Insurance Article, The Insurance Times 2021, The Insurance Times July 2021

The Suez Canal blockage and its impact

Amongst the global headlines in the month of March of this year, references to the blockage of one of the busiest shipping lanes of the world by the container ship Ever Given featured prominently. News stories on the piling up of cargo ships causing an unprecedented shipping traffic-jam, on multiple attempted salvage operations, the woes of the cargo owners, the subsequent arrest of the vessel and its seamen and the huge compensation sought for by Egypt’s Suez Canal Authority were all widely covered news items.

The blockage of the Suez Canal for six days and seven hours caused vessels to be backed up in the Mediterranean to the north and the Red Sea to the south. It is estimated that the costs to global trade was about USD 400 million per hour based on the approximate value of goods that are moved through the Suez every day, according to shipping data and news company Lloyd’s List.

This incident has starkly highlighted the omnipresent risks of international shipping. This crisis is of interest to the insurance fraternity and layman alike as the intricacies of insurance have come to the forefront in the public domain. Marine concepts which were part of insurance parlance such as general average, salvage expenses and P & I Clubs have been mentioned widely in the media. It would be of use to all stake-holders and the general public to understand these concepts in greater details in order to protect their own interests and for enhancing their general awareness.

It is insurers who will now mitigate the losses arising out of this crisis and some of the Frequently Asked Questions (FAQs) which arise are :

  • What happened in the Suez Canal in March 2021?

In March 2021, the Suez Canal was blocked for six days and seven hours  after the grounding of Ever Given, a 20,000 TEU container ship. The obstruction occurred south of the section of the canal that had two channels, so there was no way for other ships to bypass Ever Given. On 28 March, at least 369 ships were queuing to pass through the canal.

Location: Suez Canal, Suez, Egypt

Date: 23–29 March 2021

Duration: 6 days and 7 hours

  • What caused the grounding of Ever Given?

The Ever Given, which is owned by the Japanese company Shoei Kisen Kaisha, was on charter to Taiwanese operator Evergreen at the time of the incident.

It was on its way to the port of Rotterdam in the Netherlands from China when it became grounded after a sandstorm blew through the region. Visibility plummeted and wind gusts reached speeds of up to 31 miles per hour.

At 7:42 A.M., on the 23rd March, 2021, the Ever Given ran aground, driving its bulbous bow into the east bank of the Suez Canal. A minute later its stern drifting clockwise connected with the west bank and the Suez Canal was then officially blocked.

  • How many times has the Suez Canal been closed earlier?

According to the Suez Canal Authority, which maintains and operates the waterway, the Suez Canal has closed five times since it opened for navigation in 1869.

  • Why is the Suez Canal important?

The Suez Canal opened in 1869 and represented, along with the Panama Canal, one of the most significant maritime “shortcuts” ever built. It reduced the journey from Asia to Europe by about 6,000 km by avoiding a detour around the Cape of Good Hope. This famous waterway is now one of the world’s busiest shipping lanes.

Its importance can also be gauged from the fact on blockage of the Suez Canal many vessels were being rerouted around South Africa’s Cape of Good Hope. However, this detour adds an extra 6,000 miles to the European shipping route and increases fuel costs by USD 300,000 per supertanker.

  • How many ships go through the Suez Canal each day?

Although the canal’s average daily traffic totals 40 to 50 ships, the maximum authorized number is 106 vessels a day. On Aug. 2, 2019, 81 ships went through the canal, breaking a record.

  • Who owns the Suez Canal today?

The canal is now operated by the state-owned Suez Canal Authority and is a major money-earner for Egypt’s government.

  • How much does Egypt earn from the Suez Canal?

In 2020, the total revenue generated amounted to 5.61 billion USD and 18,829 ships passed through the canal.

  • How much money did the Suez Canal lose in this crisis?

The authority that operates the Suez Canal has communicated that the crisis has cost the Egyptian government a huge amount in lost toll revenue as hundreds of ships waited to pass through the blocked waterway or took alternative routes.

  • How was Ever Given refloated?

