01-04-2021 – بانوراما التامين
SUEZ JAM: Insurance Overview
By Hani Alkurdi
Vice President – Marine
APEX
30/03/2021
On March 23rd, 2021, the 400m-long, 224,000-ton containership MV Ever Given ran aground in the southern part of the Suez Canal, which caused a massive blockage in the canal resulting in backlog of more thank 100 ships to pass through the route immediately.
The number of standstill ships exceeded 422 ships carrying a vast range of items from crude oil to livestock waiting to cross. If the canal had not reopened, the number of ships would have kept snowballing to nearly 50 ships per day, resulting in potentially USD10-15m of additional losses each day.
Fortunately, the giant container ship resumed its journey on March 30th, 2021 after being successfully refloated by the tremendous efforts of both The Suez Canal Authority and salvage teams.
The MV Ever Given is a Panama-flagged vessel operated by Taiwanese company Evergreen and owned by Shoei Kisen Kaisha Ltd, of Japan. It is entered with the UK P&I Club by its owner and with Gard by charterers. It is capable of carrying 20,000 containers, some of which were advised to be removed to make the vessel lighter and easier to move.
Initially, The Suez Canal Authority stated that the ship grounded due to strong winds as it was transiting, with two canal pilots onboard, northbound the canal en route to Rotterdam, Netherlands. Afterward, Egypt’s Suez Canal Chief said that technical or human error could be behind the grounding of MV Ever Given.
About 15% of world shipping traffic transits the canal and hundreds of vessels were waiting to pass once the blockage had been cleared. The crisis has crippled global supply chains, forcing companies to consider the expensive re-routing of ships around the Cape of Good Hope to get to Europe or the east coast of North America at the cost of up to 12 additional days at sea.
Now, insurance and reinsurance companies are in limbo, with millions tied to the Suez Canal crisis, as there were potentially thousands of insurance policies taken out on the containers stacked high on the giant ship, in addition to other stalled ships. Owners of the goods on board of these ships will seek payment from their insurers, if they had one, and the insurers will in turn file claims against MV Ever Given’s owners, who will turn to their insurers for protection.
The question now is: What is the position of the marine insurance in respect to MV Ever Given and other ships whose passageway was stalled? To answer this question, we have to assume that all types of covers were purchased by either owners of ships, charterers of ships or owners of cargo.
For MV Ever Given:
1. Hull and Machinery Cover
MV Ever Given was insured in the Japanese market. Container ships like MV Ever Given are usually insured anywhere in the region for USD100m to USD140m, but the payment would be determined by the severity of the accident. From the initial reports, the propeller and its shaft could be damaged given the depth of the grounding. The MV Ever Given was being inspected in Great Bitter Lake with officials to decide whether it can continue to its original destination of Rotterdam, or if it will need to enter another port for repairs. Other damages did not seem to be severe in respect of hull and engine, and all these damages will be recoverable under H&M policy.
Also, the cost of the salvage/recovery operation, which will be paid to refloat the ship is borne by the H&M insurer. This case could potentially involve the largest salved fund in the history of container ships casualty. As the vessel is chartered, the responsibility for the expenses incurred in the recovery operation, third-party liability and the cost of repair is the owner.
In order to complete the common journey, General Average would be declared. The cost is already massive and now salvage teams are flying in from all over the world, hence GA is looking very likely, unless Evergreen (the charterer) reach a commercial agreement with Shoei Kisen Kaisha (shipowner).
General Average costs would be recoverable from the cargo interests as per the New Jason Clause, which is included in most of the bill of ladings. The purpose of this clause is to highlight the fact that no matter what, the GA would apply to the contract of carriage.
On the other hand, owners may choose to recover the GA funds form the H&M insurers through their General Average Absorption Clause where the insurers agree to “absorb” the claim that the insured shipowner could otherwise have against other parties, in this case cargo owners.
2. Cargo Insurance
It was reported that the MV Ever Given is carrying goods worth USD89m. The cargo is not thought to be damaged due to the grounding, but there are perishable goods – such as fruits – on the ship that would suffer from any delay. Cargo insurers who apply the English Institute Cargo Clauses exclude loss, damage or expenses caused by delay, accordingly these policies will not pay for these losses.
