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Expert Analysis of Important Financial and Insurance Issues in the Ever Given Suez Canal Blockage Litigation


Expert Witness: Don Coker
Renowned Worldwide Banking and Financial Expert Witness Don Coker examines some important nuances of the litigation that will certainly follow the recent catastrophic Suez Canal blockage.

Coverages including cargo insurance, protection and indemnity, business interruption, contingent business interruption, loss of hire, blocking and trapping, and parametric coverage are all issues that certainly will be a part of expert witnesses' damages analyses as insurance claims and litigation go forward.

By now, everyone on the planet with access to a television screen or computer screen has been subjected to the cringeworthy image of the behemoth - and that term understates its size - ship, Ever Given, uncomfortably sitting diagonally across the Suez Canal blocking traffic both ways. I suspect that my initial reaction of "OMG, I'm glad that I don't have to unscramble those eggs," was probably the reaction of virtually everyone else around the world, but in their native language.

The Event

For those readers that have not had the experience of traveling through the one-sea-level and lockless Suez Canal as I have, if the canal looks narrow to you, that is because it is. The reality is that it is even worse than it appears because of the surface width of the canal that you see, only the middle 38% or so of that surface width is available for navigation
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by extremely large ships such as the Ever Given, which has a draft of slightly over 51 feet. This is because the navigable part of the canal is even narrower since the sidewalls are tapered making the most navigable middle section even narrower - approximately 397 feet. United States readers can envision this roughly as a football field including the end zones and the scoreboards.

Now before you say that a football field should be plenty of room to maneuver a ship, consider that this is no regular ship. The Ever Given is approximately 194 feet wide, so you have a clearance of slightly over 100 feet on each side if you stay in the deepest part of the canal, which is advisable if your ship has a draft of 51 feet.

As would be expected, and in accordance with worldwide ship piloting practices, the Suez Canal Authority ("SCA") has its own ship pilots that board ships as they approach the Canal and take over the piloting of the ship completely through the canal. In the instant case of the Ever Given, there were two SCA pilots on board and in charge of the piloting of the 25-person Indian-crewed ship.

At some point during the Ever Given's March 23, 2021, south-to-north Suez Canal transit and before it hit the bank, it encountered a dust storm blowing from west to east with gusts as high as 46 miles per hour. It was widely reported in the news media that these winds made it difficult to control the Ever Given and contributed to its hitting the bank and blocking the canal. Certainly this is understandable since you can imagine the huge profile of the south-to-north traveling ship the size of the Empire State Building (laying on its side) exposed to 46 mph west-to-east winds.

Interesting side note: On February 9, 2019, barely two years before this Suez Canal incident, the Ever Given struck a moored 82-foot ferry boat in the port at Hamburg, Germany; and apparently, high winds were a factor. (There were high winds in this Suez Canal incident as well. Hmmm.)

On March 29, 2021, at approximately 3:00 pm, the Ever Given was freed (only to be immediately "arrested" by the SCA) and resumed moving through the canal at around 7:00 pm after having blocked the canal for approximately 150 hours. It literally took heavens and earth to accomplish freeing the ship since the Moon produced some high tides that were a major factor.

Ships in the north and south queues reportedly were delayed in their scheduled trips between seven and thirty days.

So far, the above-mentioned issues raise a number of significant questions that need to be addressed, such as:

- Presumably, the SCA monitors the weather in the area so that it can determine before a ship enters the canal if the forecasted weather might have a negative impact on the movement of each ship through the canal. Given the dust storm and its strong winds, how could the SCA have waved the Ever Given into the canal, and piloted by SCA pilots?

- If the SCA did not monitor the weather and know about the dust storm, that appears to be a failure to use ordinary care or even slight care.

- I do not purport to be specifically an admiralty law expert, but as an experienced expert witness that has worked for sixty-five insurance companies and dealt with all types of economic damages, it strikes me as highly illogical that the SCA "arrested" the Ever Given and demanded the payment of $900 million in damages to the canal (mostly lost revenues from ships that could not go through the canal) when the SCA permitted the ship to enter the canal in poor weather, and that the ship was piloted by the SCA's own pilots. Three issues that jump out here are: (1) Was the ship at fault or the SCA that let it enter and go through the canal and was piloting it? (2) Certainly some of the ships in the queue behind the Ever Given eventually did pay their fee and pass through the canal. (3) The damages from lost revenues could not have been known at the time the ship was freed since the hundreds of ships in the queue were making decisions on the fly not knowing when the blockage would be cleared.

Interesting side note: The SCA's average fee to take a ship through the Suez Canal is around $300,000.

- A serious not-so-obvious and unanticipated problem resulting from the blockage has been a shortage of containers that has delivered a shin-kick to the world's already strained supply chain. Even before this blockage, the COVID-19 pandemic has had the world's supply chain strung out tighter than a banjo string. As a result of the delay of so many ships due to this canal blockage, there has been a significant delay in the delivery of containers to ports where they are needed for outgoing shipments, especially in the United States and Asia. If containers are not available for shipments, then you can see that there will be a cascading effect of delay throughout the distribution process affecting the delivery of raw materials, components, and finished products .

Damages

In no particular order, here are some possible areas of damages - certainly not all of the damages areas - that I see from my outside viewpoint and not yet having reviewed any documents produced by any party in this matter:

- Damages to the SCA in the forms of any physical damages to the canal and the expenses of freeing the ship from its blocking position.

