The impact of the COVID-19 outbreak on supply chains will affect the cargo industry in several ways. Some of the effects might not have been anticipated, and could leave cargo owners and cargo carriers less insured than they imagine.
As countries look to manage the spread of COVID-19 and implement quarantines and travel restrictions, production of goods could be delayed, while goods in transit may be delayed, rerouted, or discharged short of their final destination as a result of port/country closures or restrictions.
Even after quarantines end and production and transportation recommence, it could take months to unravel the backlog. Even where cargo is available to ship, the availability of containers in the right locations may be problematic.
Losses and costs stemming from such delays are unlikely to be insured and, in most cases, neither a logistic company nor carrier could be held liable.
More tonnage of container ships is now idled around the world than during the global financial crisis, according to Alphaliner, a shipping data service. [note 1]
Many ports and their customs offices are operating fairly smoothly, but getting goods to and from the docks is proving difficult.
The slowdown in China is felt in the US and elsewhere. In January, for example, container volume dropped 2.7% at American ports, according to Panjiva, a research unit of S&P Global Market Intelligence. Much bigger declines are expected as the outbreak continues, perhaps as much as 20%.
Are you covered?
So what are the insurance implications for cargo owners and cargo carriers?
Cargo insurance generally excludes loss/damage due to delay. Carriers and cargo insurance are also not generally responsible for additional costs incurred as a result of cargo being discharged short of the intended final destination, or delayed in warehouses, although cargo insurance will usually continue to provide physical loss/damage coverage on the goods.
Perishable goods may have coverage for spoilage if caused by a peril, but may not have coverage for loss of market/deterioration as a result of late/delayed delivery.
Coverage is provided for general average expenses if triggered by the carrier, but insurers will expect cargo to be managed in a way that mitigates/minimizes potential losses. As it is difficult to predict where restrictions on shipments may be imposed or how losses may develop, it will also be very hard for insurers to provide specific advice on every situation, so insureds should act sensibly and maintain records of decisions and the costs incurred.
Recent history has shown it can take months to unravel the potential losses when the supply chain is impacted by a significant event — the Hanjin bankruptcy in 2017, for example, left containers and cargo stranded on ships and at ports around the world.
With the Hanjin bankruptcy, most cargo policies provided extra expense coverage as insolvency is listed as a covered peril within the "landing and warehousing" clause. It may prove far more challenging to point to COVID-19 as a covered peril to goods and/or merchandise, and also to avoid cargo policy exclusions such as delay and loss of market. With respect to the liability of a carrier or logistics services provider, the inability to perform services as a result of COVID-19 quarantines will likely be governed by the force majeure provisions included in most contracts of carriage — either per a standard bill of lading or under custom contract.
In China, force majeure certificates are being issued in recognition that manufacturers are unable to meet delivery commitments due to quarantines. As quarantines expand globally — affecting the movement of goods and logistics companies’ ability to meet contractual expectations — individual contractual terms and provisions will be under review.
Standard bills of lading/contracting terms will likely absolve logistics companies of liabilities arising out of their inability to provide services during the outbreak. But there could be situations where contracts have inconsistent approaches to force majeure provisions that could create disputes.
Given the amount of contracting that takes place in the logistics industry, however, and the potential financial impact of the transit delays, in time cases will likely be brought against logistics companies questioning their ability to limit liability for customer.
No-one can say how quickly shipping activity will return to normal. Insureds should therefore remain aware of their contractual terms with customers, and act prudently when moving customer goods and deciding cargo prioritization as quarantines lift or change.
[1] Information contained in this article is correct as of the publication date, 12 March 2020.