3. Protection and Indemnity
Typical P&I cover includes a carrier’s third-party risks for damage caused to cargo during carriage, loss of life & injury of crew, damage to fixed & floating objects and risks of environmental damage such as oil spills and pollution, in addition to other risks.
In MV Ever Given’s case, there were no reports of loss of life or pollution. However, the P&I Club will be liable for any damages to cargo that will be covered by the P&I Club. Likely this will mainly be relevant for perishable cargo since the goods were not damaged by the grounding.
However, consequential loss of the late delivery of sound cargo is not covered, as this will likely be excluded under the Force Majeure provisions and the Hague/Hague-Visby Rules.
If any fines will be imposed by The Suez Canal Authority, these fines would be covered under Rule 2 (Risks Covered) Section 22 (Fines). Damages to the Suez Canal property i.e. the banks of the canal, would be covered under Section 11 (loss or damage to property) as a result of a collision to a Fixed or Floating Object. There will be a strong argument that consequential damages i.e. business interruption to the canal as a result of the blockage, would also be covered as a result of a collision to a Fixed or Floating.
4. Loss of Hire
Loss of Hire insurance covers the insured for loss of income resulting primarily from physical damage to a particular insured vessel, or under certain special circumstances that prevent the vessel from leaving a port or similar limited area.
If this policy was purchased by the shipowners, there would be a valid claim under the policy, but it will be subject to excess period – the common practice for the Japanese shipowners is 7 days and will be limited to specific number of days of 90 to 180 days depending on the policy wordings.
5. Delay Cover
Delay insurance provides cover to ship operators for the cost of delays arising from different risks. It protects vessel operators’ revenue when their vessel is held up by strikes, port closures, collisions, breakdowns and other unexpected delays.
It is not known what proportion of voyages are protected by such cover at any one time, but estimates show that it could be in the order of just 10%. The possibility that 90% of affected vessels are not covered will add to industry gloom over the situation.
Only the handful that have availed themselves of delay cover would have a valid claim under the policy resulting from collision & grounding but it will be subject to the excess period, typically 1-4 days with limits of 10-20 days.
As for all other ships:
1. Hull and Machinery Cover
Due to the matter of fact that no damage arose or was reported to any other ships, no claims recoverable under H&M are expected.
2. Cargo Insurance
The same circumstance of MV Ever Given will apply to other ships.
3. Protection and Indemnity
Again, there were no reports of loss of life or pollution. However, any damages to cargo would be covered by the ships’ P&I Clubs. Most likely, this will mainly be relevant for perishable cargo, with recourse action of the MV Ever Given and eventually UK P&I Club.
Similarly, consequential loss of the late delivery of sound cargo is not covered. As mentioned earlier as this is expected to be excluded under the Hague/Hague-Visby Rules.
As far as we know, no queuing ships have yet sailed for a voyage around the Cape of Good Hope, nevertheless many carriers outside the Red Sea appear to be heading for transit via the Cape of Good Hope, rather than joining the ever-lengthening queue of ships waiting for the Suez Canal to re-open.
The journey around the Cape of Good Hope is more dangerous by nature, and hence if any cargo was damaged as a result of the riskier journey, P&I Clubs would have had to agree to this in advance for members to enjoy uninterrupted Club cover.
4. Loss of Hire
Owner’s LoH policies would not be triggered, as there is no H&M damage on the standstill ships.
5. Delay Cover
Delay Insurance would be triggered as the blockage of the canal constitutes a physical obstruction to a navigable waterway, a covered peril for Shoreside events. This is typically subject to a 1-4 days excess period and limit of up to 20 days.
Owners and/or charterers of ships are eligible to purchase this cover as they are exposed to a complex trading environment. Unfortunately, this cover is not available for cargo owners to purchase as a rider on a marine cargo policy, unless it was a project cargo, where they can then purchase Delay in Start Up (DSU) coverage.
After this event, I believe all parties involved in the shipping industry will think twice before purchasing any insurance product, this incident has opened risk managers’ eyes on the economic role of insurance and helped them envision the worse scenarios in advance and make sure to be fully prepared to face them.
