Marine Cargo Insurance: Kenyan Business should learn from Fertilizer Dispute Resolution

Introduction

For more than two decades, Kenyan business people importing retail goods rarely give any thought to obtaining marine cargo insurance. They only have mandatory Travel Insurance policies. Upon completing their business tours in Dubai, Ho Chi Minh City, Hong Kong, Bangkok or, Guangzhou - China, they deliver their goods to a Kenyan Clearing & Forwarding Agent, in the foreign city and, await delivery in Nairobi's Eastleigh Estate. They have never been known to fail, but I'm sure there have been some moans, which business people don't talking about.

The Consolidators initially started in Dubai, in the early 90s, as foreign exchange controls were lifted. With two flights a week from Dubai to Eldoret International Airport, on average. Include Consolidation services for marine consignments on a Full Container Load (FCL) basis and, its a service any business person would desire. The Logistics support has now spread to almost every major port in the world.

That's millions of shillings worth of uninsured goods, are at risk, every week. In the event the carrier of the goods is unable to deliver the goods. The business people are not aware about Charter Party Agreements under which a Charter Airway Bill and/or Marine Bill of Lading is issued to the Consolidator. Most are ignorant of their obligations to insure their goods not only in terms of cost and freight but, also in relation to Terrorism, Riot, and other Political Risk covers. The Consolidator is only grateful for the "No-Questions-Asked-Approach" of the business people. Question is, in the event of a loss, to whom will the business people run to?

Exporters, on the other hand, have not have to insure the goods if they ship of a Free On Board (FOB) or Cost and Freight (C&F/CFR) basis. However, some exporters don't insure their goods and lose containers worth millions of shillings, thus wrecking livelihoods and homes.

Marine Cargo Insurance: Kenyan Business should learn from Fertilizer Dispute Resolution

For the purpose of this blog, I will use a current on-going case study of the NCPB fertiliser dispute resolution, and draw comparisons with KTDA's fertiliser transaction.

Disclaimer: First Liberty Insurance Agency ("First Liberty Kenya") is not an interested party, nor has any interest in this case study, nor do we claim to have any material information other than that which is publicly available. The illustrations are used for educational purposes only, noting sources of documents.

This blog was prompted by the following news article and, a query from a client, which I shall include as an extract. Here goes;

Over 7,000 tonnes of fertiliser impounded at the Mombasa port By Patrick Beja Updated Tuesday, May 26th 2015 at 00:00 GMT +3

Over 7,000 tonnes of fertiliser are lying uncollected at the Mombasa port after the National Cereals and Produce Board ( NCPB), which imported it from China, rejected a portion of it claiming it is sub-standard.

The move has led to a standoff between NCPB and the captain of the ship containing the cargo which docked on May 14 and remains moored at the port. Yesterday, NCPB confirmed it stopped a ship from releasing Government-subsidised fertiliser to farmers over its "disputable" quality. The standoff has attracted the attention of the National Assembly's agriculture committee that is on a retreat at the Sarova Whitesands Beach Resort in Mombasa. The MPs said farmers were complaining about cheap and sub-standard fertiliser. Vice chairman Kareke Mbiuki, Mumias East MP Benjamin Washiali and Nyando MP Fred Outa said importation of sub-standard fertiliser had "become a norm and is contributing to food insecurity in the country". They said the national and county governments disregard quality. Mr Washiali said a consignment of fertiliser suspected to be substandard has been impounded at berth number 17 at the port by the Kenya Bureau of Standards (Kebs). "The agricultural sector policy should address this problem to protect farmers," Washiali said. But, NCPB said it stopped the discharge of the consignment on Thursday last week because it was caked and suspected to have gone bad. According to NCPB Coast Region Manager Lamech Oyugi Okumu, Kebs had taken samples for testing.

