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7 supply chain disruption scenarios that may impact your cargo insurance coverage

Supply chain operational changes could affect your business

By Charles W. McCammon | December 23, 2021

As supply chain operations adapt to continuing supply chain disruptions, risk managers should review their cargo coverages for potential gaps as volatility looks to continue into 2022.
Marine
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2021 proved a volatile year for shippers, with many of our clients seeking support with ongoing supply chain disruptions. The global pandemic, extreme weather events and the Suez Canal blockage caused changes to logistics patterns. Logistical challenges can alter the risk exposure forcing risk managers to work closely with their operations colleagues to understand workarounds and ensure existing cargo coverage adequately addresses potential losses.

Here, we highlight 7 scenarios where risk managers may be well-advised to check-in with their operations teams and/or review their insurance contracts to ensure the business is appropriately protected, particularly as we anticipate ongoing global supply chain volatility to continue into 2022.

If the scenarios below involve contracts with third parties, you should review these to ensure they consider both your insurance requirements and indemnity provisions.

  1. 01

    Shipping container shortage prompts increase in breakbulk cargo

    Due to the current lack of containers in international trade, we’ve had enquiries from clients about moving their cargo on pallets (breakbulk) via general cargo ships instead of using containers via container ships. Normally, insurers base their premium rates, policy terms and conditions on the expectation that most general cargo will be transshipped with ease and with the inherent protection of an intermodal container. Accordingly, any significant change in the packaging and/or shipping methods should be shared with insurers.

  2. 02

    Accumulated value of cargo outstrips limits of liability

    Cargo policies for goods in transit are subject to a limit of liability per any one conveyance and/or any one place. This limit is the maximum the insurer will pay for any one insured loss on a single conveyance or place, for example, a ship, plane, or port location, and so on.

    When the global supply chain is disrupted and the logistics stream backs up, shippers should keep a watch on the accumulated value of cargo in transit and at rest as inventory at distribution centers and warehouses, or in the instance you’ve increased your appetite to stock-pile certain goods to mitigate future supply chain disruption.

    You should also promptly notify your insurer of any new locations you’re using for accumulated inventory to ensure you maintain the integrity of your cover.

  3. 03

    Chartering large portions or entire ships increases exposures

    Some shippers have chartered large portions or entire vessels, either for containers or general cargo, to better manage their global logistics supply chain.

    If your organization has taken this step it will likely increase the limits of liability needed, as well as increase certain exposures and possibly introduce some new ones. We would recommend you review contracts to ensure adequate limits and coverage for any new or increased exposures.

    For example, if your organization has chartered an entire vessel, you may need to buy charterer’s liability coverage for the unique liabilities assumed as a charterer of a vessel.

  4. 04

    Warranty requirements and non-compliant vessels

    Most cargo policies contain vessel qualification clauses – or Class Clauses – that require shippers to carry their cargo on qualified vessels that meet certain parameters – including use of specific classification societies, limits on age and weight – for coverage and rates to apply.

    With a scramble to deploy additional capacity in the supply chain, shippers should ensure the vessels they use comply with these warranty requirements in their insurance policies. For example, some older containerships have been put back in service, but some insurers may not provide coverage on vessels more than 15 years old.

    This means it’s probably a good time to review any vessel qualification clauses in your cargo policy and ensure that this is ultimately factored into the chartering process.

  5. 05

    Standard duration provisions prove insufficient following delays

    Duration provisions under Institute Cargo Clauses will often include time-specific termination provisions. In some instances, these can only provide shippers up to 15 days to get their cargo to a destination following discharge. Given the various logistical challenges shippers are experiencing around the globe, these standard provisions may be insufficient given the increased likelihood for delay.

    We would recommend you seek to understand the extent of the delays being experienced and review existing policies to help identify whether the current duration provisions are adequate to meet the business’ needs.

  6. 06

    Logistics providers attempting to negotiate out of potential liabilities

    We have noticed a trend of logistics providers using current global supply chain issues to either negotiate out of, or attempt to severely limit, their potential liability for cargo damage.

    If this happens to your organization, you’re advised to engage with your insurance broking partners who use their expertise to help clients respond to such scenarios.

  7. 07

    Delay in the claims process following a catastrophic event

    There have been numerous catastrophic events over the last 18 months (defined in the US market as marine losses from a single vessel of more than $25 million with many individual insured affected) that have significantly stressed the resources of insurance adjusters and independent marine surveyors. If your organization faces a catastrophic event, it could take a considerable amount of time for an adjuster or surveyor to be assigned following notification of a loss.

    In these scenarios, we would generally recommend your organization acts as a ‘prudent uninsured’ – in other words, act as if it had no insurance. This means, for example, protecting the damaged property from further harm, separating damaged cargo from undamaged, hiring restoration companies, or deploying other clean-up measures and acting prudently to resume operations or mitigate the loss.

    It is imperative to document the damage in these scenarios, with relevant documentation such as signed delivery receipts, photos, videos, claim letters to responsible third parties, financial records, damaged packaging, and containers being ways to capture post-loss conditions, etc.

    If your organization has undergone operational changes that could impact your coverage, or you’d like to discuss any other supply chain disruption risks, get in touch with our Willis Towers Watson cargo specialists.

Author


National Team Leader – Marine Risk Consulting and Claims Advocacy Group

Charles leads the Marine Risk Consulting and Claims Advocacy team in North America, which offers a variety of risk consulting, loss control and claims management services. He has a background in the shipping industry that includes operational, surveying and legal experience. He is a graduate of SUNY Maritime College and Loyola University (New Orleans) Law School, and is an Unlimited Master in the Merchant Marines.


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Corporate Risk & Broking

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