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Are incidents of vessel damage to terminal infrastructure rising and are you adequately covered?

Marine
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By Nick May | April 28, 2022

Following a recent spate of maritime incidents that have damaged terminal infrastructure and interrupted port operations globally, operators need to ask themselves if they are adequately protected.

Over the past few years, a series of port incidents ranging from allisions and collisions to explosions – such as those reported in Brazil, Canada, Dubai, Spain and Taiwan - have damaged infrastructure and interrupted ‘business as usual’ at strategic facilities across the globe.

Such events have created high-profile business continuity challenges for terminal operators; they have also posed questions about the operators’ ability to recover the costs against the responsible party, especially those involving lost revenue.

A trend in need of further scrutiny?

It is difficult to understand the full picture as it would appear there is no central record held and moreover, not all events are shared in the media. However, there is some official data available which sheds light on the current situation.

In December 2020, the International Group of P&I Clubs (IGP&I), who write the majority of the world’s ocean-going tonnage, undertook a review of Protection and Indemnity (P&I) claims involving vessels under pilotage over a twenty-year period between 1999 and 2019. According to the report from the 13-member IGP&I Clubs, the majority of claims resulting from ships under pilotage at ports involve either allision-related events or incidents with ‘fixed and floating objects’ (FFO).

In 2019, about 60% of associated claims arose from incidents that fall within the allision and FFO category

In 2019, about 60% of associated claims arose from incidents that fall within the allision and FFO category, according to the IGP&I, whose report covered 1999-2019. The average amount of allision and FFO associated claims in 2019 was USD5.21 million per incident, the third highest value since the high-water mark of USD8.55 million in 2007, although at the time of the IGP&I report in December 2020, there were two incidents that were notified, in excess of USD20 million each, that could give rise to a claim totalling USD45.50 million, bringing the total value for 2019 to USD79.43 million. This results in an average cost per incident in 2019 of USD6.62 million, an increase of 1.225% when compared to the average cost in 1999 of USD0.54 million from the 26 incidents recorded.

The increase in average costs in recent years is driven by a number of factors including larger ships, more sophisticated and expensive port infrastructure, and the cost of inflation.

Whilst the above figures show a low severity on an average basis, there is still the potential for volatility to occur. As evidenced in the IGP&I report, there have been some significant incidents which have led to large losses in excess of USD20 million, for example:

  • 2007 - 2 incidents totalling in excess of USD220 million
  • 2009 - 1 incident totalling in excess of USD50 million
  • 2013 - 2 incidents in excess of USD35 million each
  • 2019 - 2 incidents in excess of USD20 million each

It also noted that there had already been two claims of a similar nature in the 2020 underwriting year with contact damage between a container vessel and gantry cranes.

The trend in the number of incidents was inconsistent throughout the decade. According to the IGP&I data, the number of incidents trended upwards from 1999 to 2014, before falling from 2017 to 2019.

The IGP&I accepted that not all claims for 2019 had been resolved at the time the report was published in December 2020 but noted: “It is self-evident … in respect of both 2019 and 2020 that, there is an issue, the risk exposure from the incidents that are the subject of this report that remains clearly visible.”

Taking a closer look at the root cause

The root causes of these incidents vary, but most, if not all, are attributable to human error or mechanical failure. Commercial pressures are also playing a role, as shipowners and their port partners try to fit more, ever-larger ships into smaller berthing spaces with reduced windows of time.

There is no question that the pursuit of economies of scale (larger ships) and greater fuel efficiency among the leading container ship owners is creating incidents and challenges for port authorities and terminal operators alike: the capacity of boxships has more than doubled in the past 15 years, according to a report from the insurance sector.

With forward-planning requirements often reaching a decade ahead in the asset-intensive sector, shore-based infrastructure at some ports has struggled to keep up.

Pressure for faster turnaround times also appears to be prompting ill-advised safety shortcuts as carriers race to berth, unload and make the next scheduled stop in shrinking transit windows between ports.

Other causes can include poor communication between pilots and tug operators, or regulations and training regimes that are lagging behind the current practices and operational demands.