The Ever Given was stuck in the canal for six days, and the effort to get it moving again required more than a dozen tug boats and multiple dredgers. The dredging efforts had removed tonnes of sand and mud, which loosened the ship’s bow, and after that the ship’s stern was cleared from the sand bank.

  • What did the Suez Canal Authority do after the blockage of the canal was clear?

While the 1300-foot-long container ship has been freed from its  grounding in the Suez Canal, it still remains in the canal. That is because Egyptian authorities say they want the ship’s owners to pay a king’s ransom to compensate for the week that the canal was shut down. The Suez Canal Authority (SCA) has arrested the Ever Given ship and is demanding USD 916 million in damages.

The money relates to lost income from transit fees, damage to the canal during the dredging and salvage efforts, and equipment and labour costs.

UK P&I Club said last week the SCA’s claim included USD 300 million for a “salvage bonus” and USD 300 million for “loss of reputation.”

  • Why was Ever Given arrested?

The containership was arrested on   April 13, 2021 as the Suez Canal Authority (SCA) and the ship owners failed to reach an agreement   on the compensation claim for the ship’s grounding in the canal.

The SCA is seeking USD 916 million in damages for the costs incurred by the ship’s blockage of the waterway.

  • How has Ever Given responded to the arrest?

Japanese shipping company Shoei Kisen Kaisha has filed an appeal before the Ismalia court in Egypt against the arrest of Ever Given and its cargo on 22nd April, 2021.

According to the UK P&I Club,

 “The appeal against the arrest was made on several grounds, including the validity of the arrest obtained in respect of the cargo and the lack of supporting evidence for the SCA’s very significant claim,”. The UK P&I Club also said that the appeal was made as it ‘has not been possible to resolve this matter without the continued involvement of the Egyptian courts.’

Meanwhile, the talks between the two sides on the compensation claim are continuing.

  • What is the impact of the Suez Canal crisis on the global supply-chain?

The Suez situation could compound issues for a supply chain already under pressure from the pandemic and a surge in buying. Virus-related restrictions have already trapped crews on merchant ships.

Expenses and losses leading to potential insurance claims

  • Salvaging expenses
  • Hull damages and costs of inspection
  • Losses of  perishable items
  • Cargo delivery after date of expiry
  • Losses due to missed delivery deadlines
  • Business compensation losses for mis-delivered or undelivered goods
  • Canal damage
  • Bunkering & expenses of provisions due to the arrest etc.
  • Crew expenses for the period of arrest and vessel maintenance expenses etc.
  • Higher container leasing expenses due to usage for a longer than the agreed duration
  • Possible forwarding costs of cargo by another vessel including attendant unloading, storage and loading expenses
  • Re-routing costs for the 6,000 mile longer journey around the Cape of Good Hope
  • Additional fuel bills of USD 300,000 per supertanker that is re-routed
  • Fluctuating crude oil prices due to the crisis-caused supply issues

§  What about third-party claims?

Experts have opined that there are many scenarios for third party liabilities that might arise from an incident such as this, for example, any damage caused to infrastructure or claims for obstruction.

These are typically covered by one of 13 mutual insurance groups globally (the  protection and indemnity insurance clubs) which provide marine liability cover to ship owners for approximately 90% of the world’s ocean-going tonnage. In case   of Ever Given  it is the UK P&I Club.

Liability claims may come from organizations such as the Suez Canal Authority for loss of revenues (and also potential damage to the canal), as well as from other vessels blocked in the area (business interruption/loss of hire, or claims for compensation of cargo delays).

§  What are the anticipated cargo-related claims?

The cargo on the vessel is also insured separately. The initial reports indicate that there has not been significant physical damage to the cargo on board in this incident. The vessel seems to have maintained its power supply, so any refrigerated cargo is expected to still be in good condition.

However, there is the potential for cargo claims resulting from damage caused to perishable goods from delays. Delay in arrival of project cargo in transit would also culminate in Loss of Profit claims under the corresponding marine and engineering policies such as Delay in Start-Up Insurance (DSU) policies or  Marine Loss of Profit (MLOP) policies.

  • Declaration of General Average?

