Reports of hundreds of thousands of containers stranded around the world have flooded news desks globally. Because of COVID-19, ports have limited ability to clear these landed containers, and a slew of blank sailings leave these containers stuck on piers.
So, what does this mean for marine cargo insurers and the buyers/sellers during and after the COVID-19 pandemic?
Marine cargo insurance considerations
Based on the current situation, if the insured fails to pick up its cargo at the port of destination because of its lack of warehouse space or its inability to move the shipment, the marine cargo insurance policy will not pay for demurrage or detention charges. The insurance policy expressly excludes these port charges. Also, the insured, because of loss of market abandons the goods, cannot recover the insured value of their shipment from the insurance policy. The insurance policy expressly excludes loss of market because the claim does not meet the requisite definition of “physical loss” to the cargo.
The insureds, as 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 a borrowed shipper-owned container (SOC) instead of a carrier owned container (COC) to mitigate detention charges.
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.com/Telehandler.
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, because of the typical policy language 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.”
A scenario would be if goods destined for New York were discharged by the ocean carrier short of its destination, say Los Angeles, and the cargo is abandoned in Los Angeles. In this case, the insurance policy will pay for “landing, warehousing, transshipping, forwarding, and other expense incurred” to deliver the goods to its final destination.
Which insurance carrier will pay for the forwarding charges, etc., depends on the agreed Incoterms shown in the commercial invoice for the shipment. 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 insurance is still running during this transshipment, etc., any loss not excluded by the policy is covered.
Additionally, please note that Incoterms® 2020 recognizes 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 to use 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.
Sue and Labour clause
Other expenses that may be deemed covered under the policy are those expenses that the insured incurred to prevent or minimize 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 go back to the “Tiger” policy in 1613, which covered goods on board the vessel Tiger from London to Mediterranean ports. A U.S. federal court considered the Sue and Labour clause in a marine policy 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.
Physical loss or damage
Property policies generally exclude 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.
A typical transit insurance policy, such as the marine cargo policy, is unambiguous at the very beginning that it covers only physical loss.
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…”
The question here is how far one can define “physical loss or damage” if it comes from an external cause but not excluded by the insurance policy. One can argue that a virus does not harm physical property.
Can one successfully remove these germs or bacteria by disinfecting them? If successful, then a claim to the insurance carrier for a total loss of the goods may not meet the definition of physical loss. For perishable goods 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 earnings 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 whether this BI endorsement is good for your business. It is also 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. Additionally, I would recommend hiring a forensic accounting firm to assist the insured pre- and post-loss, such as Meaden & Moore. Insurance carriers generally employ an accounting firm to assist in determining the value of the loss.
It is also good to find out whether the valuation of goods under the policy meets the needs of the insured. This is because the valuation of the goods is used in the adjustment of the claim. Valuation of the goods could be 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.
Force majeure claims or ‘an act of God’
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 liability cover to the ocean carrier), which if successful will reduce the ultimate insured loss for the cargo insured?
Sue and labour and landing, warehousing, transshipping, forwarding etc clauses were earlier discussed and those 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 prevents subrogation or third-party recovery by marine cargo insurers. I understand some contracts do not 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 understand 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 depending on the term of a sale, 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 into the price model, and with insurers paying non-covered losses, which are contractually agreed exclusions in the policy, especially without sub-limit, it risks the destabilization of the insurance industry, which is at the end is one of the protectors of business.
Not only should we be worried about 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 their operations to help manufacturers, shippers, carriers, insurers, and service providers in the prevention of cargo losses.
Recently, I sent an email to colleagues in Bangalore, India, attaching a picture of a COVID-19 candlelight vigil in their city. I told them that my wife and I were touched by 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.”
Jose Guerrero is president and CEO of Virtual Claims Services and author of “Marine Cargo Insurance: Adjusting, Claims Administration, History” published in 2003. He can be reached at [email protected].
A version of this article first published on The Loadstar and is republished here with consent.