Managing your risk through proactive risk management procedures and programmes

With maritime practices and assets evolving as quickly as the supply chains they serve, ports and terminal (P&T) operators – including port authorities who retain terminal-operating responsibilities – would be well-counselled to examine whether their procedures and training programmes are being kept up to date, as well as reviewing their contingency plans in the unfortunate event an incident does occur.

Port safety management plans should be tailored to reflect the specific circumstances of each port. Regular reviews/audits are expected to ensure they are fit for purpose and to incorporate any updates if port operations are changed (size and frequency of vessels, use of berths, additional passing plans, anchorage areas, etc.).

Development and ongoing review of port safety procedures should include consultation with port users (terminal operators, recreational users, etc.) and stakeholders. It is not only important to involve relevant people on the risks being discussed but also to convey the responsibility that each user has in ensuring port safety.

Safe passage of vessels relies on port conservancy and on accurate information about conditions in the compound (water depths, meteorological condition, aids to navigation, anchorage, works inside the port, etc.). Procedures should be in place to make sure this information is promptly available to mariners. Pilotage services may be required for conducting vessels’ navigation and maneuvering. Port authorities have control over this service and should make sure proper training is in place and that the service is constantly reviewed.

Port authorities should also consider operating Vessel Traffic Service (VTS) management systems appropriate to the size and complexity of the navigation risks.

Different factors can contribute to marine accidents: equipment failure, human error, adverse weather conditions, poor maintenance, etc. It is crucial that risk mitigation strategies include investigation of accidents and near miss events to learn from experience.

What’s in the small print? Check your contractual arrangements

Ports and terminal operators would also be well advised to examine their contractual arrangements to ensure they are able to recover the costs involved – not only for damage to terminal infrastructure and equipment, but also any loss of revenue from the party response for causing the damage.

Matthew Wilmshurst, Partner at law firm HFW, has advised that for Terminal operators to protect their position, they can manage their risk using contracts in several ways. The most important step is to ensure that operators have a contract in place with both the customer and the vessel owner, which are not always the same entity. This contract can be in the form of a Terminal Services Agreement or the terminal's Standard Trading Conditions (STCs) and should ideally include warranties from the customer and vessel owner that it has taken steps to ensure that it can berth safely, and clauses relating to the provision of security and dispute resolution. Thought needs to be given to the latter, in particular, whether the terminal's claim for losses would be most effectively pursued under local law or, as is commonly agreed, English law and jurisdiction.

Terminals should also ensure that their STCs are binding against all third-party users of a terminal and that these include both defences and limits of liability to minimise their exposure to their parties for claims arising out of vessel allisions – both the loss of third property and an inability to provide services post such an incident.

What role can insurance purchase play?

P&T operators may want to examine whether their current insurance policies cover their business for any incidents arising from so called “wet risk”, those occurring over water, such as vessel allisions, as comprehensively as they do for dry risks that involve onshore assets within the port.

In the event of a vessel allision causing damage to the port infrastructure and equipment, the port will have to consider the cost to repair or replace the damaged property and equipment as well as any consequential loss of revenue for the time it will take to return to full operations. Under such circumstances, the port will need to determine if the limits provided under the insurance policy are sufficient to indemnify them for their financial loss.

Help is at hand

Since the marine markets have in-depth knowledge of the P&T sector, the coverage they provide is specifically designed to cover “wet risks”, in addition to the dry risks, and provide indemnity that fully reflects the operator’s losses incurred. Their risk-transfer solutions are more focused on helping the business get back up and running with minimal disruption to their operations.

This specialist knowledge can also be used to help clients devise more effective business continuity plans -the WTW Ports and Terminals Risk Forum is one such community delivering expertise, knowledge, and customised solutions to help mitigate operational risk through shared best practice and collaboration. This heightened awareness of the sector also enables better cooperation with the various P&I Clubs, from whom loss recovery and recourse is negotiated on behalf of the port.

As growing supply-chain pressures add risk to port communities around the world, P&T operators would be well counselled to transfer those risks to insurers who can indemnify clients for 100% of their potential losses.

Author

Client Relationship Director, Marine Special Risks

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