Inside Logistics

A mirage in the desert?

The illusion and reality of risk management and cargo claims


June 18, 2021
by Christian Siviere

Christian Sivière runs Solimpex and is an international trade consultant and lecturer. christian.siviere@videotron.ca

Who hasn’t heard about the Suez Canal blockage in March, which illustrated the fragility of global supply chains?

Even people with no knowledge of or interest in the logistical challenges of international trade got the idea. The Ever Given, a giant container ship transporting thousands of containers of food, textiles, pharmaceuticals, sporting goods, furniture, toys, auto parts, electronics and more – all made in Asia and headed to the Mediterranean and Europe – got stuck for a week in a canal in the tropics. The image of the giant ship stuck in the mud for six days, surrounded with sand dunes and palm trees, seemed like a mirage.

But the stranded 20,124-TEU ship was not a mirage, and neither were the hundreds of other ships it blocked. All kinds of ships were stranded, carrying everything from consumer goods to petroleum products and livestock. The story quickly became a perfect image of a supply chain nightmare.

Of course, this was just a temporary hold-up. When the Canal reopened on the sixth day, it took a week or so to clear the backlog. Then it was business as usual.

Detention

For the Ever Given, though, it wasn’t business as usual. After being freed, it was towed to a holding area in the canal called the Great Bitter Lake for evaluation of its seaworthiness and capacity to continue the voyage. Alas, although there was no damage, the ship wasn’t able to sail onward. It was detained by Egyptian authorities, at the request of the Suez Canal Authority (SCA).

The SCA had launched a US$916 million lawsuit against the shipowner to recover rescue operation costs, lost revenue and loss of reputation. Suing for the rescue costs sounds right but the other two arguments seem preposterous. There was hardly any revenue lost. Although a handful of ships chose to go the long way down the African Coast around the Cape of Good Hope, most waited and eventually transited the Canal.

As to the loss of reputation, Suez is a monopoly – there just isn’t any other canal around. It’s not as though vessels can choose another way through the region.

The role of insurance

For the vessel owners (Japan’s Shoei Kisen Kaisha) and its operators (Taiwan’s Evergreen), it’s an issue for their insurers. Shipowners/operators typically carry two types of insurance: hull insurance covering the vessel itself, and protection and indemnity liability insurance covering the maritime liability risks associated with ownership and operation of a vessel. The latter applies to the SCA claim.

It is up to shippers or consignees to contract their own insurance, as carriers’ liabilities are limited to about US$900/container per their Bill of Lading conditions (Hague Visby Rules). However, in this case they are out of luck: they can’t claim against their cargo insurance, since their cargo was not lost or damaged but merely delayed. Delays are not covered by cargo insurance. Something has to happen to goods in order to have a legitimate claim.

This does not mean, however, that it is useless to purchase cargo insurance. In this case, the situation was complicated because the shipowner declared General Average (GA), an old maritime law principle whereby the carrier can call upon cargo owners to pay for the costs of rescuing the ship (and its cargo). The good news is that this type of GA expense is generally covered by cargo insurance and only customers who didn’t have cargo insurance will be out of pocket for the Ever Given GA contribution.

Not all global supply chain risks are insurable. Customers who had cargo insurance at least were covered for the GA costs, but no customer will be compensated for the delays in receiving their goods.

Split shipments

In the case of the Ever Given, if you had cargo on board, you were just unlucky. The only way to limit your risks would be to split your shipments. If you have three containers to ship from Shanghai to Rotterdam, ship them separately with different carriers.

But keep in mind that most carriers operate joint services. Containers stuck on the Ever Given are not just Evergreen’s. There are also CMA/CGM/APL, Cosco and OOCL boxes, as these carriers share space on each other’s vessels under the umbrella of the Ocean Alliance, one of three vessel-sharing groups operating between Asia and Europe. If you split your shipments among several carriers to spread your risks, make sure they are not part of the same alliance, or your containers may still end up on the same boat.