How the conflict in the Middle East and Red Sea crisis affects your cargo insurance

As we are all aware by now, the attacks by Hamas on Israel in October 2023 and Israel’s retaliation have resulted in a full-fledged conflict situation in the Middle East.

In retaliation against Israel’s attacks on Gaza, the Houthi rebels of Yemen have been attacking commercial ships on route to Israel and/or in the Red Sea impacting global trade and maritime trade routes through the Red Sea and the Suez Canal.

Starting with the hijacking of the Galaxy Leader, the Houthis have made several attacks on commercial ships forcing various nations to issue warnings to cease and desist.

Several hundreds of ships are now rerouting their passage around the Cape of Good Hope in South Africa rather than risk transit via the Suez Canal.

The conflict in this area has an obvious impact on the operational costs of the shipping lines/carriers which they will pass on to their clients.

While all ports in Israel are still operational, in monetary terms, it has been reported that ships calling at the Israeli ports have been hit with war risk insurance premiums.

So what does this mean to cargo owners with cargo on these ships and how it affects their cargo insurance?

To start with, there will be a delay in the delivery of cargo due to the longer voyage that the ships are now taking.

Losses caused by delay is an exclusion in most cargo insurance policies.

The wording used by Insurers is generally based on the Institute Cargo Clauses.

Clause 4.5 of the Institute Cargo Clauses A reads “loss damage or expense caused by delay, even though the delay be caused by a risk insured against (except expenses payable under Clause 2 above)”. We will comment on the reference to Clause 2 further down in this note.

It is only when delay is added as additional cover will any claims be admissible as a result of delay, but this additional cover is generally not available in the Insurance market other than for perishable products.

Insofar as actual losses caused directly by the war situation, it should be noted that generally, this appears in the policy as an exclusion under Clauses 6 & 7.

This exclusion is then generally overwritten and the cover reinstated under the Institute War (Cargo) plus Institute Strikes Clauses (Cargo).

The addition of the war and strikes clauses into the policy is essentially a “standard” addition written into all marine cargo policies, but it is always worthwhile checking your policy to make sure that this additional cover has been granted.

The war and strikes cover is generally added by insurers at no additional premium, but when circumstances require it (and it would seem in this case they do) insurers may call for an additional premium for this additional cover.

It must be borne in mind even with these extensions in cover, delay is also excluded.

Now we get to the hijacking of vessels by any party. There are instances when the hijackers have called for a ransom to be paid for the release of the vessel, crew, and cargo and thus the vessel owners will be forced into paying the ransom.

In these instances, the vessel owners will generally maintain that they should not have to bear this full cost of obtaining the release of the vessel and cargo as the cargo owners have also benefitted from this payment in order for the release of ship, crew, and cargo.

As advised above Clause 4.5 of the Institute Cargo Clauses A reads “loss damage or expense caused by delay, even though the delay be caused by a risk insured against (except expenses payable under Clause 2 above).”

“Clause 2” above refers to the general average clause and extends the exclusion to include what can be referred to as general average contributions in other words contributions or payments made to secure the safe completion of a voyage.

Something of a controversial subject as the ransom demand would fall into the general ambit of a general average sacrifice in other words a payment made to secure the vessel and the cargo.

Many jurisdictions however make it a criminal offence to pay ransom demands, and if this is the case insurers may well be legally restrained from paying any ransom contributions.

Generally, it has been accepted that the owners of the vessel declare a general average as the payment is an “extraordinary sacrifice” made for the common safety of all involved in the venture.

Should any cargo owner/shipper/consignee not have cargo insurance, they will have to put up the necessary deposit payment to the vessel/average adjuster plus complete all the necessary forms required. In the event of there being cargo insurance in place, the insurer will put up the necessary guarantee thus not necessitating the deposit having to be paid to the vessel/average adjuster.

To date, the Houthis have not called for any ransom to be paid but they are still holding the vessel, crew, and cargo and it is anyone’s guess what may happen in the future.

The main thing to remember is that any delay caused by the vessels waiting in a safe area to see what transpires in respect of safety in navigating the Red Sea or due to the longer voyage sailing around the Cape of Good Hope, there is no cover in place to cover loss or damage caused by delay for most policies issued under the Institute Clauses.

source: https://www.shippingandfreightresource.com/