Could a vessel fire sink your company's supply chain? The Importance of Cargo Insurance

Could a vessel fire sink your company's supply chain? The Importance of Cargo Insurance

The risk of sea freight can be at an alarming cost looking back at the case of the Maersk fire this past March, 2018. 

maersk fire march 2018 cargo insurance

While the cause of the fire on the Maersk Honam is unknown at this point, it's one of a spate of fire disasters at sea that cost lives and caused property damage and supply chain interruptions. Five seamen died as a result of the March 6, 2018, blaze on board.

Shippers who had cargo on the Maersk Honam may have not only lost products in the fire but will also have to share in the costs of the disaster under a maritime legal principle known as General Average. That's one of the risks of vessel fires and other hazards at sea that can disrupt the supply chain and leave shippers holding the bill.

Cargo owners must provide proof of bond for the General Average costs and for salvage security before they are allowed to receive their cargo, according to average adjuster Richards Hogg Lindley.

While the damaged vessel moved slowly toward port, shippers did not know the state of their cargo and could not adjust their supply chains accordingly. Any just-in-time shipments were undoubtedly behind schedule.

Shippers must prepare for risks of vessel fires

It's an axiom of the sea that there's no greater fear than a fire onboard a ship.

In 2016, 85 vessels of 100 gross tons or more were declared a total loss, and eight of those were due to fire/explosion causes, including one case of suspected arson, according to the Allianz 2017 Safety Shipping Review. From 2007 to 2016 fire/explosion was the third most common cause of total losses, behind foundered and wrecked/stranded.

With the trend toward larger vessels, any disruption in a single voyage has a significant ripple effect throughout the supply chain. Despite overcapacity in the market, industry experts see continued deliveries of container vessels of 20,000 TEUs or more. The larger ships increase exposure to damage, liability, environmental impact and salvage costs. Allianz predicts a casualty cost in the $2 billion to $4 billion range if a large container ship or tanker were to be lost in an environmentally sensitive area.

How shippers contribute to fire risks

Fire risks vary for different types of vessels, of course. Engine room problems are shared across all types. Given their cargoes, oil and gas tankers face their own set of issues. On container ships, the most significant risk comes from misidentified cargo.

"Fire prevention and firefighting strategies both depend on accurately knowing the contents of the dangerous goods container," Smarty Mathew John, technology manager for the American Bureau of Shipping told Supply Chain Dive in an email. "Misdeclared or insufficiently declared cargo could lead to incorrect stowage and segregation thereby increasing the potential for fires as well as incorrect firefighting or emergency response in a fire event."

Allianz estimates that up to one-third of boxes containing dangerous goods are not appropriately labeled, and one-fifth may have some other problem. Whether a box is mislabeled by accident or deliberately to avoid higher rates for dangerous goods, a container that crew doesn't know is carrying dangerous goods can lead to disaster.

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Therefore, it is absolutely essential for companies to properly insure your cargo as the risk of fire will not only mean you lose your inventory but you will also have to contribute to the resulted costs.

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