Episode 6: The Ever Given Blockage & Marine Insurance

 

In this podcast, we discuss the March 2021 incident in the Suez Canal where the Ever Given container ship ran aground, effectively blocking all traffic through the canal for 6 days.

For those in the marine cargo and insurance industries, the Ever Given situation has posed a lot of questions and for this podcast I am joined by EBMs marine insurance specialist, Carmel Price.

 

 

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0:00  

In this podcast, we have provided general advice only and not personal advice. In giving this advice we have not considered your personal circumstances.

 

0:19  

Welcome to EBM Insights. In this podcast we are discussing the March incident in the Suez Canal, where the Ever Given container ship ran aground effectively blocking all traffic through the canal for six days. For those in the Marine cargo and insurance industries, the Ever Given situation has posed a lot of questions, and for this podcast I'm joined by EBMs marine insurance specialist, Carmel Price. Welcome, Carmel.

 

0:45  

Thank you. Thank you for inviting me to participate today.

 

0:48  

Very excited to have you with me today. So before we start, I'll give our listeners a short history lesson. The Suez Canal is a major shipping lane connecting the Mediterranean Sea to the Red Sea. It effectively is a shortcut for ships to get to Europe. Each day, around 30% of the global container ship traffic, that's about 50 vessels, travel up and down the canal to reach the Middle East, Asia, East Africa, Europe and North America. These container ships are carrying around 12% of world trade, including $100 million worth of oil each and every day. 

 

Now Carmel, you are a self-confessed marine insurance nerd. What were your initial thoughts when you heard of this blockage?

 

1:32  

Well, being a marine insurance nerd, I was fascinated. There was going to be disruptions to shipping, there was going to be exorbitant costs, and there was going to be interruptions to supply chain. People would be waiting for their toilet paper and their coffee. So it was interesting to see how it would play out. The Ever Given is one of the largest container ships that's ever been built, and it is larger than the Empire State Building. So to have a vessel of that size blocking the canal was going to have some fairly serious consequences. There's only ever been five closures of the canal since it opened in 1869. And the first two were to do with war and invasion. So they were shut for extended periods of time. But obviously there was a lot more going on. The shipping wasn't a major issue. There was a vessel blocked the canal in 2004 and it was blocked for three days. Another one in 2006 but it was only eight hours. And the last one was in 2017 and it was only a few hours. So to have it blocked for six days is the biggest blockage it's had since a war.

 

2:37  

I believe that during the Six Day blockage more than 400 vessels were stuck behind that Ever Given and others were forced to take the 9000-kilometre long way around journey to Europe, and that takes about an extra 10 days. What considerations were there for the ships that went around Africa to reach Europe as a result of the blockage?

 

2:56  

Well, other than the time, the additional time of the journey, there's increased fuel costs, which is hundreds of thousands of dollars. And they're also then going to go through a region that's known for piracy attacks. And oil tankers, particularly are vulnerable because they're big, they’re slow and they've got less crew onboard. So that was a major risk. 

 

3:21  

And I see that the ship owners declared a General Average or GA claim and according to Lloyd's List, this may be the most complex GA claim in history. Can you explain what this means?

 

3:33  

Yeah, a General Average is a maritime principle where cargo interest share proportionally, the costs involved in solving a vessel or cargo that might have been jettisoned or sacrificed to save other cargo. So if a vessel ran aground, they sometimes will jettison some cargo to lighten the vessels, so they sacrifice containers overboard, and those cargo owners have lost their cargo. But the reason they lost their cargo was to save the vessel and the voyage. So this General Average principle is a way where all cargo owners and the vessel owner whose cargo was saved by the sacrifice, proportionally contribute to reimburse the cargo owners whose cargo was lost, or for the costs that were involved in the salvage. So in this case, the General Average was was declared. And so the ship owners have a lien on the cargo, and they won't release the cargo until a suitable General Average guarantee has been provided. So if you're insured, your insurer would provide that security. If you're not insured, then you need to provide a cash bond equal to the amount that's declared. So they add up the cost that was incurred, and then they proportionally allocate that to cargo owners and vessel owners as a percentage of the value. And in this case, there was 20,000 containers on the vessel. And some of those containers might have up to 20 different cargo interests in the one container. So there's a lot of people they've got to contact, calculate the value of their cargo to be able then to allocate the percentage, and then collect these General Average bonds from all those cargo interests before they'll discharge any of the cargo.