Ever Given’s Japanese ship-owner Shoei Kisen declared ‘general average’ on 1st April, 2021.

General Average is a legal principle of maritime law. General Average is all loss which arises in consequence of extraordinary sacrifices made or expenses incurred for the preservation of the ship and cargo and other interests in the  adventure such as freight and container within general average, and must be borne proportionately by all who are interested.

 

·         What will the General Average process be like?

Richards Hogg Lindley have been appointed as General  Average adjusters.

The General  Average adjuster sources said that while the claim would be quite complex, given that the 20,000  teu (twenty foot equivalent units)  Ever Given  was carrying thousands of 20 and 40 foot  containers  with up to 20 cargo interests per container. It has also been surmised that that it may take anything upto a decade to conclude.

  • How much cargo was Ever Given carrying?

The Ever Given  was carrying 18,300 containers when it was grounded in the Suez Canal.(20 foot and 40 foot containers)

  • How will this impact the release of cargo on Ever Given?

Now that the vessel owner has declared  General Average, the appointed General Average adjusters will assess each interest’s value on board (termed contributory value) and apply a formula that determines the financial contribution of each interest. Cargo owners and other interests will then need to furnish a General Average Guarantee to release their interests.

Insurance can speed up the cargo release process by providing the General Average Guarantees to meet the insured cargo owner’s contribution and facilitate release of the cargo while uninsured shippers need a Cash Deposit to obtain release of the uninsured cargo.

However, the process is complex it would also be time consuming.

  • Will a separate Salvage Guarantee also be required?

Since the General Average procedure may be a very lengthy process it is possible that the salvors may require a separate Salvage Guarantee before allowing the goods to be released.

In such a situation, the insurers would also have to provide a Salvage Guarantee before the goods and other interests are released and uninsured cargo-owners would have to provide a Cash Deposit.

  • What is a Salvage Guarantee and why is it required?

The law of salvage is a principle of maritime law whereby any person who helps recover another person’s ship or cargo in peril at sea is entitled to a reward commensurate with the value of the property salved, awarded by an Arbitrator appointed by Lloyd’s.  Procedures following major maritime casualties are set out in internationally recognized law and practices.

A salvage guarantee can be provided by cargo and hull insurers (like a General Average Guarantee). It represents an amount which, under the terms of a salvage agreement, must be paid by each owner of the salved property to the satisfaction of the salvage contractor or salvor. It is often arranged by an average adjuster (in tandem with general average security and is lodged with Lloyd’s Salvage Department). Lloyds Open Form (LOF) remains the most commonly used form of salvage contract.

  • What impact will the arrest have on General Average procedures and the release of cargo?

The Ever Given  is a massive container ship. One possibility is that if, SCA were to give up some of its leverage and releases the cargo but not the vessel, the cargo insurers collectively can initiate a plan to discharge the Ever Given cargo at the nearest port, that is, Port Said.

            As the enormity of the volume of cargo stowed aboard the Ever Given,  will make the Port Said   terminal insufficient, the discharging and trans loading of the cargo will have to be staggered. These expenses can be treated as General Average expenditure.

If  the Ever Given cargo is transferred to another conveyance to complete the voyage the cargo interests have to execute a Non-Separation Agreement to the General Average Adjuster.

However, it is also possible that the goods are transferred to another vessel at the cost and expense of the consignor/consignee and a fresh voyage is undertaken to the destination. This will help save on some portion of general average expenses as the consignor/consignee will only be liable for general average expenses upto the discharge of the goods from Ever Given.

  • What are the insurance details of Ever Given?

The Ever Given is said to be insured in the Japanese market for USD 137.7 million against hull and machinery damage. However, as of now Hull & Machinery damage of Ever Green appears uncertain. The cost of the salvage operation is being borne by the hull and machinery and P & I Club insurer. But now that GA has been declared the salvage expenses would have to be shared by the cargo interests too.

The UK P&I Club – is the Protection and Indemnity insurer for the Ever Given.  The UK P&I Club is one of the oldest P & I Clubs in the world. It provides P&I insurance in respect of third party liabilities and expenses, arising from owning ships or operating ships as principals.

