The Ever Given ship that ran aground in a single-lane stretch of the Suez Canal near the city of Suez on March 23 was estimated early on by Suez Canal Authority (SCA) Chairman Osama Rabie to reach $1 billion in loss and damages, with payouts in the hundreds of millions of dollars. These estimations however are not concrete as the actual amount will not be calculable until after investigations are complete, and when that will take place is anyone's guess. Some 400+ vessels were thwarted by the canal's closure and international supply chains were disrupted as traffic was halted for almost a week before Ever Given was dislodged and the canal re-opened.
Ever Given is in the top 1% globally of vessel size, with a length of 1,312 ft, a height of 1,454 ft, and 194 ft in width. It can carry as many as 20,000 containers, and up to 224,000 tons (source: MarineTraffic, Encyclopedia Britannica, Suez Canal Authority and Allianz Global Corporate & Specialty Graphic: Henrik Pettersson, CNN).
After working around the clock to dislodge the ship, an international salvage company finally freed the vessel on March 29th, and Ever Given was moved to the nearby Great Bitter Lake to where it was inspected for seaworthiness and underwent repairs. Recently, Egyptian authorities seized the vessel with its cargo, and subsequently an Egyptian court ordered the Japanese owner, Shoei Kisen Kaisha, to pay $916 million in compensation as a result of losses from the vessel causing marine traffic blockage. The bill includes maintenance fees and costs of the rescue operation. The ship's primary insurer, the UK P&I Club, has filed an appeal in an Egyptian court against the arrest of the ship, scheduled to be heard on May 4, 2021.
Ship owners typically carry protection and indemnity (P&I) and hull and machinery (H&M) insurance coverages. P&I insurance covers liability claims from third parties and includes coverage for environmental damage and injury. H&M insurance covers the vessel against physical damage.
Reinsurers are expected to be on the hook for the majority of the insured costs from the anticipated claims and suits.
Initially, Ever Given's P&I insurer, the UK Club, had said it expected a claim against the ship's owner from the canal authorities for possible damage to the canal and loss of revenue, as well as separate claims for compensation from some of the owners of the ships that were delayed. However, on April 13th, the UK Club responded to a claim from the SCA for $916 million, questioning its basis. "Despite the magnitude of the claim which was largely unsupported, the owners and their insurers have been negotiating in good faith with the SCA. On 12 April, a carefully considered and generous offer was made to the SCA to settle their claim," the statement said. The UK Club's statement explains its question of the validity of the claim: "The SCA has not provided a detailed justification for this extraordinarily large claim, which includes a $300 million claim for a 'salvage bonus' and a $300 million claim for 'loss of reputation.' The grounding resulted in no pollution and no reported injuries. The vessel was re-floated after six days and the Suez Canal promptly resumed their commercial operations. The claim presented by the SCA also does not include the professional salvor's claim for their salvage services, which owners and their hull underwriters expect to receive separately." This questionable validity of the arrest and lack of supporting evidence of the claim are cited as part of the grounds for the insurer's appeal.
The UK Club policy covers the first $10 million of P&I losses, but is not the insurer for the vessel or its cargo.
Ever Given has a layered insurance structure that involves a number of insurers and reinsurers with limits of P&I insurance up to $3.1 billion. Because not everyone is familiar with the concept of layering, we will provide a brief overview as we move through the layers of Ever Given's PI coverage.
Layering allocates limits of reinsurance among several reinsurers. The primary insurer provides the first limit of insurance and cedes the remaining limits to the reinsurers. So the primary insurer is called the ceding company, as it cedes losses above the primary insurance limits to reinsurers in defined amounts of insurance, called layers.
With the UK Club covering the first $10 million of losses for Ever Given, they are the primary insurer and no other insurer will participate in paying claims or losses until the first $10 million has been exhausted. In this manner, the UK Club is the ceding company and it retains the first $10 million in losses.
Up to $100 million of coverage is available from a combined pool of insurers. Even though the $100 million is a combined limit provided by differing insurers, it is called the first excess layer as it is the first layer of limits above the ceding company's retention of $10 million. We do not know the insurers or the precise structure of the $100 million but the way layering is done (simplified) is that each insurer agrees to cover a certain limit of insurance to make up part of the $100 million. Layering is done on an excess of loss basis, so each insurer's limit will need to be exhausted before the next insurer's limits become available. For example, insurer A may cover the first $25 million, insurer B may cover the next $10 million, and so on until the full $100 million of coverage is placed. Each insurer is providing a layer of insurance.
Early on, Lloyd's of London was quoted as saying the incident would likely result in a "large loss" for the commercial and reinsurance market of at least $100 million.
Above the $100 million in limits, reinsurers will step in at their respective policy limits up to a maximum layer of $1 billion. Again, we do not know the reinsurers or structure of this layering arrangement but for purpose of explanation an example might be as few as two reinsurers each providing $5 million; or many more reinsurers with each providing a limit anywhere from $500,000 up, with the first reinsured limit needing to be exhausted before the next one kicks in, until such time as the $1 billion layer would be exceeded.
Initially when Alan Mackinnon, chief claims officer with UK Club was asked if claims could reach levels of cover at $2.1 billion to $3.1 billion, he had said, "we are confident we are not in that territory at all." Let's hope he's right.
If needed however, Ever Given's Lloyds of London policy will cover up to $2.1 billion in claims, and other P&I insurers would contribute up to an additional $1 billion of coverage.
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