When the container ship Dali crashed into and collapsed Baltimore’s Francis Scott Key bridge, claiming a half-dozen lives and blocking access to one of the busiest ports in the US, it also created a knot of financial problems for the ship’s owners and cargo customers that experts say will likely take years to unravel.
For instance, how much is the ship’s owner liable for, how much of the financial burden will cargo owners take on, and how much of the damages to cargo will be covered by insurance?
CFO Brew spoke with experts in supply chain law and marine insurance on what the affected companies will likely undergo. They also shared lessons for organizations exposed to similar shipping risks.
Greater force. While the aftermath of the incident is still in its early stages, the experts cautioned, there is precedent to lay out a likely roadmap of what’s to come in ensuing months and years.
Since it’s impossible to guarantee the boat carrying their goods will arrive as planned, manufacturers should be protected by force majeure clauses in their contracts with customers, who otherwise expect timely arrival of their goods under normal circumstances, according to Ron Leibman, partner at law firm McCarter & English, who is not involved in any of the cases around the incident. Force majeure clauses remove liability in instances of unforeseeable catastrophes.
“In the case of this, there seems to be a pretty fair, clear force majeure,” Leibman told CFO Brew. “I think what manufacturers are going to see, though, is that their customers will expect them to quickly be able to replace the goods and put the goods out in a reasonably fast time or in whatever ship is possible, or potentially even move out of another port, but get it there as quickly as reasonably possible.”
Then there’s the business of recouping losses from the damaged or lost cargo aboard the ship. The owners of those goods will “likely not” be made whole by the ship’s owners and operators, Leibman said, because “have a lot of loopholes, and a lot of ways they can limit their liability.”
And yes, they are indeed pursuing those loopholes. Grace Ocean and Synergy Marine, the Dali’s owner and operator, respectively, have filed a petition in federal court for a “limitation of liability” of $43.7 million.
Leibman added that the findings of an ongoing National Transportation Safety Board investigation “certainly will be quite important in determining what kind of claims can be brought and against whom.”
Sharing the pain. There’s another complicated matter cargo owners face, and it goes by the seemingly innocuous name of “general average.” This refers to the process in which all companies that own goods on the ship are responsible for sharing some of the financial losses when an incident occurs—in this case, the incident is the ship colliding with the Baltimore bridge.
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Grace Ocean has formally initiated the general average process, meaning “this decision indicates that the Owners expect the salvage operations to result in high extraordinary costs for which they expect contribution from all salvaged parties under General Average,” the shipping company MSC announced in a recent customer advisory.
Still with us? Here’s a simplified example of how the general average process works, as described by Kevin Kearny, SVP with insurance broker and risk-management advisory firm Risk Strategies and a full member of the Association of Average Adjusters of the US and Canada: If a ship is worth $40,000 and the cargo onboard is worth $80,000, cargo owners would pay two-thirds of general average expenses in an incident, he said.
But nothing about the process is simple. “I’ve been involved in [general average] claims that have taken four or five years, and those are not nearly as dramatic as this,” Kristen Teatom, team lead and VP of claims with Risk Strategies, told CFO Brew.
Cargo owners and their insurers will have to parse out what damages will be covered by their cargo insurance policies and what applies to the general average, Kearny said. The damage the cargo sustained by the bridge falling on the ship is covered by cargo insurance, while any damages that occur during salvage efforts will be part of the “general average sacrifice,” he said.
Moving forward. The collapse of the Baltimore bridge holds important lessons for marine and cargo risks, experts said. According to Kearny and Teatom, organizations should insure their cargo at full value and obtain coverage for other potential losses such as business interruption. They also recommended that companies obtain policies that use broker-written wording as opposed to wording from the insurance carrier, since the wording on carrier forms is typically more restrictive.
“The point of insurance, of course, is to protect against the unforeseeable,” Teatom said. “I don’t think anyone would have come up with an example like this [bridge collapsing] when they said, ‘You know, I think we should have business interruption coverage.’ But the point is to have those kinds of coverages because they are offered, and this is the exact scenario in which you might be able to rely upon it.”