Cargo loss has been in the news again recently with the grounding of the 11,850 TEU container vessel Ever Forward in Chesapeake Bay. The ship was finally refloated after more than a month, following extensive dredging and the offloading of over 500 of the 5,000-plus containers onboard. Other recent cargo losses of note include the February 2022 fire aboard the Felicity Ace that destroyed almost 4,000 cars, as well as an ongoing spike in overboard container losses caused by factors like more powerful storms at sea, larger ships allowing taller and more precarious container stacks, and ships moving faster to make up for port delays.
Is Your Cargo Adequately Insured Against Loss?
With cargo loss and damage risks on the rise, now is a good time to examine your marine cargo insurance coverage. Many shippers think they are insured against cargo loss by their company’s “umbrella policy,” or that the ocean carrier is responsible for cargo losses. But a false sense of security quickly fades when disaster strikes at sea and maritime law is invoked.
What is general average?
One of the key maritime legal principles that comes into play around marine cargo losses is general average. Under the law of general average, all parties in a sea venture proportionally share in any losses resulting from a voluntary sacrifice of part of the ship or cargo taken to save the whole in an emergency. In the event of such an occurrence, the ship owner will declare general average.
The law states, “There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally or reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.”
When general average is declared, the ocean carrier is not liable for cargo loss or damage. In fact, all cargo owners are actually made partly responsible for each other’s cargo, as well as the vessel itself. Once the total cost of the incident is known, the general average adjuster appointed by the ship owner will calculate the costs owed by each party involved in the voyage. In extreme cases, these costs can be onerous and put a small company’s bottom line at significant risk.
General average on the Ever Forward
A case in point is the Ever Forward grounding mentioned above. Though worst-case scenarios like hull damage, fire, and loss of containers overboard were all avoided, the costs to refloat the ship were massive. Cargo owners without sufficient cargo insurance coverage will have to pay out of pocket for the general average declared on the vessel, including needing to pay nonrefundable cash deposits (the “acceptable general average security”) before their cargo can be released.
Actual costs for the Ever Forward grounding haven’t yet been reported, but it’s likely that salvage fees on the order of $6,000 to $7,000 per container will be assessed. For those with marine cargo insurance, the cost remains just the amount of the premium they paid upfront to arrange the insurance with the insurer covering the amount of any loss incurred including covering the deposit required for the “general average security bond”.
Another point of interest within the Ever Forward scenario is that the grounding was caused by pilot error and missing a turn in the ship channel. Yet the vessel owner, Evergreen, is still able to invoke general average to recoup salvage costs through cargo owners.
Should I get maritime cargo insurance?
The worst time to realize you need insurance is after a loss event. If you typically don’t insure your cargo, now is a good time to reevaluate that option to make sure you are adequately covered in the event of a loss.
Marine cargo insurance is comparatively affordable and protects you from catastrophic damages, so it offers a great deal of protection and peace of mind for a relatively minimal cost. It can also mean the difference between a quick claim settlement or months of waiting and back-and-forth to recover any value from your goods.
With so much complexity in contracts, accurately judging risk exposure and insurance needs can be challenging. For example, it’s key to know what risks are excluded by most policies, such as delays, and disruptions caused by “acts of God” like COVID-19 lockdowns in Shanghai.
Contact Laufer Group to download our cargo insurance white paper and sign up for a free, personalized evaluation of your cargo insurance policy.