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Maritime Economics exams in South Africa

A South African mining company wants to export 900 000 tons of coal to China via Richards Bay. In negotiations with the Chinese importer, the mining company agrees to instruct the shipbroker to arrange that the coal is shipped FOB.

  1. Who is the shipper – the mining company or the Chinese importer?
  2. Who is the consignee – the mining company or the Chinese importer?
  3. Who will pay for the ocean leg of the transport chain – the mining company or the Chinese importer?
  4. Who will select the ships to move the cargo from Richards Bay to China – the mining company or the Chinese importer?
  5. If the shipments are made CIF, how will the shipping arrangements change in terms of payment and choice of ships?
  6. If the ships will carry 180 000 tons of coal, how many ships will be needed to move the cargo from Richards Bay to China?
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To replace a ship or to repair damage to a ship can cost a lot of money, even millions of dollars. Similarly, to replace damaged or lost cargo (which in some cases can be of higher value than the ship) can also be very expensive, while the consequences of a serious accident (e.g. an oil spill) can cost billions of dollars in extreme cases.

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A ship can be damaged or become a total loss in many ways :

  • She can go aground
  • She can be involved in a collision with another ship
  • She can catch fire (or the cargo can catch fire)
  • She can collide with a jetty or a floating object such as a buoy.
  • She can be damaged (or sink) as a result of a severe storm. Structural damage or cracking can result from heavy seas.

A ship can be exposed to insurance claims (lawsuits) that result from other forms of difficulty. Some examples are given below :

  • Her cargo can be damaged or the cargo can shift or even go overboard in a storm.
  • Because of malfunctioning of equipment on board, cargo may be damaged, e.g. the frozen fish in a c reefer container is spoilt because the power to the reefer container failed while the container was aboard, or the cable on a ship’s crane broke and cargo fell, causing damage to that cargo, other cargo or injury to people.
  • A crewmember may become ill or be injured on board and the sip may have to divert to land him at the nearest port.
  • A visitor to the ship may be injured while on board.
  • A ship may break down and have to be towed into port. The cost of chartering a tug to tow her can run to a large sum.
  • A ship may be responsible for oil pollution, such as an oil spill while bunkering, or an oil spill might caused if the ship has an accident. Cleaning up a large oil spill and other damage caused by an oil spill can cost billions of dollars!

To cover incidents such as these, a shipowner takes out insurance, for which he has to pay a prescribed premium. Marine insurance takes several forms, each form of insurance covering an aspect of risk.

  • Hull & Machinery Insurance covers any damage to the ship or her machinery, e.g. if she becomes a total loss the insurers will pay the value of the ship; if she is damaged in any way (e.g. an engineroom fire, or in a collision), the insurers will pay for the repairs.
  • Protection & Indemnity Clubs (P&I Club) are insurance co-operatives whereby shipowners join together to pay into a fund (called a “club”) that will cover a range of claims. There are 13 P&I Clubs in various parts of the world, and shipowners can choose which they would like to join. If a ship’s P&I Club cover is not valid, costs of accidents or other incidents will not be covered.
insurance

The Turkish bulker Seli I that drifted ashore at Table View near Cape Town did not have proper P&I cover. As a result, the state had to pay for costs involved in the attempts to refloat her, removing her bunker oil, her cargo and for the wreck removal. Photograph : Andrew Ingpen

Among the claims handled by P&I Clubs are :

