Port and Terminal Risks: Pandemic Brings Congestion and Delays
Among the risk exposures highlighted by the COVID-19 pandemic is the impact that congestion and delays at ports and terminals has on their owners and operators, as well as on those relying on them. There are estimates that major port delays for ships in some areas will be experienced well into the summer of 2021, possibly longer.
Ports and terminals feeling the effects of COVID-19
Scientists warned for years that a global pandemic was likely, yet COVID-19 still caught the world by surprise, bringing long-term consequences. Maritime ports and terminals are among the components of the marine industry that are experiencing severe disruption due to the pandemic. As these facilities are keys to the global shipping industry, which handles over 80% of all internationally traded goods, congestion and delays there have wide ripple effects.
In general, ports and terminals can be adversely affected by any downturn in global trade. At other times they can be the cause of ‘bottlenecks’ within the supply chain, if, for example, their service level is reduced.
During the pandemic, supply chains have experienced unprecedented disruptions. In some cases, goods have been stockpiled at ports, terminals, and elsewhere, unable to be shipped. In other instances, manufacturers are producing fewer goods as they face their own difficulties. Additionally, some facilities are unable to operate efficiently due to workforce reductions necessitated by national and/or regional lockdowns, or due to illness within the workforce.
All of the above are bad news for ports and terminals, where commercial success is determined by regular traffic of cargo-carrying vessels and the efficient flow of goods through shore-side facilities. Any sudden trade disruption for ports and terminals exposes them to potentially unforeseen risks, for which they may be ill-prepared.
Delay and congestion bring insurance considerations
Insurance concerns, including coverage limitations, quickly enter the spotlight. The volume and value of goods slowly stockpiling under the care, custody, and control of a terminal can increase exponentially. Careful monitoring of insurance policy limits — whether based on location, value, or volume — needs to be regularly undertaken to ensure that the limits on aggregated values are not exceeded.
Business interruption (BI) insurance has been a standard feature of many port and terminal packages for many years. However, the severity and length of disruption that many ports and terminals have experienced over the past months have exposed the limitations on compensation under BI coverage.
Issues regarding BI coverage during the pandemic have been felt well beyond the marine industry. In the UK, for example, the Financial Conduct Authority (FCA) recently brought legal action against insurers regarding BI insurance. The verdict was largely in favour of the insured’s, following which many insurers have imposed clearer, more prohibitive exclusions in communicable disease exclusion wordings.
Ports and terminals have more than BI exposure to consider. For example, storage space needs to be found when goods must be stockpiled in ports, unable to be loaded onto vessels. This creates problems as congestion and delays can drag on.
The lack of suitable storage facilities may, in turn, lead to goods being kept in the open, exposed to the elements. In other instances they may be stored inside inadequate and insecure warehouses, where they could be subject to damage, deterioration, and theft. Such storage issues bring the potential for claims from the owners of the goods should they be lost, damaged, or stolen while under the care, custody, or control of the port or terminal.
Other potential liabilities for ports and terminals may arise from not providing contractually agreed levels of service. With a reduced workforce caused by the pandemic, many ports and terminals have struggled to maintain service levels. This is not a quick solution to the problem, as a number of major ports on the west coast of North America are realising. There are estimates that major port delays for ships in that region will be experienced well into the summer of 2021, possibly beyond.
In a ripple effect, contractual liabilities may extend beyond ports and terminals to the owners of goods that are held for excessive periods of time in the port. Vessel and truck operators could also face liability issues if they are unable to enter ports in a timely fashion to discharge/load goods. Many parties could find themselves suffering loss of earnings caused by such delays.
Four lessons for ports and terminals
Ports and terminals can learn many lessons from the pandemic, including:
1. Put in place relationships with local, alternative facilities for additional storage. On a contingent basis, such facilities could be employed to securely and safely store goods that cannot be shipped as expected and when the port’s own storage ability is limited.
2. Carefully assess contracts that impose performance standards on a port or terminal. When such requirements are agreed, work to ensure that excessive, punitive penalties for failure to perform are avoided when major events occur.
3. Ensure effective health care systems exist for the workforce of ports and terminals. This can help to maintain the level of available workers throughout a catastrophic event, such as a pandemic. This may need to be supported and augmented by more effective and long-term health insurance for workers.
4. Regularly review insurance coverage. Insurance cannot stop pandemics, but it can be a useful tool to mitigate some of the financial consequences. It is important for port and terminal operators and those that use their facilities to regularly evaluate their insurance contracts — and update them as necessary — to understand how they will respond under a wide variety of possible circumstances. Insurers, too, have a role in providing policy language that is not unnecessarily exclusive or unclear.
If you have questions regarding the impact on your business of congestion and delays at ports and terminals, or other marine issues, please contact your Marsh Specialty advisor.