- Financial damages sustained by the SCA due to lost or deferred revenues from a reported 367 ships that were unable to transit the canal or were delayed in transiting the canal. Some of the delayed ships chose to reroute their voyage around the Cape of Good Hope at the southern tip of of Africa which added on average seven to nine days to their voyage and the commensurate unplanned expenses for fuel, crew and other operating expenses and more likely than not also impacting their subsequent planned voyages, some of which probably were lost.

Responsibility of SCA

If the SCA is found to be at fault for allowing this event to happen, then it is possible that they may not have any damages at all that can be blamed on any party other than the SCA itself.

- If a ship is delayed from its intended voyage by a blocked canal, then that has a cascading effect on that ship's availability for its subsequent bookings. Likewise, those lost bookings will result in domino-style economic losses for the businesses that are relying on the delayed ships for the delivery of goods.

- Damages to shipped goods can be a factor particularly if the shipped goods are of the perishable or live animal types, and I understand that there were sixteen "livestock ships" in the queue behind the Ever Given. Perishable products such as meat, cheese, produce, and fruit can be adequately prepared for a long shipment, but a significant delay can have an impact on the quality of the product that is delivered. Typically, these damages are claimed by the owner of the goods that are being shipped; and we will revisit this area later during the discussion of insurance coverages.

- Many manufacturers and processors pride themselves on "Just-In-Time" delivery to them of components, raw materials, etc., that they immediately upon receipt enter into the assembly, manufacturing, or processing operation without having to warehouse the shipped materials. Needless to say, if a ship is sitting in a queue of a few hundred ships, or is headed around the Cape of Good Hope instead of scooting through the Suez Canal bringing goods to the manufacturer or processor, that throws a major monkey wrench into that customer's just-in-time procedure; and you can replay all of my previous comments about cascades and dominoes as to what happens to delivery commitments, etc.

Insurance Issues

Here, in no particular order, are several insurance issues that will be a part of some of the litigation that results from this canal blockage:

- Parametric Coverage - You are in luck if you have parametric coverage for an event such as a canal blockage, but hardly anyone has it. Parametric coverage usually is for very specific risks, such as extreme weather or low water levels in inland waterways that make normal operations impossible, etc., and could cover the blockage of a canal. Do not expect many, if any, of the affected ships to have parametric coverage for this event.

- Cargo Damage Coverage: The cargo on ships routinely is insured for damage or loss by the owner of the cargo, and is not insured by the owner of the ship. Accordingly, physical damage or loss has to occur for a claim to be paid. Don't expect this type of insurance coverage to cover a claim for a delay in delivery.

Interesting side note: I have heard estimates that over one thousand and up to ten thousand shipping containers are lost at sea each year.

- Protection and Indemnity ("P&I") policies: While this coverage varies a lot due to additions that may be tacked onto the coverage, it is generally associated with an insured ship and damage. You will have to carefully read each policy's coverage provisions, but do not be surprised if this coverage does not cover delays in the delivery of cargo.

- Business Interruption Coverage: Here again, most policies for this type of coverage require some physical damage. However, as has been happening with business interruption claims due to COVID-19 factors, there likely will be litigation regarding the true purpose of business interruption coverage in relation to the canal blockage.

I expect that some business interruption claims will point out that extending the length of a ship's voyage makes it unavailable for a subsequent voyage just like damage to the ship would make it unavailable for a subsequent voyage.

The SCA is a governmental entity, and I would not be surprised to see some litigation include the "civil authorities" issue in seeking the payment of a business interruption claim.

- Contingent Business Interruption Coverage: This coverage typically does not require physical damage to the insured's business or property, but often does require some physical damage to a supply chain provider of goods or services. As mentioned above with business interruption insurance, I expect that some claims will cite a similarity of a canal blockage that impedes a supplier to that supplier being impeded by any other type of physical damage.

- Loss of Hire Coverage: This coverage typically requires some physical damage, but I would not be surprised to see some claims draw a similarity of physical damage making a ship unavailable for hire and a ship having its scheduled voyage extended through no fault of its own and thereby rendering it unavailable for hire.

- Blocking and Trapping Coverage: Given the nature of this canal blockage, and the facts that numerous ships were positioned in confined areas such as the canal itself and the Great Bitter Lake, it is likely that there should be an opening for some claims for this coverage. Who the insurer turns around and goes after is another matter.

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Disclaimer: Don Coker is an Expert Witness and not a lawyer, and does not offer legal advice.

© 2021 by Don Coker. Serving clients worldwide from his Atlanta metro area office.



ABOUT THE AUTHOR: Don Coker, Banking and Financial Expert Witness and Consultant
700+ cases, 178 testimonies, plaintiffs & defendants. All areas of banking, mortgage banking, finance, real estate, investments, trusts, estates, business, IP, insurance, damages, embezzlement, funds and wire transfers, SWIFT.

Listed in expert databases recommended by DRI, AAJ members.

Clients: individuals, 77 of the country's top 400 law firms, 118 banks, 65 insurance cos., 90+ trusts & estates, government clients incl. IRS, FDIC, Federal Reserve, Agency for Int'l Development, United Nations, World Bank, Int'l Monetary Fund, Int'l Accounting Standards Board Foundation, Centers for Disease Control and Prevention, et al. Clients in 40 countries, work in 67 countries.

Previous officer at Citicorp and other banks now JPMorgan Chase, Bank of America, BBVA & two years as a high-level government bank regulator.

BA, postgrad., executive ed.: Alabama, Houston, SMU, Spring Hill, Harvard Business School.

1 book, 110+ articles. Quoted over 150 times by over 50 media news sources.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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