Suez Canal Crisis May Cost Insurance Companies Millions

Ruben Onsu

Ever Given stuck in the canal north of the city of Suez, Egypt on March 26. Source: Maxar Supply Lines is a daily newsletter that tracks trade and supply chains disrupted by the pandemic. Sign up here. There were potentially thousands of insurance policies taken out on the steel boxes stacked […]

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There were potentially thousands of insurance policies taken out on the steel boxes stacked high on the massive boat blocking the Suez Canal and upending world trade. They could result in millions of dollars in payouts — but first, a game of passing the buck.

Taiwan’s Evergreen Line, which chartered the Ever Given, says Japan’s Shoei Kisen Kaisha Ltd — the ship’s owner — is responsible for any losses. The shipowner has taken some responsibility but says charterers need to deal with the cargo owners. The Suez Canal’s own policies suggest it’s not to blame, even if its pilots were at the helm of a ship that ran aground.

Regardless, the blockage is set to unleash a flood of claims by everyone affected, from those in the shipping industry to those in the commodities business. Owners of the goods on board the Ever Given and other ships stalled because the fastest waterway connecting Europe to Asia is closed will seek payment from their insurers, if they have one. And the insurers for cargo on board will in turn file claims against Ever Given’s owners, who will turn to their insurers for protection.

As Chris Grieveson, partner at shipping law firm Wikborg Rein LLP in London, put it: It’s an “Armageddon type scenario.”

Among the things insured is the ship itself. That’s usually covered anywhere in the region of $100 million to $200 million, according to insurance broker and risk adviser Marsh. But the payout would depend on how bad the accident is. While the propeller could be damaged given the depth of the grounding, the sandy surfaces mean the damage could have been worse.

If a process called general average is declared — which involves sharing costs among all stakeholders — the payouts, which will be well into the millions, become incredibly complex.

“It adds a huge complexity to settling the final claim,” said Marcus Baker, head of the marine practice at Marsh. “And when I say a huge complexity, we’re talking years before we can get to a place where everyone knows there they stand.”

While major risk modelers aren’t putting out estimates yet, the eventual payout for the vessel will span a whole host of insurance sectors. One entity directly involved is the U.K. P&I Club — one of thirteen mutual groups that insure third-party liability in global shipping markets. It covers the Ever Given for things like damage to infrastructure and claims for obstruction. The U.K. club said it will consider all valid claims in due course.

What Bloomberg Intelligence Says:

The Ever Given will be the clear cause of business-interruption loss for other ships, resulting in a flood of claims. Primary policy and reinsurance limits may come into play, likely putting industry losses in the hundreds of millions of dollars rather than billions, according to Bloomberg Intelligence analyst Matthew Palazola

P&I cover can also include things like salvage costs and loss of revenue. Those are currently some of the biggest unknowns, as exactly when the ship will be on the move again is unclear.

If the vessel has to be made lighter by removing some of the boxes on board, it will incur a bigger liability, according to Rahul Khanna, global head of marine risk consulting at Allianz SE.

“If they have to take off the containers, that’s going to be another huge expense,” he said. “Then we’re talking high millions, tens, possibly hundreds.”

There’s precedent for big marine claims. The capsizing of the Costa Concordia cruise ship led to a payout of $1.6 billion in 2012, according to Marsh. While that didn’t disrupt global trade like the Suez incident has, it required a huge salvage operation.​

How to Dislodge a 200,000-Ton Ship From a Canal Wall

​The task of pinning the blame hasn’t been made any easier by the Suez Canal Authority’s rules of navigation. They state that the master of a vessel is responsible for any accident that takes place, rather than the pilots navigating them through the canal. The ship’s owners have said that two Suez Canal Authority pilots were on board at the time of the incident.

Further claims will be made by the salvage company once the ship is freed. A top-tier crew like the Dutch firm SMIT Salvage now in Egypt will usually work on a so-called Lloyd’s Open Form basis and be paid a success fee based on the value of the ship and cargo. This fee will be in the tens of millions of dollars for the Ever Given, Grieveson said.

What About the Rest of the Cargo?

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