The Suez Canal blockage, potential implications

The Suez Canal blockage, potential implications

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The grounding of an ultra large container ship in the Suez Canal brought traffic on the central shipping route between Europe and Asia to a standstill for almost a week before it was freed. In this Q&A, AGCS Global Head of Marine Claims, Régis Broudin, looks at some of the potential implications that the incident could have for marine insurance claims.

What kind of claims activity is the marine insurance market likely to see from the blockage of the Suez Canal caused by the Ever Given container ship?

Although the current situation is still uncertain, potential claims scenarios are likely from a number of different areas. Any damage caused to the vessel during the incident, such as to the bottom of the vessel or its propeller, for example, will be covered by hull and machinery (H&M) insurance. H&M insurers are also responsible for the costs of the salvage operation, including the freeing, refloating and towing of the vessel. The size of this claim will be dependent on the scale and length of the operation.

What about third-party claims?

There are many scenarios for third party liabilities that might arise from an incident such as this, including, for example, any damage caused to infrastructure or claims for obstruction. These are typically covered by one of 13 mutual insurance groups globally (so-called protection and indemnity insurance clubs) which provide marine liability cover to shipowners for approximately 90% of the world’s ocean-going tonnage (in the case of this incident 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).

Do you also expect to see cargo-related claims?

The cargo on the vessel is also insured separately. The initial reports are optimistic 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.

There has been talk of “General Average” potentially being declared because of this incident. What is this and how does it work?

General Average is a historic legal concept which goes back to the days when many cargoes were carried on one vessel and the owners of the cargo took collective responsibility for losses which occurred en route.

General Average occurs when one of the interests involved in the voyage (for example the cargo or the vessel itself) is sacrificed for the common good of the rest of the interests. When the ship-owner – or its Captain declares a ‘General Average’. the costs or loss arising out of this event – including the salvage costs – are then shared collectively by all those interested in the voyage, but only in proportion to the value of their cargo on board, for example.

The only way for cargo interests to contest the General Average is to prove the unseaworthiness of the vessel or the willful misconduct of the owner. If they succeed they then have a recovery action against the vessel owners and their P&I insurers.

The settlement of a General Average case can be a lengthy process. It can take years to settle the final claim and the increase in the size of container vessels is ensuring this process is taking longer. Hence if the ship-owner considers the expense to be manageable they typically prefer not to declare it.  However, once expected costs look likely to exceed any “General Average” threshold in any insurance policy, it is more likely to be declared.

Some interesting statistics

  • Nearly 19,000 ships passed through the Suez Canal in 2020, according to the Suez Canal Authority – an average of 51.5 ships per day.
  • The Suez Canal has a good safety record overall with shipping incidents rare. There were 75 reported incidents in total in the canal between 2010 and end of 2019. More than a third involved container ships (28).
  • However, groundings (such as the Ever Given incident) are the most common cause of shipping incidents in the canal – 25 in the past 10 years or 1 in 3 of all shipping incidents in the canal.
  • Together, grounding, collision and contact incidents account for half of all shipping incidents in the Suez Canal over the past decade.

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Whether you have a question about your current insurance, need to discuss a claim or are looking for advice, give us a call on 1300 565 622.

The information provided in this article is of a general nature only and has been prepared without taking into account your individual objectives, financial situation or needs. If you require advice that is tailored to your specific business or individual circumstances, please contact HDL.

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