He said the vessel had 7,260 tonnes of fertiliser and the suspect lot was discovered after 5,000 tonnes of good quality had already been offloaded. According to NCPB, an analysis by Intertek Testing Services of Mombasa show the remaining batch had a moisture content of 1.7 per cent instead of 1.5 per cent and it was lumpy. "At the time of stopping the discharge, NCPB had offloaded 5,000 metric tonnes of the commodity out of a total consignment of 7,260 metric tonnes which was part of the additional 2,100 metric tonnes of government of Kenya subsidised planting fertiliser that had been received earlier," said NCPB in a statement. The preliminary analysis showed that all other parameters were within the required standards, NCPB said. "The voyage from China took about a month and it is suspected the cooling effects of the water could have led to hardening of the fertiliser in hatch two of the ship," Okumu said. According to Okumu, the cargo had been inspected and confirmed to be in good quality by a Kebs agent in China and the ship master was now being held responsible for its current state. Okumu said in March NCPB imported another 32,000 tonnes of subsidised NPK fertiliser from China. NCPB Corporate Affairs Manager Rose Andanje said in a statement the board's principal insurers of the consignment in question have since then commissioned a laboratory analysis of the fertiliser to establish its suitability for use.

Mv Locomotive reportedly arrived at the port with total of 17,000 tonnes of fertiliser on board. The other consignment belonged to another importer and was not disputed, officials said.

Acting Agriculture Cabinet Secretary Adan Mohamed denied knowledge of the impounded vessel but noted that the national government was importing subsidised fertiliser for farmers through the NCPB to ensure food security.

http://www.standardmedia.co.ke/?articleID=2000163497&story_title=Kenya-bad-fertiliser-bought-by-state-firm-held-at-mombasa-port

What Can We Learn?

Lets go through these facts and discern what insurance implications there are for local business people, as their transaction sizes increase. It'll be a rather long article, so please grab some coffee, or better a mug of soup. We will compare NCPB and KTDA procedures for fertiliser, hoping will all learn some lessons regarding insurance:

MV Locomotion (not Locomotive), flying under a Liberian Flag, discharged all its cargo on 10th May 2015 (?!) being 27,240 MT of cargo, of which 17,000 MT comprised fertiliser, imported under Charter Party. Subsidized NCPB fertiliser was 7,260 MT. The vessel is stilled moored in Mombasa.
The Master of MV Locomotion is disputing that the shipper is to blame.
The dispute cargo is about 13% of the total fertiliser consignment and, about 31% of NCPB's consignment.
MV Locomotion vessel is 3 years old, having entered into service in 2013, with a gross tonnage of 23,268 MT and Deadweight of 38,046 MT. It's a relatively new vessel. We ask ourselves why use a relatively new ship? The answer, may be inferred; given the sensitive nature of the transaction, the Supplier and Buyer wanted to reduce their risk exposure. The maximum age of the ship is normally set out in the Pre-Qualification stage of the Tendering process, in the NCPB case it is 15 years. In the event, an older vessel is used, the supplier has to seek approval of NCPB. However, in the case of KTDA fertiliser tenders, they stipulate that the supplier must meet the overage marine insurance premium, for vessels over 15 years. Further, KTDA specify a maximum age limit of 25 years, beyond which the proposed vessel will not be accepted. The Buyer of the goods may include technical specifications of the ship such as the type of and number of hatches, the capacity of two in-built off-loading cranes and, not derricks. This means that the Chinese Supplier has to ensure nominated vessels are pre-approved by the Kenyan Buyer.
Documentation requested by the Tender is as follows:

Pre-Export Verification Certificate of Conformity (Pvoc)
Quality Analysis Certificate by reputable Inspection Companies and/or Laboratories covering both Technical Quality and Quantity Inspection. The KTDA go further than NCPB, stipulating the methods, and other parameters including heavy metals and radioactivity.
Samples during Manufacture.

The Insurers will have a number of questions for the Inspection Company, including: Were the bulk holds of the ship inspected? Were the holds cleaned before on-loading as stipulated in NCPB's tender documents? Were any linings used? Who supervised placing of the linings? Was there a Pre-Loading Survery at the Port of Loading? What were the moisture level readings? What does the Visual Inspection report say? What were the parameters on the Pre-Loading laboratory analysis? How do they compare with those at the Port of Discharge? I'm sure the Inspection Company is still holding Pre-Loading samples from each batch and/or hatch. These will be compared against samples obtained prior to off-loading the cargo.
The Insurers of NCPB have instructed KEBS to perform lab analysis and have found a discrepancy in one parameter, moisture content of 1.7%. The KEBS/ISO standard stipulated in the tender documents gives the maximum moisture content of 1.5%, for DAP, CAN and NPK. Urea would have a maximum moisture content of 1%.
Caking results since all fertilisers are hygroscopic which means they start absorbing water given certain humidity and water vapour pressure conditions and, particle surface shape and size.
How was the fertiliser loaded onto the vessel? Was it in bags? If loose cargo, was the cargo loaded, in each hold, in one cone or segregated cones? Was it foggy during on-loading operations?
Now this is where NCPBs team aces KTDA, with regard to including clauses in the transaction structure:

