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Quick freeing of Suez Canal ship spared insurers a bigger claim

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Quick freeing of Suez Canal ship spared insurers a bigger claim

SNL Image

People watch as the Ever Given container ship is refloated, unblocking the Suez Canal on March 29.
Source: Mahmoud Khaled/Getty Images News via Getty Images

The insurance industry faces a claim in the low hundreds of millions of dollars after a container ship blocked the Suez Canal, a major trade route.

But the freeing of the Ever Given, a 20,000 twenty-foot equivalent unit-capacity container ship, on March 29, six days after it ran aground, means the industry has avoided a much larger claim. Marcus Baker, global head of marine and cargo at insurance broker Marsh LLC, said in an interview that the claim would be "significant" and "still a couple of hundred million [dollars], but it's not a billion."

He said that considering all the known elements of the claim, "it does not feel like a lot of expense there" for insurers. He added: "I just think it is pretty finite. We are talking about six days here."

Martin Hall, head of marine casualty at law firm Clyde & Co, said in an interview that while it was "impossible to say" how much the blockage would cost insurers, he suspected it would be "quite a large claim." "It could have been an awful lot worse," he said, adding the industry would be relieved the vessel had been freed in six days. The operation would have taken several weeks longer if salvors had had to lighten the ship by removing containers, he noted.

Rating agency DBRS Morningstar said in a report March 30 that total insured losses "will remain manageable given the relatively short period of time that the canal was blocked, the limitations and deductibles for certain coverages, and the strong capitalization of most insurers." The report also said that while there was no public information on the limit of the ship's liability insurance, "estimates point to a limit in the $200 million to $300 million range."

Neil Roberts, head of marine underwriting at Lloyd's Market Association, the trade body for Lloyd's underwriters, said in an interview that the situation more generally "has been a near-miss overall" given the physical difficulty of getting such large ships out of trouble.

Canal operator claim

The running aground of the Ever Given, owned by Japanese company Shoei Kisen Kaisha Ltd. and leased under a time charter agreement to Evergreen Marine Corp. (Taiwan) Ltd., has caused severe disruption. The BBC reported that about 12% of global trade passes through the canal each day. S&P Global Platts reported March 29 that the blockage had resulted in a logjam of more than 360 ships and a backlog that could last for weeks.

However, "by far the biggest claim" for the insurance industry will be from the Suez Canal Authority, according to Hall. The authority will likely bill the ship's owner for a combination of damage to the canal itself, its assistance in the salvage — such as the hire of tugs and dredgers — and loss of revenue. The owner is then likely to claim against its machinery and hull and cargo insurers for the salvage part of the bill and its protection and indemnity, or P&I, insurer for the third-party liability element of the claims such as damage to the canal and loss of revenue, Hall said.

P&I is marine liability insurance typically provided by mutual insurers known as P&I clubs. One such insurer, the UK P&I Club, said in a statement on its website that it has insured the Ever Given owner "for certain third party liabilities that might arise from an incident such as this — including, for example, damage caused to infrastructure or claims for obstruction."

Claims for the disruption to other vessels are less likely. The LMA's Roberts noted that most cargo policies do not cover delay, and so affected parties "may try and make a claim against the owner of the Ever Given."

Delay costs

Baker said he suspects there will be efforts to recover delay costs, but added: "I'm just not entirely convinced that is going to be recoverable." Hall said claims against the Ever Given's owner from other ships that were delayed or diverted were "much more speculative" and would be "complex and difficult." He added that the P&I insurer would pick up such claims "if they ever materialized."

The delay was "not really long enough" for loss-of-hire policies to kick in, Hall said, and it was "a big question" whether it was long enough to trigger business interruption policies. "Is a couple of weeks in the shipping world considered an extraordinary delay? I would doubt it, frankly," he said.

Uncertainty remains about the size of the Suez Canal Authority's claim for loss of revenue. Some estimates have put the authority's daily revenue at $15 million, based on its annual revenue, but Hall noted that the authority would only lose revenue for the ships that had diverted to avoid the blockage, not those waiting to go through the canal. The DBRS Morningstar report said that so far "only a few ships" had opted to take the detour around the Cape of Good Hope, "mitigating the impact of lost revenues to the SCA."

The P&I portion of the claim could hit the reinsurance market. The UK P&I Club is one of 13 members of a pool, the International Group of P&I Clubs, which shares members' claims bills once they exceed $10 million. The pool's reinsurance kicks in once its annual losses hit $100 million.

On the overall impact to the reinsurance market, Baker noted the size of the reinsurance program's premium relative to the potential loss arising from the Suez incident and issues elsewhere in the market, such as increasing claims costs from the Golden Ray, a cargo ship that capsized and caught fire in 2019.

"I think here are other things that will impact [the reinsurance market] more than this." But, he added, that if the Ever Given claim did turn out to be in the $500 million to $700 million dollar range "we have got a completely different scenario ahead of us."

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.