 

5:15  

So just as a follow on to that you mentioned, they do sacrifice cargo. What happens to those containers that do go over? 

 

5:30  

They are retrieved at a later time particularly if it's in a major shipping lane, they can't just leave floating containers, they sort of sit like a bit of an iceberg and only a small proportion above the water. And so they will need to take them out of the water if they can. So they'll either retrieve them if they can, if not, that'll sink them by putting holes in them, so that they're not floating and a risk. But they wouldn't get to sink them if they're in a shipping lane, because then they'd be a risk for vessels going through the channel. 

 

5:59  

So that's not something I realised?

 

6:03  

But apparently, the army use them as target practice, they go out and shoot them. From an environmental point of view, they want to recover what they can. But if they know what's in there, and it's not something toxic or a problem, or even if they're empty containers, then they put holes in them. They're supposed to be watertight, so they float, but if they put holes in them, they can sink them.

 

6:24  

Okay. Okay.

 

So the Suez Canal authority has launched a compensation claim for this incident. Can you tell us a bit about this type of claim for his particular very unique situation?

 

6:37  

Yeah, so the costs in saving the vessel, the salvage costs are all covered by the General Average. So the costs that were incurred to refloat the vessel will all be recouped from the cargo owners and the vessel owner. So those costs aren't part of this claim. This is in addition to the salvage costs. The Suez Canal Authority lodged a claim of 916 US million dollars on the vessel owner. And the vessel owner felt that the claim was largely unsupported. Included in that amount was $300 million as a salvage bonus. So that wasn't the cost of the salvage. That was just a bonus for doing a good job. There was another 300 million US dollars, they were claiming for reputational damage to the Suez Canal. Again unsupported. And then they were claiming for lost transit fees and damage to the waterway caused by the salvage. The transit fees are estimated to be about 15 mil US per day, and the Six Day blockage that would be 90 odd million. But the majority of those vessels actually did go through the canal in the following days. So they didn't lose that revenue, it was just delayed by a week. So to be claiming the 916 odd million dollars, the vessel owners felt that that was exorbitant, and they weren't prepared to pay it. So they were in negotiation with the Suez Canal Authority. But the Authority weren't happy with the offers that were being made. So because they couldn't reach an agreement, the Suez Canal Authority had Ever Given arrested. That's another maritime principle, where if you have a dispute, and you can't come to an agreement, you can take it to court and ask to have the vessel arrested. Arresting the vessel means that it can no longer move or trade. So it has to stay where it is. And this includes the 25 crew that were on board the Ever Given. They have to remain in Egypt, awaiting the resolution. So no cargo can be discharged, even if the General Average ones are all signed, and they're all ready to release the cargo until the vessels been released from its arrest. It can't move. So that to this day is still in the courts that hasn't been resolved. 

 

8:45  

So what does all of this mean for marine insurance policyholders with cargo on the Ever Given or any other vessel that was delayed in the canal.

 

8:55  

So from a duration of cover point of view, if you thought the voyage was going to take 30 days, and it takes 40 days, the policy would remain important in force because it's considered to be part of the ordinary course of transit. So your policy remains in force for that delayed period. Before if you had cargo on the Ever Given, and the General Average was declared, and you needed to provide the General Average guarantee or bond, if you're insured, you'd go to your insurer, they would sign that bond on your behalf, which is a promise that they will pay the agreed amount when the final calculations are done. It could take 10 years before they actually calculate all costs and proportionate out. So the insurer assigns that bond as a promise they agree a percentage of the cargo value and they sign that and then your cargo will be released. In this case, not until the vessels no longer arrested but once it's released from arrest and docks, then your cargo is being released. Okay.

