Marine market risks irrelevance in face of health crisis (source Lloyd’s List)

Marine businesses are exposed to significant delays and business interruption related to quarantines, voyage cancellations and factory closings all over the world

The issue for insurers is not that coronavirus represents an unprecedented challenge for the marine sector, but the sense there is not much they have to offer by way of risk mitigation

THE marine industry has been hit hard by the coronavirus and insurers have had little to offer to mitigate the impact of the pandemic.

As a result, there is likely to be a radical reassessment of the kinds of insurance covers required in the future, and whether or not that cover should be obtained in the mainstream market.

At the moment, the full extent of the impact of coronavirus, both for insureds and insurers, is far from clear, as are any possible risk mitigation solutions that might address the issue in the future.

Marine businesses are exposed to significant delays and business interruption related to quarantines, voyage cancellations and factory closings all over the world. The prospects for marine business owners and investors are daunting, to say the least, as these delays and cancellations weaken the transport chain and create disputes and divisions between shipowners, charterers and cargo interests.

According to loss adjusters, the impact is especially acute on perishable cargo delayed in ports, particularly in China, and in cases where customers are unable to take delivery because of border restrictions or lockdowns, the severity of which varies from one country to another.

For example, travel between Holland and Belgium is currently restricted to essential transport; in France, people are expected not to leave their houses except in case of emergency; Cyprus, South Africa and the Middle East have closed their ports and are not allowing any ship or cargo to come in. Not surprisingly, there has been an exponential rise in the number of cases of product damage and container casualties caused by delays as a result of cargoes not being delivered in time, of cargoes being abandoned or as a result of shipping restrictions.

The extent of damage from abandoned cargo or delayed shipment depends on the type of goods, says Ton Schox, head of marine for continental Europe at Sedgwick.

“For certain products such as paper, it won’t have any problem; the worst and only impact is delay. However, some products need to be carried in refrigerated conditions to maintain their temperature, like perishable cargo, and any delay to its shipment will become an issue,” Mr Schox explains.

However, losses on marine policies caused by delay attributable  to pandemics like coronavirus or Sars are excluded from the standard marine insurance policies. And, even in cases where there might be grounds for a claim, there are often significant grey areas.

For example, perishable food products may be covered in the event of deterioration caused by a risk, but they may not be covered in the event of market loss or deterioration caused by delayed delivery.

“We understand that in some cases, the expense of overheads would be warranted, but the shippers will have to prove their due diligence in the management of the claim. Each new claim is therefore studied by insurers on a case-by case basis and no general behaviour seems to have been adopted as yet,” says Mr Schox.

The pandemic has also highlighted business interruption-type exposures not typically associated with the marine sector such as event cancellations.

For example, the insurance industry in the Netherlands which is currently in semi-lockdown until the end of April and where all major events have been cancelled, has seen a marked increase in such claims.

Again, whether or not an insurance policy will pay out is far from clear and loss adjusters have to consider factors such as whether or not the event is in fact insured, in which market the event is insured, and policy wordings.

“Events are most likely to be insured in the marine market because they involve moving equipment. Travelling showmen and fairground ride operators for example, have traditionally always been insured in the marine market, and not the property market, due to the nature of their business,” says Mr Schox,

Sedgwick does not expect these cancellation claims to rise any further past May or June, unless, of course, the lockdown continues beyond these dates.

But given the extent to which the marine industry has already been affected by coronavirus, the pressure is mounting on insurers, despite the protection afforded them by policy exclusions. The pressure is mounting too on government. This is not least because of the critical importance of the maritime sector to the UK economy. For example, UK seafarers were recently classed as key workers by the government.

While this classification will go a long way to help the sector continue to operate during these uncertain times, and allow UK ports to continue functioning at 95% capacity, the emergency Coronavirus Bill does permit the government to close ports if required, says Gemma Pearce, head of marine at London law firm BLM.

“We have already seen numerous big ferry operators seeking financial assistance from the government owing to a decline in passenger footfall, although their cargo/freight business continues to thrive due to the ongoing demand for consumer products, predominantly food goods and essential supplies,” she says.

The issue for the insurance industry is not that the challenges facing the maritime sector are huge, but the growing sense that there is not much the insurance industry can offer, or is willing to offer, by way of a solution.

The maritime sector is facing the prospect of an unprecedented number of vessels at anchor, as well as unprecedented congestion at ports. Thousands of containers lack the relevant paperwork and cannot be landed, because of the loss of staff and lockdown procedures.

There is also the potential loss of shipping routes, as well as the loss of smaller coastal vessels servicing remote locations due to economic reasons. “Vessels will then have to be sold and the sale price will likely be less than pre-outbreak costs,” Ms Pearce adds. “Another consequence could be construction delays, in terms of delivery of new vessels, of both small and mega build.”

In the ports and terminals sector, most insurance policies appear to provide even less coverage for coronavirus-related losses than they do in other marine sectors. Where they do, there is a requirement for a governmental authority to mandate closure of the business in order to trigger policy coverage.

The latter is unlikely to occur, says Robert Iremonger of Abingdon Risk Consulting, a marine claims advisory firm which advises port authorities and marine businesses.

“Very few have a contagious disease clause, which would trigger coverage should there be an outbreak of an infectious disease within a set distance from the insured’s premises,” he said. “Currently, I know of no claims which have been submitted to any marine underwriter.”

A few port or terminal-based marine businesses have non-physical damage business interruption cover in the form of denial of access clauses under their policies, which would trigger policy coverage irrespective of whether there is a specific damage event. An infectious disease clause would, similarly, not require physical damage to occur.

But, whatever the merit of the broader distribution of such covers in the future, most ports and terminals are at present focusing on formulating their future business strategies, including enhanced risk mitigation strategies such as captives and risk pooling arrangements, Mr Iremonger says.

To what extent this process of strategising by the managements of ports and terminals involves or relies on the insurance industry is not clear. “They are only focusing on insurance to the extent of requesting their insurers to provide a premium return at the time of the next renewal, to reflect the reduction in turnover in the preceding (that is to say, the current) policy period,” says Mr Iremonger.

In terms of marine underwriters’ response to coronavirus, his sense is that there will be a renewed examination of policy wordings and the exclusions built into wordings, to prevent any type of claim relative to a pandemic being covered in the future. “Due to the potential aggregated exposures, underwriters are very unlikely to offer any coverage in this regard,” he says.