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  • 5.7-LOGISTICS AND INSURANCE-WAR RISK INSURANCE IN SHIPPING

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  • War risk insurance in shipping

     
     

    There are instances where underwriters declare certain areas to be ‘war risk zones’. Not because of actual war but because of piracy attacks. For example the Malacca Straits in June 2005 and much more recently the Arabian Gulf area as well as large stretches of the Indian Ocean due to a spiralling number of attacks emanating from the Somali Coast. Piracy problems are also encountered along the coast of West Africa. When a ‘war risk zone’ declaration is made shipping companies may decide to recoup any additional insurance premium they may have to pay by charging ‘war risk’ as a separate, additional freight cost to shippers. This is of interest to coffee producers because, inevitably in today’s coffee economy, such costs will be passed back to the producer in the form of lower prices.

    The decision on the Malacca Straits Declaration was taken by the Joint War Committee or JWC, part of the Lloyd’s Insurance Market Association, following a report on shipping security it had commissioned because of piracy attacks whereas the appalling situation along the Somali Coast is of course general public knowledge. Strictly speaking, ‘war’ of course means a dispute between nations, conducted by military and/or naval attack. But this was not the case in the Malacca Straits, nor is it so along the Somali coast.

    In insurance The Institute War Clauses (Commodity Trades)* speak of ‘loss or damage to the coffee caused by war, civil war, revolution, rebellion, insurrection or resulting civil strife or any hostile act by or against a belligerent power’. But ‘war’ does not equal piracy. Yet, where such acts occur frequently, underwriters have to consider this additional risk and do so by declaring the area in question to be a ‘war risk zone’. Individual insurance companies then determine what level of additional premium to apply – this calculation will depend on their assessment of the situation as well as the reinsurance arrangements they have in place.**

    Individual shipping companies, faced with demands for additional premium on vessels sailing through or passing the declared danger zone, basically have three options:

    • Purchase the additional insurance cover
    • Cover it themselves through their in-house insurance pool
    • Do nothing and take the risk

    Within all three options a commercial decision then has to be made on whether or not to charge ‘war risk’ as a separate, additional freight cost to shippers or receivers. As is done with bunker (fuel) surcharges for example – see 05.01.04. By quoting freight and surcharge together the ‘war risk’ issue in question automatically becomes part of the contract of carriage, the bill of lading.

    However, insuring cargo against ‘war risk’ is not the responsibility of the shipping company: the conditions of the contract of carriage firmly place the onus on the owners of the goods. Thus, the additional premium mentioned here is that payable for the insurance of the vessel. A premium paid by the shipping company that may result in a surcharge on the ocean freight it in turn charges to shippers.

    Of course the owners (receivers) of the cargo most likely also have to pay additional ‘war risk’ insurance to cover the goods they ship. And if all these additional costs become substantial then it is inevitable that prices will suffer: new costs or cost increases that are introduced between ‘production’ and ‘landing of the goods abroad’ in the end usually fall on producers in in the form of lower prices.

    Finally, the foregoing only provides a brief overview of what usually takes place between declaring that ‘war risk’ exists, and shippers or receivers being asked to pay a surcharge for this. The legal definitions and interpretations of what constitutes ‘war risk’ are extremely complicated and cannot be explained here, nor can the level of surcharges individual companies might apply be easily estimated.

    The unprecedented increase in piracy attacks emanating from the Somali coast affects East and Central African coffee producers in that war risk surcharges on their main export routes have been driven to very high levels indeed, with as much as USD 200 per 20ft TEU reportedly being charged by some shipping lines in early 2011. Fortunately coffee prices had risen substantially by early 2011 but over the longer term there can be little doubt that such surcharge levels, together with the increased premiums receivers have to pay for insuring their goods, in the end directly impact on the economies of the countries concerned. Not forgetting that these additional charges of course apply to all their maritime import and export cargo!

    For more information on piracy threats and counter measures visit www.imo.org and go to their Knowledge Centre.

    *The insurance industry utilises a number of acknowledged definitions of what covers certain types of risk – this is one of them. War Clauses also deal with capture, seizure, damage due to derelict mines etc. as well as general average or salvage charges. Other Clauses relevant to the trade in coffee are the Institute Commodity Trades Clauses (A), dealing with loss/damage to goods, general average and salvage charges, and liability under the ‘both to blame collision’ clause which appears in some bills of lading; and the Institute Strikes Clauses (Commodity Trades) dealing with loss/damage caused by strikers, locked-out workers or people taking part in labour disturbances, riots or civil commotions, and any terrorist or person acting from a political motive in addition to general average or salvage charges connected with the foregoing.
    **The implementation of such a move, i.e. the levying of higher insurance premiums for ‘war risk’, was previously arranged jointly by the underwriters concerned who then advised the relevant shipping conferences. Usually, this resulted in a standard, across-the-board charge applicable to all shipping lines. Today however this is no longer the case, mostly as a result of the introduction of strict anti-cartel legislation that forbids ‘joint price setting’ by underwriters and shipping companies alike. See 05.01.02 for an explanation of ‘shipping conferences’.