As container vessels continue to increase in size, insurers are voicing concerns for fire risks and salvage.
Some 100 million containers valued at over USD4trn are shipped ever year, yet only around 1,500 are lost, according to the World Shipping Council. While container ships have a good record in this regard, the growing size of container vessels is of concern for insurers.
Over the past decade, container ships have grown larger, more efficient and technically sophisticated – the largest container ships can now carry over 21,000 TEU (twenty foot equivalent containers) while vessels on order will soon carry around 22,000 TEU.
ULCVs generate huge savings for operators, and with modern technology they are generally considered to be safer and more reliable. But mega vessels also mean large values and concentrations of risk for insurers. According to one major marine insurer, cargo capacity has increased by 80% over the past 10 years. The total value of a ULCV and its cargo can be as high as USD1bn, although a loss could potentially be double that when salvage and wreck removal costs are added.
Large losses are thankfully few and far between – shipping casualties have declined in recent years with improved safety and more modern vessels. However, recent years have witnessed a number of incidents involving ULCVs, including groundings and structural failures, but in particular, large fires.
On 6 March, while en route from Singapore to Suez with a cargo of 7,860 containers, the ULCV Honam suffered a serious fire in one of its forward holds. The vessel was eventually towed to the anchorage off Jebel Ali Port on 25 April, however it took another month before the ship was finally berthed on 27 May and cargo discharged and released for forwarding.
The fire was just the latest in a growing list of losses involving large container vessels, which highlight concerns over the risk of fires on ULCVs, as well as challenges around salvage and finding ports of refuge. Fires on the MSC Flaminia in July 2012, the Hyundai Fortune in 2006 and MSC Daniela in 2017 all took considerable effort to bring under control and resulted in costly damage to cargo.
In a position paper published in 2017, the International Union of Marine Insurers (IUMI) said that those fire-fighting capabilities for ULCVs are inadequate and need improving. For its part, IUMI recommends greater separation into fire compartments and additional fire-fighting systems in order to more effectively suppress fires and to prevent them from putting the hull, cargo and crew at risk.
Many fires on ULCVs are thought to have started in the cargo hold, and some are linked to mis-declaration of cargo, which may increase the danger of combustion of the goods in the container and lead to an incorrect fire fighting strategy. According to the International Cargo Handling Association, more than a third of boxes containing dangerous goods are marked incorrectly.
For example, the mis-declaration of cargo containing calcium hypochlorite – a substance that is unstable at high temperatures – is known to have caused a number of fires and explosions. In 2007, the crew of the ZIM Haifa stowed mis-declared cargo containing calcium hypochlorite in the hold close to the engine room, causing an explosion and fire that took several days to control.
Salvaging ULCVs and their cargo is fraught with difficulties. Limited access to specialised salvage equipment and ports of refuge typically means that salvage of large container vessels is expensive and time consuming. Few ports and ship yards are capable of berthing or repairing ULCVs, which are limited to deep water ports while large floating salvage cranes are also few and far between.
When the 3,351 TEU MV Rena ran aground off New Zealand in 2011 carrying just 1,668 containers the salvage operation and wreck removal took over two years to complete and at a cost of more than USD 400m. A similar situation involving a ULCV is likely to be far more expensive.
The increasing size of container vessels may also have implications for General Average (GA), the equitable principle that has been traced back at least as far as the Justinian Code of the 6th Century.
GA has a reputation for baffling complexity, however the basis of GA is simply that the cost of intentionally taking extraordinary measures to successfully preserve the common venture (shipment) is shared between all property saved in proportion to the saved values. In practice the major contributors will be the owners of ship and cargo but smaller interests such as bunkers and freight may also contribute. In the case of ULCVs the containers themselves also have significant value and will also contribute in GA.
A huge amount of information has to be gathered and assessed by the average adjuster in order to produce a final calculation of each interest’s contribution and this can take years. In practice therefore security for the estimated ultimate GA contribution is required in exchange for delivery of cargo at destination.
In the case of the Honam, which is expected to be among the largest GA claim in recent times, cargo owners were required to post security or a GA deposit of 54% of cargo value in order to have containers released. The cargo owner who has wisely insured their consignment may look to their insurers to provide the required security, whereas the uninsured owner is faced with the prospect of providing a cash deposit. This situation illustrates the fact that GA exists quite independently of insurance.
With larger container vessels and higher salvage costs, large GA claims – which are complex claims to adjust – could become more commonplace, if not more expensive.
With ULCVs still increasing in capacity some argue for the replacement of GA as overly complex and disruptive, according to the TT Club, a mutual transport insurer. However, GA as a concept is as applicable today as it ever was, and it is important that stakeholders understand the process and role of insurance.