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Cargo Ship Blocks Suez Canal for Nearly a Week, Spotlighting Trade Vulnerabilities

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The MV Ever Given, a massive cargo ship that gained notoriety for running aground amid high winds on March 23 and completely blocking the Suez Canal, was finally freed on March 29. Salvage and dredging crews labored for days before successfully re-floating the vessel, aided by a full moon and high tide.

The nearly quarter-mile-long ship was reportedly carrying 20,000 containers when it became lodged across the 300-foot, manmade waterway that serves as a route for about 13 percent of global trade. The blockage imperiled about $9.6 billion in ship traffic each day, according to one estimate. At the time the Ever Given was freed, 367 vessels had been delayed in or just outside the Suez. Officials estimate the backup could take up to six days to fully clear and prioritized three livestock carriers with live cattle on board once the canal was deemed safe for passage.1

Supply chain impacts were expected to worsen the longer the blockage continued, with experts expressing particular concern about the 1.9 million barrels of oil routed daily through the Suez Canal.2 This impact was felt quickly in Syria, where officials rationed fuel because the canal blockage prevented the arrival of oil supplies.3

“Thankfully the vessel was not trapped for longer than a week, though delivery delays in perishables or other cargo it had on board are of course problematic,” said Patrick Barco, Manager, Ocean Marine, Burns & Wilcox, Toronto, Ontario. “The ripple effect on trade of all the other ships barred from passing through the canal for several days is substantial.”

While the Ever Given’s predicament was unusual, the story has cast a spotlight on global supply chain vulnerabilities and the risks inherent with moving cargo overseas.4 Cargo ships are larger and carrying more containers than ever before, underscoring the need for robust Marine Insurance protections, said John Gambino, Cargo Manager, RB Jones, New York, New York.

“The impact that one disabled vessel can have on trade is much greater today than it was 10 years ago when these ships were carrying 10,000 containers, rather than 20,000,” Gambino said.

Protection needed for physical damage, third-party liability

While it remains unclear whether the Ever Given sustained physical damage, any vessel repairs needed could potentially be covered by a Hull & Machinery Insurance policy, available to the ship’s owner. Hull & Machinery Insurance coverage could also help mitigate the costs of retrieving or refloating a vessel that has run aground.

“There are salvage and removal costs that should be considered,” Barco said. “Hull & Machinery Insurance with Protection and Indemnity (P&I) policies can include coverage to help with these costs; ultimately, recovering a vessel benefits all affected parties, including the insurer.”

P&I clubs, mutual insurance associations of marine insurance providers, offer owners of commercial and cargo vessels broad coverage to mitigate their risks. This can include third-party liability coverage, which could help with costs to repair damage the ship causes to a canal or other property during an incident. Specifically, P&I clubs can provide coverage to help with costs stemming from civil and collision liabilities, bodily injury or death, cargo damage or loss, pollution and wreck removal, and salvage operations.

“If a shipping canal is damaged by a vessel, P&I clubs could be on the hook and could help with costs that stem from the damage,” said Barco.

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Just-in-time orders that deliver goods to end users within a couple of days are the norm. So, days-long delays can create major problems with low inventories. A manufacturer that runs out of a critical component may have to halt production, which impacts all of the companies in its supply chain.

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- Patrick Barco

Manager, Ocean Marine, Burns & Wilcox

In 2016, a Chinese coal carrier agreed to pay $29.6 million to the Australian government over damage its ship caused to the Great Barrier Reef when it ran aground in 2010.5

According to a report in Reuters, industry sources have said the owners and charterers of cargo ships delayed by the Ever Given blockage likely face at least $24 million in expenses not covered by insurance.6 Another report anticipates the ship’s owner and insurer likely face millions of dollars in claims related to the canal disruption.7

“Just-in-time orders that deliver goods to end users within a couple of days are the norm,” Barco pointed out. “So, days-long delays can create major problems with low inventories. A manufacturer that runs out of a critical component may have to halt production, which impacts all of the companies in its supply chain.”

Cargo susceptible to theft, water damage

Ships carrying tens of thousands of containers at once face a variety of perils, including theft, fire and loss at sea. A prime example of this occurred last November, when the MV ONE Apus lost 1,816 containers that went overboard during severe weather.8

Water damage and mishandling of cargo, such as dropping containers, are other common risks. “Water damage is a major contributor in terms of claims made in this industry,” Gambino explained. “Containers are supposed to be water-tight but they get older and sustain damage, including holes.”

An Ocean Cargo Insurance policy can apply to a single shipment or multiple shipments and can help with expenses related to covered physical loss events caused by external forces. This type of policy is generally obtained by the entity financially responsible for the cargo while it is in transit; depending on the contractual agreement, this entity could be the manufacturer, buyer, retailer or the bank financing the trade.