  • Cargo damage where it can be proved that it was the ship’s fault, e.g. the cable on a ship’s crane parted while the crane was lifting cargo. The cargo fell and was damaged; a hatchcover leaks and water wrecks the wheat cargo in the hold; cargo is damaged as a result of a fire on the ship.
  • Expenses relating to an accident, especially in cases where the ship has gone ashore and salvage operations are in progress. Tug hire, helicopter hire, hire of emergency equipment or other claims (apart from damage to the ship herself) will be covered by the P&I Club. Even wreck removal is covered by P&I insurance.
  • The ship causes damage to another ship through a collision, or if cargo fell overboard, and another hit an item of cargo (e.g. a log or a container) and sustained damage. The damaged ship can claim from the ship that caused the damage.
  • A crewmember suffers an injury or illness and needs to be evacuated form the vessel. This may mean that the ship has to divert from her planned course to go to another port to land the injured or ill crewmember. The costs of any diversion from the ship’s route are borne by the P&I Club. If a launch from the port or a helicopter is used to evacuate the patient, the costs are also borne by the P&I Club
  • Oil Pollution where negligence on the part of the ship resulted in an oil spill that had to be cleaned up. Claims resulting from the oil spill following the grounding of the tanker Exxon Valdez off Alaska in 1989 were over $1 billion. The oil rig Bluewater Horizon caught fire and sank in the US Gulf in 2010. This accident resulted in thousands of tons of oil gushing from the seabed, polluting vast areas of the sea. The clean-up and other claims resulting from that accident were well in excess of $20 billion.
  • A ship breaking down at sea and needing to be towed to port costs money, and the ship’s P&I Club will meet those expenses. The same applies to a ship going ashore and needing assistance from a salvage tug and/or team of salvors. Costs are covered by the ship’s P&I Club.
  • Under certain circumstances, a delay to a ship can also be claimed from the vessel’s P&I Club.
  • TT Club covers the loss of – or damage to – a container, not damage to the contents of containers. If a container falls overboard from a ship, TT Club will cover the loss of the container.
  • Fixed & Floating Objects. If a ship hits a fixed object, e.g. a wharf and damages it, eh costs of repairing the wharf are covered in terms of his insurance. Similarly, if a ship hits a floating object, e.g. a buoy, damage to or loss of the buoy is covered by this insurance.
  • Re-insurance is a system of insurance to cover insurance companies against huge claims such as the loss of a large cruise ship, an oil rig or an FPSO. A large cruise ship may be valued at $450 million, but if she is a total loss, a single insurance company would never be able to withstand such a huge loss. It is better to engage other companies to help cover the loss should it ever happen. An insurance company will cover most of that value, while other companies (known as the underwriters) will cover the rest of the value, e.g.
Value of Blue Sky $450 million
Cover taken by Insurance Company ABC $200 million
Cover taken by Insurance Company DEF $ 100 million
Cover taken by Insurance Company GHI $   50 million
Cover taken by Insurance Company JKL $   25 million
Cover taken by Insurance Company MNO $   25 million
Cover taken by Insurance Company PQR $   25 million
Cover taken by Insurance Company STU $   25 million

 

  • Cargo Insurance is taken out by cargo owners to insure against damage to or loss of cargo when the ship has not caused the damage or loss. Cargo, or example, may have got wet before it was loaded, but the damage is only noticed at the discharge port. The ship is not responsible for damage to cargo inside a container as the cargo was stowed at the shipper’s premises or at a container depot. In some cases, the ship’s officers do not know what is inside a container, let alone whether the cargo inside has been stowed correctly. The only time a ship can be held responsible for damage to containerised cargo is when the ship’s crane drops the container, or the lashing was not done correctly or twistlocks provided by the ship break.
  • General Average – Every cargo-carrying voyage should be regarded as a joint venture between the owner of the ship, the owner(s) of the cargo and the owner(s) of the bunkers (if the bunkers are not owned by the shipowner. On the back of every Bill of Lading are the conditions under which the shipment is made. Among those conditions is a clause that indicates that the shipment is subject to General Average. This means that, in the event of an accident, the owner can declare General Average.

In terms of General Average, all participants in the joint voyage – i.e. shipowner, cargo owner(s) and bunker owner(s) – are responsible for helping to cover the costs of the joint venture being able to resume (e.g. participants in the joint venture pay to cover the costs of repairs to a damaged ship so that she can resume her voyage with the cargo; participants in the joint venture cover the costs involved in towing a disabled ship to port.)

The participants contribute a percentage of the costs according to the percentage of the value of their involvement in the joint venture. If the value of the shipowner’s contribution is 80 percent, he will have to contribute 80 percent of the costs.

General Average can only be declared if the joint venture can be completed. If a ship sinks, the joint venture cannot be completed, but if a ship goes ashore, is refloated and, after repair, she can complete the voyage with the cargo, the joint venture will have been completed


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