Cargo Insurance Implications of Middle East Conflict

The conflict between Israel and Palestine, and the associated attacking of commercial ships in the Red Sea by the Houthi rebels – both seem a long way from New Zealand.  But, with this country having an economy reliant on import and export trade, and all except a tiny percentage of goods moving by sea, there are significant flow-on effects.

The Houthi attacks mean that hundreds of ships are now being routed around the Cape of Good Hope in South Africa, rather than through the Suez Canal.  That canal connects the Red Sea to the Mediterranean Sea, and very many carriers now consider the area to be too dangerous.  This will add at least two weeks to the usual transit time, increasing not only fuel costs but also labour charges and other operational costs such as war risks premiums.

These costs are being passed on to cargo owners.  Surcharges that are currently being imposed for cargoes being carried between New Zealand and Europe (and vice versa) are up to US$1550 per container, to cover fuel, additional insurance premiums and the like.  The surcharges for cargoes that have to be loaded at or discharged from ports in the Red Sea area are higher. 

From a cargo insurance point of view, the major issues are likely to arise from the delayed arrival of goods at destination.  Some will miss their intended markets (such as Easter goods) and perishable goods may reach or exceed their usual shelf life, reducing their value or making them entirely unusable by the time they arrive.

Many insured parties are going to be very upset to be told that loss caused by delay is an excluded peril under all of the standard cargo insurance wordings.  In some circumstances additional cover for delay can be purchased, but this is normally limited to perishables only and it comes at a cost.  For goods that simply miss their market, there is no cover at all under standard policies because cargo insurance responds only to physical loss or damage, not to purely financial loss.

In the event that goods are lost as a direct result of war or war-like activities, cover will similarly be excluded by standard exclusions.  That cover is customarily written back by the Institute War (Cargo) and Institute Strikes Clauses (Cargo), so it would pay for brokers to ensure that the policies held by their import and export clients do include it.

Cargo owners also need to be aware that routing ships around the Cape of Good Hope carries additional risks.  The area is notorious for frequent storms (it was originally called the Cape of Storms) and for dangerous waves caused by the meeting of currents from the east and west.  It is home to nearly 3000 known shipwrecks.  While damage caused by adverse weather and sea conditions is generally covered, those responsible for packing containers should be taking additional care to make sure that their packing is appropriate and adequate, to avoid arguments over the “insufficiency of packaging” exclusion in the standard cargo wordings.

The other risk that arises from the Cape of Good Hope route, is piracy.  Pirates operate off the coast of Somalia, with there being two attacks on ships in November 2023.  This is not as great a risk as it once was, but it has certainly not gone away.  In one of the recent attacks, the pirates were able to seize the ship and demand a ransom.  A ransom payment, if made by the ship owners, can be treated as a general average sacrifice, meaning a payment made for the benefit of all those with a financial interest in the voyage, including cargo interests.  The good news is that general average is an insured peril, and all that cargo interests need to do is pass the general average paperwork straight to their insurers, who know what to do and will sort it out.

Comment by Pauline Davies

The world of shipping is one in which overseas events can have significant impacts locally.     Such events often have the unwelcome effect of bringing home to insured parties some of the limitations of their cover with the resulting financial consequences.  Risk management should not, though, start and finish with insurance and all importers and exporters need to be aware of how best to use terms of trade and Incoterms to minimise their cargo risks.  This is an area, too, where brokers can be adding value.