Aerial View Port of Long Beach Containers
Long Beach, © trekandshoot | Dreamstime.com

Reports of hundreds of thousands of containers stranded around the world have begun to flood into The Loadstar’s newsdesk, and there is every expectation they will continue as social lockdowns limit ports ability to clear landed boxes, and a slew of blank sailings leave export containers stuck on quays.

In the following guest post, insurance expert Jose Guerrero looks at how marine cargo insurance relates to the Covid-19 pandemic; whether this insurance will help sellers/buyers on their current and future claims; and also the limitations in the marine cargo insurance sector.

Potential remedies to cargo owners

If the insured fails to pick up its cargo at the port of destination because of the lack of warehouse space, the marine cargo insurance policy (henceforth called a policy) will not pay for demurrage or detention charges. These charges are expressly excluded under the policy. And if the insured, because of loss of market abandons the goods, they cannot recover the insured value of the goods from the insurance policy. This is because any claim for loss of market is also expressly excluded under the policy and that the claim does not meet the requisite definition of “physical loss” to the cargo.

Importers can hope that their freight forwarder can help mitigate demurrage by way of negotiation, dispute resolution process, or rerouting the cargo to another warehouse. Additionally, a freight forwarder can also help the importer by using the borrowed shipper-owned container (SOC) instead of conventional containers for hire to mitigate detention charges.

These demurrage and detention charges will increase the transportation cost and will impact cash flow and profitability of the importer and perhaps ultimately impact the end consumer.

The loss of market is one of the possible unfortunate results of Covid-19. One may resort to seeking help from the salvage market, such as SalvageSale.

However, if the insured incurred these demurrage and detention charges under the direction of its insurer, then these charges will be paid by the marine cargo insurer, as per below:

“If the insured is directed by this insurer to retain a container, trailer or rail car and if the insured is assessed a late penalty and/or demurrage charge for the holding of the container, trailer or rail car past the return date, this insurer will pay late penalties and demurrage charges. The amount this insurer will pay shall be the charges assessed until this insurer and the insured agree that the container, trailer, or rail car may be released.”

For example, if the goods destined for New York were discharged short of its destination, say Los Angeles, and the cargo is abandoned in Los Angeles by the ocean carrier, the policy will pay for “landing, warehousing, transhipping, forwarding and other expense incurred” to deliver the goods to its final destination.  In this case, which insurance carrier will pay the forwarding charges, etc, depends on the agreed Incoterms shown in the commercial invoice or sales contract. If it is FOB port of origin, the buyer’s insurance will pay for these expenses. However, if it is a CIF port of destination, then the seller’s insurance will pay for the expenses. Since the policy is still running during this transhipment, etc, any loss not excluded by the policy is covered.

Additionally, please note that Incoterms® 2020 recognises the recent trend that buyer or seller may have their means of transporting goods instead of using a third-party transportation carrier. I would think that at this time, it’s a heavier burden on the part of the buyer using FCA Incoterms® 2020 because of the Incoterms rule, which states that “…  the buyer/seller must contract or arrange at its own cost for the carriage of goods to the named place of destination or the agreed point …” At this time, with Covid-19, buyers might be reluctant to use FCA because of logistic issues. Before Covid-19, FCA is one of the most favourable terms for the buyer who wants to have control over the delivery of the goods from the point origin.

Other expenses that may be deemed covered under the policy, but not business interruption loss, are those expenses that the insured incurred to prevent or minimise covered loss. These expenses fall under the Sue and Labour clause of the policy. This clause is deemed a supplementary cover under the marine cargo policy, and as such, the insured has another policy limit available on top of the physical loss cover.

The Sue and Labour clause goes back to the “Tiger” policy in 1613, which covered goods on board the vessel Tiger from London to Mediterranean ports.  The Sue and Labour clause in a marine policy was considered by a US federal court in 1943 as separate insurance and supplementary to the contract to indemnify the insured for physical loss.  Therefore, the insured can recover the full value of the goods, and an amount not exceeding the full-insured value of the goods damaged for sue and labour expense.  For example, if the insured incurs expenses for $10,000 to dry damaged shipment of paper, valued by the cargo policy at $500,000, and the drying did not prevent the goods from total loss, the insured will recover $500,000 for physical loss and another $10,000 for sue and labour expense.  Or a total amount of $510,000, if no other limiting condition applies.

Property policy generally excludes coverage for goods in transit. Goods are either covered by inland marine policy for inland/domestic transit or by marine cargo policy for international transit.

Transit insurance policy, such as the marine cargo policy, is unambiguous at the very beginning that it only covers physical loss. Therefore, business interruption loss is not covered.

The relevant language in the marine cargo policy limiting coverage to physical loss is as follows:

“Unless otherwise specified below, all goods, merchandise, and property are insured: against all risks of physical loss or damage from any external cause…” (emphasis added).

The question here is how far one can define “physical loss or damage” if it came from an external cause, but not excluded.  One can argue that a virus does not harm physical property. And that it may be cleaned off like any other germs or bacteria that are normally removed with general cleaning. Therefore, the property does not need to be replaced or repaired, just cleaned as advised by the CDC.  Does Covid-19 cause physical damage to the insured goods? I think this course of reasoning may be difficult to pursue. However, if produce goods are shipped in bulk instead of by containers, there will be a question as to whether Covid-19 caused physical loss to that kind of goods.

