Feb 1, 2024

Understand Risk

In the wake of recent events unfolding in the Red Sea, the maritime industry faces a stark reminder of the unpredictable nature of international logistics. As shippers grapple with the complexities of this dynamic environment, understanding the legal frameworks governing cargo transportation is more critical than ever. The Carriage of Goods by Sea Act (COGSA) and General Average are at the forefront of this regulatory landscape. This article delves into the implications of COGSA and General Average and underscores the pivotal role of cargo insurance, especially in light of the current challenges in the Red Sea.

COGSA: A Brief Overview

The Carriage of Goods by Sea Act (COGSA) provides a legal framework regulating the relationships between shippers (or beneficial cargo owners (BCO) based on the terms of sale) and carriers. Particularly significant in maritime legislation, COGSA applies to agreements involving the sea transport of goods between foreign and U.S. ports, where bills of lading are issued.

COGSA lays the groundwork for liabilities but, crucially, establishes limitations on carrier liability. §4(5) of COGSA limits carrier liability to $500 if a shipment is lost or its contents damaged or destroyed.

Limits of liability are enforced irrespective of the carrier used, the amount shipped with the carrier, or the value of the material. 

General Average

Recent incidents in the Red Sea also serve as a reminder that cargo loss is not the only risk. General Average (also known as the York-Antwerp Rules) states that in the event of an emergency resulting in the partial loss or total loss of a vessel or cargo onboard a vessel, all stakeholders (ship owner, carrier, as well as all beneficial cargo owners with cargo onboard the vessel) are each proportionately responsible for the resulting financial burden.

Since the year 2000, there have been seven notable instances where General Average has been declared, including:

  • The Hyundai Fortune (2006) – Explosion and Fire off the coast of Yemen
  • MSC Sabrina (2008) – Grounded in the Saint Lawrence River
  • Hanjin Osaka (2012) – Explosion in Ship’s Engine Room
  • Maersk Honam (2018) – Fire in the Arabian Sea
  • Ever Given (2021) – Grounded and subsequent blockage of the Suez Canal
  • Ever Forward (2022) – Grounded in the Chesapeake Bay

Since November 2023, there have been roughly 30 attacks on commercial shipping lanes in and around the Red Sea. Subsequently, the risk of an attack resulting in a situation that may result in a carrier declaring a General Average is exceptionally high.

Managing Risk with Cargo Insurance

Regardless of the factors causing cargo loss or damage, the only surefire solution is obtaining comprehensive maritime insurance. However, it’s important to note that, like all insurance, there are many service providers with varying degrees of quality and a wide range of coverage options.

Choosing comprehensive coverage from a reputable insurance provider is paramount in managing risk.  Since insurance amounts to another cost factor for BCOs, the desire for low premiums is understandable; however, weighing the cost against the extent of your coverage and the insurance company’s rating is essential. 

Insuring with Compass

At Compass, we recognize the gravity of safeguarding cargo amidst the uncertainties of maritime operations and offer our clients a seamless solution for transportation and insurance. Subsequently, our commitment to excellence extends to our choice of insurance providers – only AAA-rated insurers make the cut.

Conclusion: Navigating with Confidence in Unpredictable Waters

Shippers must fortify their strategies as the maritime landscape evolves, particularly with the ongoing incidents in the Red Sea.

Carrier limits under COGSA and the increased threat of General Average underscore the need for risk management. Cargo insurance provides the critical safety net every shipper should embrace.