Notification to NCPB's bankers 5 days before. This clause indicates that there is a Structured Trade & Commodity Finance transaction, with the Bank being the "First-Loss Payee" on any Marine Cargo Insurance. There could also probably be an Export Credit Insurance policy, possibly SINOSURE, China Export and Credit Insurance Corporation, enabling the Supplier to be able to obtain structured financing deliver good to the Buyer, NCPB. The Chinese exporter would have access to Short-Term Export Credit Insurance facility covering Buyer's breach of contract and, pre-shipment and post-shipment risks. The Chinese exporter would be covered against:

Commercial Risks

Bankruptcy of the Buyer and/or Bank or Syndicate of Banks
Refusal by the Buyer to pay for the goods after accepting the goods
Refusal by the Buyer to accept the goods.

Various Political Risks

Restrictions on Foreign Exchange transactions
Restrictions on Imports by the Government of the Buyer's country
Cancellation and/or Non-Renewal of an Import License by the Government of the Buyer's country
Protracted payment resulting from a Government Decree, or third country where proceeds are transferred
Force majeure or War in the Buyer's country
Any events classified as other Political Risks

Charter Party Agreement

b) The supplier shall arrange for the vessel to bear and to pay all port dues / charges (except port unloading charges), tonnage dues, light dues, and other taxes, assessments and charges which are customarily payable at the Mombasa Port of discharge on or with respect to the vessel(s).
d) The Master of the vessel shall allow on board the vessel the representatives of the independent cargo inspection agency/marine surveyors appointed by NCPB and provide such information / assistance as may be required by them in connection with the performance of their assigned duties.
e) The Master of the vessel shall provide free use of light on board the vessel as may be required for working the vessel at the port(s) of discharge at all times and in each case free of expense to NCPB.
f) The opening and the closing of the hatches of the vessel shall always be done by the vessel's crew and the cost involved therein and the time used for opening and the closing of the hatches, gangway placement, grab fixing shall be to the account of the vessel even if the vessel is on demurrage. The time used in the initial opening and final closing of the hatches shall be to the account of the vessel even if the vessel is on demurrage.

Notice of Readiness of Discharge of Cargo
Lay Time and Expected Periods
Guarantee Discharge Rates

(b) NCPB shall guarantee a discharge rate of 3,000 MT PWWD SSHEX, WEATHER WORKING DAY (WWD) of 24 consecutive hours
(c) All vessel related charges including composite berth hire charges are to be on owner's account.

Marine Insurance

NCPB shall put in place the necessary Marine Insurance Cover for the shipment of fertilizer from the port of loading to Mombasa Port

Delivery Terms

(a) The fertilizer must be delivered on Cost and Freight Free Out (CFR FO) basis, Mombasa port by the successful bidder(s) within forty five (45) days from the date of notification of the award.
(b) For any delay in clearance at the port of destination i.e., Mombasa Port, Kenya, on account of non-supply of shipping documents in time and / or due to faulty documents, the supplier would be responsible for any demurrage, port rents etc, which, NCPB may become liable to pay to the authorities concerned at the Mombasa discharge port in Kenya.

Many transporters made money transporting fertilizer!
We assume, the Goods were discharged by way of a conveyor belt and, stored in a warehouse. Was bagging done on the Quay-side? How many re-baggings were done?
Question for the reader, whilst under dispute, whose insurance cover will cover the goods stored in the warehouse on a DDU basis, subject to a decision on whether the goods will be transhipped back to China? (Reward: You'll gain practical knowledge for use in your business.)
Another question, if the goods can be reconstituted in a Bonded Warehouse and, the moisture content reduced to 1.5%, who would bear the cost? Would it be an effective remedy? Whose insurance, the Buyer, Supplier, Shipper or Inspection Company, would cover the goods while reconstitution is in progress?
Question: Are you able to nominate a Vessel for your goods?
Question: How do Incoterms in the underlying Sale Agreement determine the Insurance Cover you need?

