Hurricanes, groundings, containers overboard, collisions at sea, engine failure and piracy all pose risks to ships at sea as well as to the crew and cargo that they carry. The recent tragic loss of the El Fargo off the Bahamas is just one example of the potential outcome of facing up to these dangers.
A total of 33 crewmembers lost their lives and the cargo owners saw 391 containers disappear when the 224 m vessel lost power in a category 4 hurricane. This loss is not isolated and, while estimates of the actual count of containers lost at sea vary widely, cargo owners need to face the reality of this potential loss.
Niel Cowley, Trade Ocean’s Johannesburg Branch Manager, emphasises the importance of shifting perceptions away from seeing marine insurance as a “grudge payment” and understand that a sinking ship can literally sink an importer or exporter’s business.
“Some importers and exporters hold the view that marine insurance is an unnecessary expense due to the robust nature of their goods, while others believe that they have entrusted their goods to the carrier who should therefore compensate them should a loss occur,” he says.
“While it is certainly possible to experience no losses over many years on numerous shipments, the reality is that losses do occur and often cannot be recovered,” he warns explaining that many of the perils at sea are outside the control of the carriers.
Cowley adds that many cargo owners are still under the impression that the carrier or agent is accountable should damage or loss occur. “This is not the case. Carriers and agents operate under limited liability clauses in their contract of carriage,” he says explaining the context of the Bill of Lading or Air Waybill.
“It is therefore important for importers and exporters to have marine insurance in place to avoid being out of pocket should a loss occur. Insurance costs merely a fraction of replacing the cost of lost freight.”
But, as Cowley warns, adequate marine insurance cover also protects a cargo owner against any salvage costs that may arise. “In the case of General Average Events, cargo owners will be obliged to contribute towards salvage costs of all cargo on board the ship,” he stresses.
General Average Events
He says it is important to understand that in maritime law a sea journey is considered a joint venture between those who have an interest in the cargo and the carrier. “If the voyage succeeds and the vessel arrives safely then all will profit, but if the vessel sinks, all will lose,” he explains.
“If the cargo is intentionally sacrificed to help avoid a real threat to the vessel, the party who has suffered the loss will be compensated by the parties who have benefited from the sacrifice,” says Cowley, who explains that this compensation will be based on the value that each individual party has in relation to the value of the entire joint venture.
“A General Average Act or Action occurs when cargo is destroyed or damaged in the process of saving the venture, while a General Average Sacrifice involves the jettison of cargo for the benefit of the venture as a whole.”
Cowley highlights the stark implications of these laws: “When a General Average is declared the cargo owner will be compelled by law to contribute to the loss of any cargo and related salvage costs even if their own cargo has not been lost.”
This poses a major risk to any business as salvage costs can run into millions of dollars, which can be recovered on a pro-rata basis from all the owners of goods on board that vessel. “It is therefore clear,” stresses Cowley, “that arranging marine insurance is not an optional extra, but a business imperative for importers and exporters.”