Mega-containerships: impact on cargo underwriters

Container shipping, Legal, Salvage, Towage, Wreck Removals — By on January 31, 2014 at 10:24 PM

matthew wilmshurstThe last 12 months have seen the entry into service of the mega-container vessels the CMA CGM MARCO POLO and her sister-ships, with a capacity of 16,020 TEU, and the MAERSK MC-KINNEY MØLLER, and her sister-ships, with a capacity of 18,270 TEU.

With these, and another six mega-container vessels still to arrive, many questions have been asked of the shipping industry’s readiness to deal with such vessels; whether they can safely enter certain ports, whether the landside infrastructure in place is sufficient, and the International Salvage Union has expressed a concern that operations to salvage a mega-container vessel would stretch even the largest salvor.

As discussed in the previous article, the London underwriting community has produced a new insurance product which it suggests will alleviate some of the problems that are likely to be faced by the declaration of general average on one of these new mega-container ships.

Little has been said of the impact of these new container vessels on the cargo insurance market, a large proportion of which is already operating on small profit margins. The areas of greatest concern arise out of risks that are in existence today, but are amplified by the size of the mega- container vessels. We consider some of these further below.

Given the industry speculation that mega-container vessel casualties will be too difficult to salvage, it stands to reason that there will be either increasingly expensive payments to professional salvors or an increase in the number of total losses of vessels and cargo. The cost of both would be covered under the most commonly used cargo insurance wordings, the Institute Cargo Clauses (ICC).

Larger salvage payments?

The factors which are considered by an LOF arbitrator in determining an Article 13 Salvage Award (the salvor’s remuneration under the “no-cure, no-pay” LOF contract) will all be directly affected by the difficulties in salvaging the mega-containerships. Professional companies engaged to salvage such large vessels are likely to have to work longer and utilise more resources in order to do so. These factors, along with the potentially enormous salved funds, and the fact that salvors are expected to invest in more equipment to deal with such casualties, are likely to weigh heavily on a arbitrator’s mind and could well result in much more encouraging awards, which will come at a cost to cargo insurers.

More total losses?

Even a comparatively small 8,000 TEU container vessel on a Far East to Europe service is likely to commence its voyage with roughly US$500,000,000 of cargo value onboard. Given this, it is not unreasonable to assume that a mega- container vessel on the same service could be carrying cargo with a value in excess of US$1,000,000,000. The total loss of such a vessel would therefore result in the cargo insurance industry as a whole facing claims at a level very close to the cost of the entire 2012 UK floods. More than one such event in an underwriting year would surely be close to catastrophic for some of those in the cargo insurance industry.

Claims for delay?

Longer and more complex salvage operations and potentially delays in discharge due to general average security issues could also result in cargo insurers facing more claims for losses and expenses caused by delay. Prior to the Supreme Court’s decision in the CENDOR MOPU, these would not have been covered by most cargo insurers as they would be excluded under the ICC terms, but in light of that decision, there is now a risk that insurers would not be able to rely on the exclusion if the proximate cause of the losses were the perils of the sea.

The advent of mega-containerships has resulted in a lot of debate as to the potential impact on many sectors of the worldwide shipping industry, and the cargo insurance market is certainly not the only one to be potentially affected, but the effect goes beyond just the shipping and insurance industry. The natural reaction for insurers would be to protect themselves against the risk of higher claims by raising the premiums charged, which is normally passed directly onto the last person in the supply chain – the high street consumer.

For more information, please contact Matthew Wilmshurst, Associate, on +44 (0)20 7264 8115 or matthew.wilmshurst@hfw.com, or your usual contact at HFW.

“Jo”

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