The Shipper, Seller and/or Inspection Company may be liable for the 2,260 MT, in whole or in part, depending on various factors.

What Recourse does the Shipper have?

The solution derives from ancient Greece maritime development of the practice of General Average. General Average will be the subject of another blog.

Protection and indemnity insurance, more commonly known as "P&I" insurance, is a form of mutual maritime insurance provided by a P&I Club. Whereas a marine insurance provides "Hull and Machinery" cover for shipowners, and cargo cover for cargo owners, a P&I Club provides cover for open-ended risks that traditional insurers are reluctant to insure.

Typical P&I cover includes:

a carrier's third-party risks for damage cause to cargo during carriage;
war risks; and
risks of environmental damage such as oil spills and pollution. In the UK, both traditional underwriters and P&I clubs are subject to the Marine Insurance Act 1906.

A P&I Club is a mutual insurance association that provides risk pooling, information and representation for its members. Unlike a marine insurance company, which reports to its shareholders, a P&I club reports only to its members. Originally, P&I Club members were typically ship-owners, ship-operators or demise charterers, but more recently freight forwarders and warehouse operators have been able to join.

Whereas the assured pays a premium to an underwriter for cover which lasts for a particular time (say, a year, or a voyage), a P&I Club member instead pays a "call". This is a sum of money that is put into the Club's pool, a kind of "kitty". If, at the end of the year, there are still funds in the pool, each member will pay a reduced call the following year; but if the Club has made a major payout (say, after an oil spillage) club members will immediately have to pay a further call to replenish the pool.

There is an International Group of P&I Clubs based at Peek House, London. These Clubs cooperate to provide funds in the event of huge claims using a complex system to determine liability.

Relationship with Marine Insurance

Marine insurers offer insurance on measurable risks: hull and machinery insurance for ship-owners, and cargo insurance for cargo owners. P&I clubs provide insurance for broader, indeterminate risks that marine insurers usually do not cover, such as third party risks. These risks include: a carrier’s liability to a cargo-owner for damage to cargo, a ship-owner’s liability after a collision, environmental pollution and P&I war risk insurance, or legal liability due to acts of war affecting the ship.

Marine insurers are usually for-profit companies that charge customers a premium to fully cover ships and cargo in the time period when the policy applies. In contrast, a P&I club is run as a non-profit and the insurance is financed by “calls”. Club members contribute to the club’s common risk pool according to the Pooling Agreement Rules. If the risk pool cannot cover current claims, the club members will be asked to pay a further call. If the pool has a surplus, the club will ask for a lower call the following year or make a refund to members. Only ship-owners with acceptable reputations are allowed to join a P&I club and any P&I club member who incurs reckless or avoidable losses to the club may be asked to leave.

Thus, marine cargo is generally covered twice by insurance standards. The shipper or cargo-owner will be covered by a marine insurer and the carrier or ship-owner will be covered by the P&I club. If the cargo is lost or damaged, the cargo-owner needs to first make a claim against the ship-owner. However, the ship-owner may avoid liability if it did not cause the loss or if the Hague-Visby Rules grant exemption from liability. In that case, the cargo-owner will claim against its own insurance company. If the cargo-owner fails to claim first against the ship-owner, but claims instead against its own insurance company, the insurer, having reimbursed its client, will through subrogation pursue the claim in its own right against the ship-owner.