Recently some markets provide business interruption (BI) cover as an endorsement to the marine cargo policy. However, business interruption loss is still contingent on the occurrence of a covered physical loss, which is also one of the requirements under the property policy. The business interruption coverage afforded in the endorsement to the marine cargo policy is calculated either based on gross earning or gross profit. This market even provides the insured with the choice of calculating their loss based on the above two options after the loss. It is worthwhile examining this coverage as to whether this endorsement is good for your business. It’s important that the parameters of calculating BI be examined as to what variables are involved, such as the probable experience or expected operations of the facility during the period of indemnity, had the covered peril not occurred.  It is typical of a business interruption coverage that the business interruption endorsement to marine cargo policy also adds extra expense cover to enable the continuation of the business.

It is also good to find out whether the valuation of goods under the policy when determining insured losses is based on the typical CIF (cost, insurance, freight) plus advance or imaginary profit, which usually ranges between 10 to 25% or on selling price less un-incurred expenses.

But what if the goods were detained because the ocean carrier or the port facilities declared force majeure, or worse, an “act of God”, which is a means of escape from meeting its responsibilities? The rationale is that Covid-19 causes unprecedented quarantines and massive disruptions to transportation and supply chains. Can cargo owners successfully pursue a claim against the ocean carrier or their P&I policy (protection indemnity insurance, which provides cargo liability cover to ocean carrier)?

Sue and labour and landing, warehousing, transhipping, forwarding etc clauses were earlier discussed in reference to detention, demurrage, and mitigation of loss, and these clauses (coverages) may be triggered when ocean carrier or any logistic service provider declares force majeure or abandons the cargo.

The question is still whether the declaration of force majeure is legally enforceable and thus prevent subrogation or third-party recovery by marine cargo insurers.  I understand some contracts don’t have a force majeure clause, or resemblance to it. One can argue that a force majeure clause cannot be implied in a contract. It was stated that Ceva Logistics and DHL Global Forwarding have both announced force majeure actions to their carriers and logistics services customers.

The next question is whether one can invoke Covid-19 as an “act of God”. I read that demonstrating the “act of God” remedy by the courts is a high burden.

In addition to ocean carriers or logistic service providers, sellers/exporters can also declare force majeure, which forces the buyer/importer to look for alternative suppliers from China, such as those in Vietnam. But perhaps with this logistics nightmare, this is a blessing in disguise, because the sellers have not placed the goods in transit.

If insurers are forced by the government to pay non-covered Covid-19 losses, it seems reasonable to expect that the government demanding payment of these non-covered losses should pick up these payments with a pass-through arrangement. The rationale is that the covered losses are built in the price model, and with insurers paying non-covered losses, which are contractually agreed exclusion in the policy, especially without sub-limit, it risks the destabilisation of the insurance industry.

And there are more reasons to be concerned with it. On 3 April, Insurance Journal reported that “Fitch Ratings has placed Lloyd’s of London’s ‘AA’ Insurer Financial Strength (IFS) ratings on rating watch negative, on the uncertainty and increased risk to Lloyd’s earnings and underwriting performance due to claims from the Covid-19 pandemic.” Matt Sheehan Matt, on 24 March states that the marine sector faces massive exposure to an economic slowdown, and based on Russell Group, the marine/insurance sector could face massive exposure to a slowdown induced by a Covid-19 outbreak. What this means is that there will be a shortfall of incoming insurance/reinsurance premium, and coupled with huge losses from Covid-19, will there be enough funds for some of the insurers to cover insured losses?

According to Russell Group, Maersk was found to have the most substantial exposure to Covid-19 at roughly $27bn. Cosco Shipping Lines Co was found to have the second-largest exposure with $25bn, and MSC was the third-largest at $20bn. Suki Basi, of Russell Group, states that “[t]he shipping industry is at the heart of what we call the transportation layer, which enables the flow of money and goods across the global economy.”  So, in addition to the exposure that there may not be enough funds to cover losses, generally non-marine cargo losses, the transportation carriers may not be able to come back in full force once this pandemic ceases.  It is also interesting that the article states, “Russell Data is tracking these movements at an increasingly granular level providing fresh insights to both insurance carriers and corporates. Now is the right time to invest in new technology led analytics that helps to build new scenario led models.” Well said. As I preached everywhere, it is data, and what we do with the data will save us.

Not only should we be worried about an insurance or logistical nightmare, but Contguard warned that, even if your cargo is moving, valuable goods are a big target for cargo crime, which could result in a negative impact on brands, loss of cargo and loss of profit. In mid-2000, my former employer was one of the members of TAPA (Transported Asset Protection Association) while handling the Motorola account, and I think they continue to expand to help manufacturers, shippers, carriers, insurers and service providers.

I sent an email to friends in Bangalore, India, this week attaching a picture of a Covid-19 candlelight vigil in their city, and I told them that my wife and I were touched by seeing the picture, and I followed with my comment that “our world is like a village and we are here together to face and overcome this challenge”.

This is a guest post by Jose Guerrero, president of Virtual Claims Services and author of Marine Cargo Insurance: Adjusting, Claims Administration, History published in 2003.

Comment on this article


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  • Jose Guerrero

    July 13, 2020 at 1:04 am

    In my article, it states that marine cargo policy is unambiguous from the start that it covers only physical loss, and therefore, business interruption loss is not covered. The article also states that covered losses are built-in in the price model, and with insurers paying non-covered losses, it risks destabilization of the insurance industry.
    The article (with the URL link) written by Hannah Smith, titled “Insurer wins in one of the first U.S. Covid-19 coverage rulings,” is very timely in bringing this big BI decision to our attention. The fundamental question in this case is whether there was a “direct physical loss of or damage to property.” I enjoyed watching the ruling from the bench via Zoom, and the entire proceeding is available on YouTube – done “virtually”. The above coverage trigger was hammered down by the defense, Henry Emrich, and expanded by Judge Joyce Draganchuk. The result is that Judge Draganchuk granted the defendant’s motion for summary disposition.