 The UK P&I Club will be required to cover all third – party risks for damage caused to cargo during transit, risks of environmental damage and injuries.

So far, there have been no reports of pollution, injuries, or damage to the Ever Given’s cargo.

  • What are P & I Clubs?

A Protection and Indemnity  Club or P&I club is a non-governmental, non-profitable mutual or cooperative association of ship owners, operators, charterers and seafarers under the member companies. It also provides compensation for any loss of life, environment and property.

A ship owner can face substantial monetary losses if his/her ship meets with an accident and there is damage to the environment, cargo or to the vessel. Also, there are risks to the lives of seafarers. Ship owners need to insure for all these third party claims. These claims could also be damage to the jetty, pollution from the ship or even the fines to the ship from authorities. P&I clubs provide insurance to the ship owners for all these claims. Thus P & I insurance is a significant aspect of sailing.

P & I Insurance is taken in addition to Hull and Machinery Insurance by vessels as they cover many risks which are not covered by Hull & Machinery Insurance.

  • What is the Omnibus Rule under P & I Cover?

Experts have opined that it is likely that some liabilities arising out of the Suez Canal blockage may trigger the Omnibus Rule under P & I Cover.

The Omnibus Rule gives the club the discretion to cover risks that do not fall expressly within the expressly itemized cover but which, in the opinion of the club, are incidental to the operation of an insured ship and which fall broadly within the scope of club cover. It would also be pertinent to mention here that this is a discretionary power of the Board and the payments can be made based on the unanimous decision of the Board Members in this regard.

Some of the costs claimed by the SCA and/claims of other ship-owners may be paid under this Rule.

  • Will Reinsurers be impacted due to claims triggered by this crisis?

The P & I claim now looks likely to exceed the USD 10 million retention layer held by the UK Club, with which the Ever Given was entered. In that eventuality, it will become a pool claim, with the payout up to USD 100 million shared between the 13 International Group affiliates according to a weighted formula. If the claim goes beyond this the burden will fall on the reinsurance markets, which take on the risk under what is the world’s largest reinsurance contract.

Apart from the P & I claim, there could similarly be Hull & Machinery and cargo reinsurance claims if the claims in these areas exceed their reinsurance capacity. That would depend on the quantum of the claims, particularly if they are very large claims.

  • What about cargo claims for delay?

Delays arose for the hundreds of ships that decided to wait for the canal to clear. The delays may have caused some of the cargoes on board the vessels to deteriorate and for delays after expiry date. As mentioned earlier, in case of project cargoes, delays may affect deadlines.

Unfortunately, there is no recourse in marine cargo insurance policies for losses due to delay, as most marine cargo insurance do not cover losses due to delays.

Cls 4.5 of the Institute Cargo Clauses excludes losses due to delay:

In no case shall this insurance cover…………….

4.5 loss damage or expense caused by delay, even though the delay be  caused by a risk insured against

However there would be claims payable for delay under Loss of Profit policies such as LOP or DSU, wherever linked with project cargo, as also clarified earlier.

  • Where is Ever Given now?

It is currently at anchor in the Great Bitter Lake, where it is undergoing a number of technical investigations into the interplay of factors which caused the ship to lodge itself against both banks of the canal.

There are suggestions that the strong winds which are encountered along the canal pushed against the sizeable height of the ship.

There are also suggestions of the pilot’s contribution. In cases where the engagement of pilots are necessary (i.e. compulsory pilotage), the pilot acts as the agent of the ship, so any imputation of fault will reflect back on the ship owner.

However the final findings are yet to emerge.

Conclusion

In a major development, the Suez Canal Authority has reduced the compensation amount sought for the Ever Given ship blockage. The compensation has now gone down to USD 600 million from USD 916 million which had been asked earlier. However, negotiations are still going on in this regard.

Though the Ever Given has been freed from its grounding, its owners and the owners of cargo on board the vessel are finding that they are still very much lodged in a quagmire of legal and insurance issues. Figuratively, for the Ever Given the transit through the canal is not yet over, in more than one sense.

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