Stuck: The Insurance Impasse Over the Suez Canal Blockage
By Kevin Cowan
The Suez Canal (“Suez”), located in Egypt, runs across the Isthmus of Suez connecting the Mediterranean and Red Seas and sees nearly 20,000 ships pass through every year on its way to having approximately 12% of the world’s seaborne trade.[1] Thus, it is one of the more important trade passageways in the world. On March 23, 2021, due to adverse weather conditions, the Suez was blocked by the 220,000-ton nearly quarter-mile long mega ship, the Ever Given, bringing a halt to this key trade checkpoint for over 6 days while the ship was lodged sideways.[2] An estimated 400 vessels were affected, with some taking the long trip around Africa to avoid further delays.[3] This blockage opens the possibility to many claims including the owners of goods on the Ever Given itself as well as the other ships that were delayed with all parties looking to their insurance carriers for coverage.[4] The sheer number of policies involved could venture into the thousands as every box aboard the Ever Green could come with its own owner and individual insurance policy.[5] The question then becomes what parties involved should bear the costs for which damages.
The ship’s owner, Japan-based Shoei Kisen Kaisha Ltd., has a total of $3.1 billion in liability coverage, which should cover the owner’s legal liability to the cargo owners.[6] Total insurance claims are estimated to “run into the hundreds of millions of dollars” for both large salvage costs and third-party losses.[7] Coverage for ships in this type of scenario generally comes from protection and identity (P&I) insurance.[8] According to insurance experts, any salvage costs would typically fall on the hull and machinery insurer, which would be a separate entity with a different policy.[9] Both types of claims typically exclude loss of earnings, which could leave many with no way to recoup costs.[10] Shipping sources indicated that the daily expenses for each vessel that was delayed was approximately $10,000-$15,000, including additional fuel, lost days of voyage, and extra supplies.[11] Before any findings of an actual investigation, the Suez Canal Authority Chairman initially estimated that the losses associated with the blockage could reach $1 billion.[12]
The events on the Suez will likely lead to reinsurance companies bearing a large portion of the costs arising from the blockage.[13] Reinsurance is an entire industry of its own and is basically insurance for insurance companies where companies “transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim.”[14] Thus, while a pool of P&I insurers will cover roughly the first $100 million, reinsurers will then step in for claims going all the way up to $2.1 billion.[15] Shoei Kisen has stated that it will accept part of the responsibility, but has reiterated that cargo owners need to deal with the charterer as well for part of the costs.[16] Moreover, the Suez Canal Authority had two pilots on board the Ever Green at the time it ran aground, but at the writing of this post has not admitted any liability on its own part.[17] When it is all said and done, it is likely that all parties will bear part of the blame.
The Suez blockage is a great example of just how complex lawsuits and insurance claims can be when many parties are involved. While the Suez was a viral story that enthralled the world for almost a week straight and seemed to vanish the next night like most popular internet stories, the blockage will have legal implications that will likely last for many years.
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[1] William B. Fisher, Suez Canal, Brittanica https://www.britannica.com/topic/Suez-Canal (Mar. 26, 2021); Natasha Turak, Suez Canal blockage could cause problems for the globe: Here’s what you need to know, CNBC, https://www.cnbc.com/2021/03/25/suez-canal-cargo-ship-blockage-could-cause-problems-for-the-globe.html (Mar. 25, 2021).
[2] Turak, supra note 1; George Petras & et al., Tugboats, tides and dredgers pull ship from canal bank; traffic expected to resume soon, USA Today https://www.usatoday.com/in-depth/graphics/2021/03/26/how-evergreens-ship-got-stuck-in-the-suez-canal/7010375002/ (Mar. 26, 2021).
[3] Jonathan Saul, Reinsurers set to beat brunt of costs for Suez Canal grounding, Reuters https://www.reuters.com/article/us-egypt-suezcanal-shipping-insurance/reinsurers-set-to-bear-brunt-of-costs-for-suez-canal-grounding-idUSKBN2BV20J (Apr. 8, 2021).
[4] Aaron Clark et al., Lengthy Legal Battles Expected from Suez Canal’s Longest Closure in Almost 50 Years, Insurance Journal, https://www.insurancejournal.com/news/international/2021/03/30/607759.htm (Mar. 30, 2021).
[5] Alex Longley et al., Insurers May Be on Hook for Millions Tied to Suez Canal Crisis, Bloomberg https://www.bloomberg.com/news/articles/2021-03-27/insurers-may-be-on-hook-for-millions-tied-to-suez-canal-crisis (Mar. 26, 2021).
[6] Leslie Scism & Benoit Faucon, Suez Canal Insurance Claims Loom as Ever Given Blocks Shipping; More than $3 billion of liability coverage is in place for the owner of the grounded container ship, Wall Street Journal https://www.wsj.com/articles/suez-canal-insurance-claims-loom-as-ever-given-blocks-shipping-11616837401 (Mar. 27, 2021).
[7] Ian Smith, Suez Canal insurance claims to run into hundreds of millions of dollars, Financial Times https://www.ft.com/content/0ebac21e-c90d-44db-a4d3-ea1d727b4451 (Mar. 29, 2021).
[8] Saul, supra note 3.
[9] Smith, supra note 6.
[10] Jonathan Saul & Carolyn Cohn, Insurance Unlikely to Cover all Shipowners’ Expenses Incurred in Suez Closure Chaos, Insurance Journal https://www.insurancejournal.com/news/international/2021/03/30/607552.htm (Mar. 30, 2021).
[11] Id.
[12] Saul, supra note 3.
[13] Id.
[14] Caroline Banton, Reinsurance, Investopedia https://www.investopedia.com/terms/r/reinsurance.asp (Jul. 30, 2020).
[15] Saul, supra note 3.
[16] Longley, supra note 5.
[17] Id.