Exceptions

The following are the major exceptions to P&I coverage:

Other insurance: A P&I insurance claim may rejected if club managers think the risk should have been covered by other types of insurance that the ship-owner should have obtained, such as war risks insurance or hull insurance, which pays collision liabilities and, in some cases, liabilities for damages to fixed and floating objects ("FFO").
Mutuality: A claim may be rejected in part or full if the ship-owner took insufficient steps to limit its liability in order to protect the Club. The Club requires ship-owners to ensure that the text within bills of lading and passenger tickets minimises the ship-owner's liability faults (within the scope of section 2 of the Unfair Contract Terms Act 1977). The Club expects ship-owners comply with all flag state requirements concerning marine safety and environmental protection.
Moral hazard: Liabilities due to the fraudulent non-delivery of cargo, especially deliveries of cargo that do not require an original bill of lading, are usually not covered by P&I insurance. This view is reflected in the decision of the English courts in Sze Hai Tong Bank v. Rambler Cycle Co. [1959] UKPC 14;^[6]^[7]
Willful misconduct: Losses intended by the insured, or to which it "turned a blind eye" knowing they were likely to happen.
Public policy: Criminal liabilities used not to be covered as a matter of course. Criminal liability was imposed only for intentional misconduct, and the requirement of fortuity generally included the coverage of criminal liabilities. Today, statutes in many countries impose "criminal" liability for negligent conduct that damages the environment, under circumstances that do not rise to the level of "willful misconduct" under the law of marine insurance.

New developments in P&I Club Insurance

European Union Directive 2009/20/EC - The European Union Directive 2009/20/EC was implemented in all 27 Member States by January 1, 2012. The Directive requires compulsory P&I to cover for EU and foreign ships in EU waters and ports. Foreign vessels that do not comply to the Directive are expelled and refused entry into any EU port, although ships may be allowed time to comply before expulsion. As EU competence does not generally extend to penology, (see Re Tachographs (ECJ) 1979), the Directive requires the Member States themselves to set penalties for any breach.
The Rotterdam Rules - The Rotterdam Rules are a set of rules designed to replace the Hamburg Rules and the outdated Hague-Visby Rules (both of which are International Conventions to impose duties upon a carrier of goods by sea). Should the Rotterdam Rules come into effect, they would cover not merely the sea voyage, but all parts of any contract of carriage with a sea leg. Thereafter, land carriers, warehouses, and freight forwarders would need P&I cover. This would inevitably lead to an increase in the scope and importance of P&I cover, and might diminish the scope of standard cargo insurance.

Source: http://en.wikipedia.org/wiki/Protection_and_indemnity_insurance

The Hague-Visby Rules and/or Hague Rules (1924) are not complicated. Under the Rules, the carrier's main duties are to "properly and carefully load, handle, stow, carry, keep, care for, and discharge the goods carried" and to "exercise due diligence to ... make the ship seaworthy" and to "... properly man, equip and supply the ship". The carrier's duties are not "strict", but require only a reasonable standard of professionalism and care; and Article IV allows the carrier a wide range of situations exempting them from liability on a cargo claim.

http://en.wikipedia.org/wiki/Hague-Visby_Rules

Conclusion

There is a real need for Business people to review their Marine Cargo Insurance. Call in your Insurance Agent and, purpose to have a review of your Insurance needs within a stipulated reasonable period. The "mad" rush for Insurance is just that and, errors are made. Plan ahead. Plan Ahead with your Insurance Agent, just as your Plan with your Financial Advisor.

I will leave you with three articles unique to the case study on Fertiliser, for your own reading pleasure. Fertiliser can be hazardous when mis-handled. Some photos are included noting a fire or spontaneous combustion whilst in transit. The worst disaster caused by fertiliser was in 1947 and, it changed the way fertiliser is transported.

THE CARRIAGE AND POTENTIAL HAZARDS OF NPK FERTILIZERS

Excerpts from an article By Peter Cook of Burgoynes, Consulting Scientists & Engineers

Properties of NPK Fertilizers relevant to Storage & Transport

Ammonium nitrate based NPK fertilizers are thermally stable and are not prone to self-heat dangerously under normal conditions of storage and transport. They are not combustible but when heated sufficiently they will decompose. The decomposition process is exothermic (heat is released) and is accompanied by the production of copious quantities of fumes containing water vapour and numerous toxic gases such as oxides of nitrogen, hydrogen chloride, ammonia and chlorine. The exact composition of the fumes produced will depend on the temperature and the precise composition of the formulation: apart from the principal constituents, frequently other additives are present to accommodate specific agronomic requirements or quality parameters (e.g. caking tendencies and thermal stability).

