Article by Georges Hardegger, Account Executive Marine, International Trade, Logistics and Fine Art, IBC Insurance Broking and Consulting Lugano and Zürich
“Ever Given” or better “Never Get” indemnities for the delay in the global trade?
A few weeks ago everyone was talking about a giant of the seas carrying approximately 18’000 TEU, blocking hundreds of ships from traversing the Suez Canal, leaving (not only) the insurance market breathless and disrupting the world trade. A tremendous number of companies, various industries, ports and infrastructure across the globe are directly or indirectly affected by that event and therefore suffers financial losses.
The “Ever Given” (about 400 meters in length, roughly the height of the Empire State Building) was caught in a sandstorm while crossing the Suez Canal, the crew was unable to steer the ship which deviates and stuck into the border of the Suez Canal.
Who is responsible?
Two SCA (Suez Canal Authority) official maritime pilots were on board at the time of the incident. They were in charge to command the ship, taking over from the regular crew and the captain. Independent experts argue that their role is often a mere presence and the captain has the final responsibility. The Egyptians authorities are supporting obviously this understanding of the facts; the ship-owner is blaming obviously the sandstorm. Independent observers might suggest a combination of the causes. By the way . . . the Suez Canal’s own policies suggest it’s not to blame, even if its pilots were at the helm of a ship that ran aground.
The 224,000-ton vessel, immobilized on March 23 within the Suez Canal was dislodged on March 29 by the force of several rescue teams with 14 tugboats and multiple dredgers at high tide. On Apr. 13, the “Ever Given” has been immobilized again: this time however by the chains of the Egyptian justice. It was seized by a court in Ismailia after a request of the SCA for compensations estimated initially at USD 916m, including lost revenue for the canal, USD 300m for the salvage (equipment plus 800 people that worked to free the ship) and USD 300m for loss of reputation. The Egyptian State did not say who would be responsible for paying the USD 916m in damages.
Currently the Egyptian Court rejected the request for release the “Ever Given” from arrest; it’s therefore still kept in the Great Bitter Lakes; additionally Egypt has reduced on May 8 its USD 916m compensation claim for the grounding of the Ever Given to USD 600m and then (May 26) to USD 550m. The SCA reduced the value of the required compensation by 40 % after they obtained the estimated financial value of the goods on the ship.
The rescue story is now over. The story for the Legal and Insurance Implications just started.
There are different insurance sectors that are impacted such as
- Hull & Machinery (H&M)
- Marine & Cargo and
- Protection & Indemnity (P&I)
The Hull insurance covers the damage to the ship itself. These losses should be manageable. The Cargo insurance in place for at least a part of the 18’000 TEU (probably affecting thousands of insurance policies) provides coverage against physical losses and/or damage for the goods being shipped. Information’s received at IBC through own clients indicated that the ship had power at any time and the cooling system for the perishable goods operated properly. Damage to goods on the other 360 blocked ships (including 41 bulk carriers and 24 crude oil tankers) should also be considered. The Protection & Indemnity insurance provides protection to the ship owner/operator should their negligence cause damages to others (this might include claims against the ship’s owner from e.g., the SCA for possible damage to the canal and for loss of revenues, and separately claims for compensation from some of the owners of the delayed ships).
In short: the canal blockage will trigger a flood of indemnity requests by everyone affected. The salvage company which usually work on a so-called Lloyd’s Open Form basis and will claim a success fee based on the value of the ship and cargo; the Suez Canal Authority; the shipping industry; the charterers; the owners of the goods; the other 360 ships stuck in the traffic jam, etc. The insurers for cargo on board will in turn file claims against ship owners, who will turn to their insurers for protection.
The ship-owner of the “Ever Given” declared on Apr. 1 “General Average” following the work to re-float the vessel. The declaration of a General Average means that shippers will be required “to share the relevant expenses incurred in ship rescue”. The General Average terms are outlined in the shipment’s bill of lading and are covering a pretty long list of expenses, which include towing and salvors. Lost revenue for the canal, however, would probably not fall under general average declaration. The goal of this incredibly complex process is to share the costs of a ship’s rescue among all stakeholders. The mandated adjuster RHL (Richard Hogg Lindley) will determine now how much the shippers will have to pay. Currently RHL is getting in touch with all of the shippers that had cargo on board to obtain guarantee bonds from the insurance industry. If the cargo interests decided no not to buy an insurance coverage – although it’s a relatively cheap insurance – then a cash deposit is requested by RHL.
Even if the period of time that the canal was blocked was relatively short, it’s beyond any doubt that the mayor concern will be around the coverage for delayed cargo. We are not speaking about shipping delays of everyday items for customers around the world like garden gnomes – which are in short supply in England – or about flower pots, barbeques and garden furniture in short supply in Switzerland. We are speaking about container ships and tankers which were not in the position to deliver on time food, fuel, commodities, pharmaceutical raw materials and industrial goods to Europe. The same applies the other way round for goods from Europe to the Far East. The impact ranges from infrastructure projects to essential spare parts for the proper working of the industry. Not to speak about the 18’000 TEU which timely availability is compulsively necessary for the shipment of further goods.
Losses due to delays
The crucial point is that most of the cargo policies exclude coverage and therefore an indemnity for losses due to delays. Effectively specific marine insurance policies for delay to cargo are in place however usually for vessel shipping perishable goods such as fruit. Generally, for non-perishable cargo a delay insurance is not bought.
Most of the marine cargo insurance policies adopt the ICC (Institute Cargo Clauses), English law and practice is therefore applicable (e.g., the terms of the UK Marine Insurance Act 1906). These policies require “physical loss or damage” to trigger coverage. The ICC “A” excludes delay. Also, according to the Swiss General Conditions of Marine Insurance on Goods (GCMI 2006) States that the insurer is not liable for the consequences of seizure, confiscation or temporary seizure (quarantine) by government authority or power as well as delay, howsoever caused, in transit or delivery.
Cargo owners of non-perishable goods normally renounce to an expensive coverage for delays. The “Ever Given” case sets a precedent. It should be considered as an alarm bell. The current approach of ship-owners and operators should be seriously reconsidered. Risk Managers across all industries have to reconsider how to deal with such risks, at least partially not insurable and take appropriate actions. Beside additional marine clauses covering pure financial losses, other insurances like CBI (contingent business interruption coverages), TDI (Trade Disruption Insurance) or supply chain risk insurance coverages should be considered. It must be imperatively agreed that the insurance coverage will also be triggered by an event that is not limited to physical loss or damage. The focus has to be aligned on non-physical losses and on business interruption damages as a result of delay in the reception of goods.
On the “Ever Given” case there are objectively different liability situations with an incredible number of parties involved; at the end of the day everyone will try to recover from the party that is at fault.
Please contact the following IBC Insurance Broking and Consulting team members with any additional questions or to discuss further