As the Costa Concordia shifts on its rocky perch, search-and-rescue efforts have been temporarily halted. Yesterday the death toll rose to 11 after divers removed five more bodies from the dark abyss. Meanwhile, 23 passengers remain missing.
Amid the choppy waters a glimmer of hope emerged: all of the ship’s 17 fuel tanks appear to be intact, thus diminishing the likelihood of a significant environmental disaster. Officials nevertheless caution the vessel could still slip into deeper waters off the Tuscan coast and that salvage efforts, including siphoning more than 500,000 gallons of fuel, hinge upon effectively stabilizing the ship.
The ship’s many stakeholders find themselves in a precarious situation. Will the heavily battered Costa Concordia ever regain its footing or be declared a total loss? Will the tragedy turn the cruise industry on its side? Were any conceivable profits for marine insurers already swept away with the miscellaneous debris? This is to say nothing of the looming business interruption (BI) expenses.
To explore the tragedy’s potential impact on the global marine insurance industry, we spoke with John Woods, a partner at the New York City office of Clyde & Co. Drawing upon his 31 years of experience representing largely marine insurance interests in both the U.S. and in London, Woods estimates the toll on the industry will be heavy indeed.
“From what I understand, [the Costa Concordia] is insured at 264 million euros for the hull,” Woods explains. “If the cost of raising and repairing the vessel exceeds that, then she would be declared a constructive total loss. In that case, the hull insurance would pay out both the maximum on the hull plus a separate increased value (IV) policy in the amount of 131 million euros.”
As for the removal of the wreckage itself, Woods says the vessel’s liability insurers would typically cover the associated expenses, if the vessel is a total loss. This is carried under protection and indemnity (P&I), a type of marine insurance coverage that would cover liabilities such as passenger claims and pollution and in the event of CPL.
“It is still very early, but in addition to the deaths there are reportedly 70 or more personal injury claims,” Woods says. “Every passenger may be entitled to some compensation.”
Woods expects that crew death and injury passenger claims will be significant but predicts they will be “dwarfed by the hull and wreck removal claims.”
The ‘Italian Titanic’
In light of reports of a chaotic, disorganized evacuation, miraculously the majority of the 4,200 people aboard managed to reach safety. This is a stark contrast to the maritime tragedy to which the Costa Concordia wreck has been compared.
“[The initial outcome] could have been more like the Titanic, had the collision not happened so close to shore,” Woods says. “Remember that the Titanic was out at sea and also battling bad weather.”
The Concordia tragedy, however, underscores concerns raised by many marine insurance experts over the last few years.
Out of Commission
“As these ships get bigger, so too do the potential losses associated with a disaster,” Woods says. This is coupled with the fact that owners of the massive luxury liners tend to opt out of BI coverage due to the exorbitant premiums.
“It is not surprising that Costa does not reportedly have loss of earnings insurance for the vessel,” Woods says. “However, if a total loss is declared, then that IV policy is intended to assist in some of loss, even though it is not explicitly worded as a ‘loss of earning.’ IV is nevertheless intended to help recoup such losses. It could take years to contract for and build a comparable vessel, should the Concordia be declared a total loss.”
The MSC Napoli and MV Rena illustrate that salvage efforts associated with large vessels are protracted and costly.
“The MSC Napoli had structural difficulties and was deliberately grounded,” Woods says. “Removal of its containers took more than a year.”
Marine insurers have larger issues looming, as Woods points out:
“Over the last two days, I’ve seen different estimates about the potential impact, ranging from 500 million to 1 billion in insured losses,” he says. “It remains to be seen exactly what the total impact will be. Undoubtedly, it will be huge. Because of the timing with the new year, this already means that a lot of marine insurers will not make money this year, depending on their net loss overall.
“It is a bad start to the year,” he continues. “I imagine the impact will be felt in significant premium increases.”
John Woods concentrates his practice in maritime law and insurance and reinsurance litigation and arbitration. He principally represents U.S. and foreign insurers in the areas of maritime hull, liability, cargo, pollution, war risk, loss of earnings and environmental claims. Woods has handled litigations involving major maritime casualties and claims in courts across the United States.