A Stock Throughput Insurance policy, on the other hand, includes coverage for stock from the moment it leaves its original location and at all points reached thereafter, until it arrives at its final destination.

“Stock Throughput Insurance simplifies the process: all coverage is with one insurance company, so there is no confusion over where to file a claim in the event a loss occurs,” Gambino explained. “It has the potential to eliminate almost all disputes over when or where damage was sustained.”

Cargo ship fires are becoming more common, according to Barco, and such fires are often linked to the misdeclaration of cargo.9 More containers are also being lost at sea, in part due to improper storage practices like stacking containers too high that are not able to withstand gusty winds.

Some companies are under the misconception that any damage to their cargo will be covered by the ship owner’s insurance; however, this is not typically the case.

“A ship owner has limitations: often the maximum an owner would pay for damaged cargo is as per the bill of lading terms governed by either Hague–Visby or COGSA rules and regulations. Companies without appropriate insurance end up paying the remainder out of pocket,” Barco explained.

“The increase in cargo ship size has implications for shipping containers,” Gambino said. “The containers are subjected to a great deal more stress as vessels can pitch and roll more severely in heavy seas.”

Ocean Cargo Insurance is generally structured to include coverage to help with replacement cost plus freight or for the final sale price for the cargo. “This type of policy is tailored to a specific company’s needs,” Gambino said. Precious metal cargos, for example, are typically based on a market value because the price of metals can vary day to day.

“The vast majority of merchandise is insured on a bifurcated basis, meaning if it is sold, it is insured for the sales price; if it is not sold, it will be insured for the cost of freight plus a 10 percent markup,” Gambino noted.

Insurance plays critical role in global trade, economy

The COVID-19 pandemic has had a major impact on global trade, Gambino pointed out, making any new disruptions an even greater challenge for all parties involved.10 “The Suez Canal blockage comes on the heels of an exceptionally bad year and a half for global trade,” he said. “The stranded cargo ships were losing money for months when shipping was halted due to lockdowns and lowered demand. Now, just as the supply chain has started to get back on track, they are faced with this extended delay.”

Marine Insurance helps keep all of the players in the shipping industry running, which helps safeguard the economy in the wake of a loss or disaster. Insurance policies can serve as the financial backbone that helps support companies so they can engage in trade with peace of mind that they have transferred their risks.

- John Gambino

Cargo Manager, RB Jones

As companies navigate these turbulent times, it is vital to review their policies and evolving insurance needs with an experienced broker, Barco stressed. “A capable broker will be well-versed in educating marine shipping clients on their exposures and the appropriate coverage to protect their bottom line,” he said.

“Marine Insurance helps keep all of the players in the shipping industry running, which helps safeguard the economy in the wake of a loss or disaster,” Gambino said. “Insurance policies can serve as the financial backbone that helps support companies so they can engage in trade with peace of mind that they have transferred their risks.”

Ultimately, Marine Insurance allows the industry and the economy to progress in the face of daunting risks and obstacles. “Marine Insurance helps keep the shipping industry running, which helps safeguard the economy in the wake a loss or disaster,” Gambino said. “Insurance policies can serve as a financial backbone that helps support companies so they can engage in trade with peace of mind that they have transferred their risks.”

 

Sources

1 Raghavan, Sudarsan, Heba Farouk Mahfouz and Antonia Noori Farzan. “Giant ship blocking Suez Canal is freed; incident on key trade route cost the global economy billions of dollars.” Washington Post, March 29, 2021.
2 Thorbecke, Catherine. “Economic concerns mount as Suez Canal impasse drags on.” ABC News, March 26, 2021.
3 Tawfeeq, Mohammed and Lauren Smith-Spark. “Syria forced to ration fuel as stricken ship keeps Suez Canal blocked.” CNN, March 28, 2021.
4 Taylor, Adam. “The big ship is free, but the hard part isn’t over.” Washington Post, March 30, 2021.
5 McGuirk, Rod. “Damage to Great Barrier Reef costs ship owner $30 million.” StarTribune, September 16, 2016.
6 Saul, Jonathan and Carolyn Cohn. “Suez chaos leaves shipping companies counting the 'lost expenses' cost.” Reuters, March 29, 2021.
7 Saul, Jonathan and Carolyn Cohn. “Stranded Suez ship's owner, insurers face millions in claims.” Reuters, March 24, 2021.
8 Schuler, Mike. “ONE Apus Sets Sail from Japan Months After Cargo Loss.” gCaptain, March 16, 2021.
9 Dupin, Chris. “Number of containership fires is ‘shocking.’” American Shipper, January 8, 2019.
10 Veiga, Alex. “Suez Canal ship freed, but the pressure points in supply chain, global trade persist.” USA Today, March 29, 2021.

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Cargo Ship Blocks Suez Canal for Nearly a Week, Spotlighting Trade Vulnerabilities

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