In some cases the decomposition, initiated by an external heat source, will stop when the heat source is removed. With some fertilizers, however, the decomposition will continue and will spread deep into the bulk of the material even when the heat source is removed. This process is referred to as self-sustaining decomposition and progresses relatively slowly.

Relatively minor heat sources, such as buried lighting or self-heating resulting from contamination, can be sufficient to initiate decomposition in some instances.

In addition to the above, ammonium nitrate-based fertilizer cargoes are hygroscopic. In order to prevent caking or moisture pickup, therefore, the cargo surface may be protected against humidity by plastic sheeting.

Suitability for transportation is determined using the UN “Trough test”. Under the conditions of the Test the self-sustaining decomposition rate of the cargo, which is measured in metres of propagation per hour (m/hr), must be less than 0.25m/hr.

As will be apparent from the above the principal means of classifying an NPK cargo as “non-hazardous” is on the basis of its performance in the Trough test. Our experience, however, is that the Trough test does not adequately reflect the potentially hazardous behaviour in bulk of material that under the conditions of the test can be designated “non-hazardous”.

Precautions on Loading and During the Voyage

Prior to loading the Master should obtain a Material Safety Data Sheet (MSDS) for the cargo to be loaded and should familiarise himself, and comply fully, with the provisions of the Bulk Code: this should also include familiarization with the Emergency Procedures.

All sources of heat must be kept away from ammonium nitrate-based fertilizers, regardless of their classification. Potential heat sources include light bulbs/cargo lights, heating systems, steam pipes, electric motors, live electrical cabling and naked flames. Therefore:
All lights and other heat sources in cargo holds should be switched off prior to loading and should remain off throughout the voyage so long as the fertilizer is on board.
Electrical circuits within cargo holds should be properly isolated while the cargo is on board.
Welding or any other form of hot work that could affect the cargo should not be permitted while the fertilizer is on board.
Contamination of the cargo with oils and fuels, e.g. from loading equipment in the holds, should be avoided: in the event that contamination does occur all contaminated cargo should be removed.

Action in the Event of Decomposition

As mentioned above, the rate of decomposition with this type of cargo is relatively slow although it will be accompanied by considerable quantities of gaseous by-products. Decomposition is indicated by the release of brownish/white fumes. These will need to be ventilated although, because of the toxic nature of the fumes, the ship should be orientated to minimize the risk of gases reaching the accommodation. If the ship is in port it may prove necessary to move it away from an inhabited area. Self contained breathing apparatus and suitable protective clothing should be worn in the vicinity of the fumes.

It should be emphasized that the reaction producing the gas involves chemical decomposition rather than combustion, and is, therefore, not dependant on the presence of oxygen to sustain the process. The use of CO2 or other forms of inerting or smothering agent are, consequently, useless. The only effective way of terminating the reaction, therefore, is to remove the heat from the reacting zone. Prompt action is required to prevent the decomposition from escalating.

If detected very early and the initiating external source of heat can be identified, this should be turned off or removed, if this can be achieved safely. This in itself may result in the process terminating. In the more likely event that this action proves unsuccessful, the most effective means of removing heat from the system will involve the use of copious quantities of water directed into the reacting zone. This has been achieved effectively using water lances pushed in to the cargo in the relevant area although this is unlikely to be a practicable solution unless suitable water lances are readily available. If large quantities of water are necessary to quell the reaction, in the absence of a more focussed approach, consideration will have to be given to flooding the affected hold. In such circumstances due regard must be given to the stress and stability implications this will have for the vessel.

As the reaction zone is localised, an IR thermometer is an effective way to locate the hotspot.

Toxic cloud generated by the decomposition of a “non-hazardous” NPK cargo in one hold at an advanced stage

It should be noted that wetted fertilizer can set like concrete in time and every effort should be made to discharge water damaged cargo at the earliest possible opportunity. The products of the decomposition are also highly corrosive to the ship’s structure.

Source: Burgoynes, Consulting Scientists & Engineers http://www.burgoynes.com/carriage-and-potential-hazards-npk-fertilizers

Marine Cargo Insurance: Kenyan Business should learn from Fertilizer Dispute Resolution

Introduction