurance is negotiable, however, and companies with significant exposure to the risk of kidnapping—including oil and gas companies—should analyze whether the K&R policy they are purchasing addresses their actual risks.
K&R insurance provides three basic coverages: the services of a trained consultant who works with the company and the family to negotiate the release of the victim; reimbursement of any ransom payment paid by the company for the release of a covered employee; and liability coverage.
The quality of the consultant is key, and experts recommend comparison shopping to find a sophisticated consulting group as part of K&R coverage that can operate with ease in the regions where a company's risk is highest. The consultant provides expert advice, but does not conduct the negotiations, so as to avoid tipping off the kidnappers that insurance money is available to pay the ransom. Indeed, the existence of K&R insurance presents an ethical and legal dilemma with respect to the funding of terrorist organizations or drug cartels.
Nevertheless, coverage for ransom payments is what most companies think of when they purchase K&R insurance. It is not well known among policyholders, however, that ransom payments must come from the company itself in the first instance. The insurer only provides reimbursement for ransom payments. But ransom payments can entail significant legal complications. For example, how does a company obtain several million dollars in cash on short notice without needing to explain itself to banks, shareholders, and governments? This funding issue should be worked out in advance as part of the company's crisis response plan.
K&R insurance also generally covers liability incurred by the company resulting from loss of life and certain injuries to the victim. K&R insurance, therefore, commonly includes medical and psychiatric expenses for the released victim; the cost of recruiting and training new or temporary employees; and the fees of a public relations firm.
Most K&R policies cover any person in the service of the insured company who is directly paid a salary or wages, as well as temporary employees, consultants, and student interns. Companies that rely on the services of agents or independent contractors should consider negotiating an endorsement to their policy specifically extending coverage to those workers.
Several exclusions generally apply to K&R coverage. Among them: where the kidnapping is related to fraudulent, dishonest, or criminal acts by the insured; where the victim was in the country where the kidnapping took place without a proper visa or other documentation; where the kidnapping is related to political activities of the victim. Policyholders often can write over these exclusions by endorsement, but this will likely add to the overall premium.
Like other lines of coverage, K&R insurance also requires that the policyholder comply with conditions precedent to coverage, including timely notice to the insurer and the crisis-management team identified in the policy. Particularly sensitive is the common requirement that the existence of the K&R coverage not be disclosed, including to insured employees. Policyholders can sometimes narrow this requirement, however, by negotiating policy language that only requires that it make "all reasonable efforts" not to disclose the existence of the coverage.
Companies that regularly send employees to global hot spots—be they energy companies, telecoms, or media groups—increasingly are confronting the threat of kidnapping for ransom. These companies must implement a variety of risk mitigation strategies and establish procedures and protocols in the event of a kidnapping. Understanding how K&R insurance works and negotiating customized coverage can provide a valuable safety net after other risk-mitigating tools have failed.
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