 

9:56  

And again because it is such a unique situation. Can you take us through some of the delays that aren't covered?

 

10:04  

So most marine insurance policies cover physical loss or damage to the goods, so you have to suffer loss or damage to the goods before you've got a claim under the policy. So a pure delay is not normally insured. The only exception to that would be if you had perishable goods, you may insure for delay. So consequential loss or business interruption wouldn't normally be insured. So if you're unable to fulfil your order, or by the time the cargo arrives, the buyer no longer wants that because they've sourced an alternative product that wouldn't be covered because there is no physical loss or damage trigger for policyholders who cargo had to go around Africa, the delay and the extra costs involved also wouldn't be recoverable. There is no physical loss or damage to their goods, that's considered a commercial loss.

 

10:54  

And would you say that this situation has highlighted the importance of managing supply chain risks?

 

11:01  

Yes, it has from the blockchain presented a lot of issues from a cargo insurance point of view, but also just from shipping, because of the delay that had all those vessels waiting to go through the canal, that's the cause of port congestion, when they finally get to their destination. During that period, shipping rates doubled, because there was fewer vessels available to take your cargo supply of oil was affected, there was medical supplies and PPA equipment on board the vessel because of the delay that was impacted. There was also vessels who cancelled their sailings because they couldn't actually go where they needed to go. And then vessels that were delayed, missed the next scheduled sailing. So it said that the Six Day blockage can take up to 60 days for the trading of the vessels to get back to normal loss.

 

11:49  

And I mean, just you mentioned PPA, so in the era we're living in that's quite a significant piece of cargo to be delayed.

 

12:01  

Yes, that's right.

 

12:03  

And what about others operating in the Marine cargo industry? Would cargo delays and General Average consequences be a consideration?

 

12:13  

Yes, definitely. Some cargo owners believe that maybe their cargo is not susceptible to loss or damage. It's indestructible. Therefore, why would I bother insuring it. But there are costs and expenses that you may incur that aren't to do with loss or damage to your cargo, it might be a General Average where your cargo is fine, but you've still got to contribute to be able to have your cargo replaced. There was a General Average in 2018 for a fire on board a container ship, and the salvage amount for that was 42.5% of the cargo plus another 11.5% for a GA deposit. So that meant if you had cargo worth $100,000, you would need to have a deposit of $54,000 just to get your cargo released. If you didn't have insurance, you have to put a cash bond down for that $54,000 to get your $100,000 cargo released. So in that case, there'd be a lot of cargo owners that wouldn't be able to provide the General Average bond and they would then discharge a cargo that they would would pass over to the ship owner. So insurance is important not just for locks or damage to your own goods, but for these other costs and expenses that you might incur.

 

13:27  

Well, thank you Carmel for providing some really interesting insights to the recent Suez Canal blockage. But before we finish, are there any final thoughts or interesting facts you'd like to share with us?

 

13:40  

Global trade has a lot of complexity and cargo owners may not be aware of all the risks involved. So we would recommend that you speak to a marine insurance professional who will make sure you have the appropriate cover. One of the interesting facts about this refloating was that they relied on the Spring Tides or King Tides that only occurred twice a month. Just before 3pm the tide rose and that helped refloat the vessels so they were lucky that it was only six days. If the King Tide wasn't due for another two weeks, we could have had a blockage for a lot longer period. In this instance, it was a General Average that happened but next time it could be insolvency or financial default of a carrier. We'll leave that for discussion another time. But there are a lot of complexities that cargo owners need to ensure they've got the appropriate insurance for.

 

14:32  

Alright, Carmel, thank you very much for your time.

 

14:36  

You're welcome.

 

14:37  

So Carmel is part of EBM’s specialist marine risks team and who are up to date with the international and local maritime laws and conventions. To discuss any insurance questions please reach out to the team on 1300 755 112 or visit ebm.com.au.  Thank you.

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