Coronavirus

Covid-19 demands urgent business continuity action from shipping sector

The maritime sector is highly exposed to the fast rising threat of coronavirus (Covid-19). It is not clear how the insurance market will help out and so shipping firms need to act fast to mitigate the risk. Peter Birks reports.

At the time of writing the extent of the global spread of Covid-19, the coronavirus that was first reported in Wuhan, Hubei Province, China on December 31st 2019, is unknown, but, it is spreading rapidly across Asia and worldwide.

In late February the World Health Organization (WHO) said that it was too early to declare the virus as a pandemic but the world should do more to prepare for this outcome. It also said that it is worried that the window of opportunity to stop the virus has narrowed significantly. By the time you read this the world could be facing up to a pandemic.

The virus’s relatively long incubation period, and the possibility of passing on the virus while still asymptomatic means that the illness poses a greater potential threat than its coronavirus predecessor, SARS.

In economic terms, shipping companies in commodities, finished goods, components and, in particular, cruise lines, have been impacted.

AP Moller-Maersk said on February 20th that the outbreak would weigh on earnings this year, although it still expected global container demand to grow by 1% to 3% in 2020, compared with 1.4% last year and 3.8% the year before.

The outbreak has been described by the International Monetary Fund as a global health emergency. Morgan Stanley has estimated that Covid-19 could knock 0.5pp off the previously predicted Q1 2020 global growth rate of 2.5%, China’s GDP was expected to expand by just 4.2% in Q1, year on year.

Covid-19 is a particular threat for two obvious reasons. First, it has shown itself to be more infectious compared with SARS

The Marine Insurer | March 2020 or MERS. Second, China is far more integrated into the global economy today than it was when SARS emerged 15 years ago. Insurers are writing far more Asia-related business today than they did in the early 2000s. As BIMCO observed in a February note, “when China sneezes, we all catch the flu”.

THE LEGAL BIT Legal firm Clyde & Co observed that one aspect of insurable cover thrown into the spotlight as a result of the outbreak of Covid-19 had been the concept of force majeure. Nearly all legal experts have come up with the same answer. “It depends”.

Early in February the Chinese authorities effectively gave buyers in the country the right to declare a force majeure (FM) situation. So, if you were thinking of taking legal action in China, good luck.

China’s various measures have meant that many companies have found themselves unable to perform their contractual obligations, or were at risk of being unable so to do.

Although the concept of FM was globally recognised in commercial transactions, there were key differences in the treatment and recognition of FM across different jurisdictions.

Under common law systems such as English law, parties who wish to rely on FM must come within the express wording of the FM clause, one which expressly excuses non-performance upon the occurrence of certain specified events beyond a party’s control. A party must bring itself clearly within the wording of the FM clause before it can claim FM.

Civil law systems are different. They may excuse nonperformance of a party based on FM, even in the absence of an express FM clause.

Restrictions preventing crew leaving the ship or denying seafarers access to a visa-on-arrival have been imposed in Singapore, Indonesia, Malaysia, Philippines, Russia, Australia and South Korea.

Just to further muddy the water, the concept of FM is also a creature of statute in some jurisdictions, including the People’s Republic of China.

That said, epidemics and pandemics are usually excluded from standard insurance policies. It was therefore possible that container ship companies, ports and other insureds, face major losses that they will be unable to recover from their insurers.

Shanghai and Hong Kong – two of the world’s busiest container shipping gateways. As a result Chinese ports have set expectations of significant disruption in the first quarter, which will likely continue into the second”.

He said that, without doubt, there would be an increase in business interruption, credit risk and cargo claims, with purchasers along the supply chain being compromised by nondelivery. He added that obligations stipulated in sale and supply agreements that were not respected would also give rise to insurance disputes.

Vessels were leaving Chinese ports significantly underloaded. That meant that shipowners could be unable even to cover their fuel costs. Mr Moss said that this would impact shipowners’ ability to pay premiums for Hull & Machinery cover, should the marine insurance market begin to harden. GOODS COMING FROM CHINA Jonathan Moss, Head of Marine and Trade at legal firm DWF, noted in late February that “increasing factory closures across China are causing severe supply chain disruptions for retailers, whilst Chinese ports are also severely under-staffed. with only half of port officials and tug operators working at the ports of It gets worse. Mr Moss also noted that shipowners were also failing to fulfil their contractual obligations under their charter parties, which in turn was likely to trigger an influx of disputes with their charterers, leading to a rise in FD&D claims and claims under charterers legal liability cover.

Insurance disputes could focus on whether “Increasing factory closures across China are causing severe supply chain disruptions for retailers, whilst Chinese ports are also severely under-staffed.”

or not a vessel operating under cargo-capacity rendered it offhire. And, if so, whether the shipowner would permitted to invoke force majeure.

During February it was estimated that diminished trade was costing container shipping lines $350m per week in lost volumes. Shipowners were in fact looking at something of a perfect storm, hit from all sides. They could face the costs involved with claims from cargo interests if the cargo had not been shipped under the bills of lading. Insurers are likely to see a burst of claims under shipowners’ Freight and Cargo policies as a result, with many leading to coverage disputes. Jonathan Moss, DWF

THE THREAT TO CREW HEALTH While much of the talk was on supply chain disruption, Singapore-based ship manager Synergy Group noted that the impact on the seafarers who crew the ships had largely been overlooked.

Synergy said that seafarers had been working under tremendous pressure and were understandably, anxious about when they might be able to see their families again. Shipping lines had imposed temporary restrictions on crew changes, while quarantine periods were being enforced on arrival at some countries.

The increased restrictions on crew had led to a change in demand. In particular, late February saw a surge in demand for Eastern European seafarers and a fall-off in demand for crew from the Far East.

Restrictions preventing crew leaving the ship or denying seafarers access to a visa-on-arrival have been imposed in Singapore, Indonesia, Malaysia, Philippines, Russia, Australia and South Korea. Crew calling at Chinese ports cannot disembark. Synergy noted that the logistics of managing crew changes had become so complicated that some vessels had diverted to an intermediate port, just so that the crew could be changed.

At the time of writing it appears pretty clear that this virus will not simply disappear and is rapidly spreading worldwide and sadly the death toll is rising. The disruption caused to individual lives and all businesses could be enormous and the international maritime sector is particularly exposed with, it appears, little hope of redress. Now is clearly the time for the risk and business continuity manager to step up to the plate.