The high potential level of claims as a result of container ship Dali striking and causing the collapse of the Baltimore Key Bridge has raised the prospect of the International Group reinsurance arrangements all being exhausted.
In its just published article “Navigating the Aftermath: The MV Dali Bridge Collision”, broker Gallagher Specialty, details the current structure and the implications of limitation being breached. For those interested (and hopefully of a benefit to younger or more recent entrants to the insurance sector), here’s a (relatively) brief catch-up on what happened during the accident, what has happened since so far in terms of the liability response, and what the implications of this are, given the structure of the insurance structure within the P&I Clubs and its International Group.
The two main legal scenarios rest on whether an application for limitation of liability under the 1851 US law is accepted by the courts, or rejected.
The incident:
Early on March 26th 2024 the 9,962 teu container vessel MV Dali (IMO 9697428) allided with the southwest pier of the central truss arch span of the Francis Scott Key Bridge in Baltimore, Maryland on the US Atlantic Coast. The vessel was travelling at around 8 knots when the allision occurred. The vessel was leaving the port of Baltimore bound for Colombo, Sri Lanka carrying some 4,700 containers. The allision resulted in the collapse of a 1.6 mile section of the bridge, part of which fell onto the ship’s bow, causing it to ground on the soft muddy bed of the channel.
The relevant parties are Grace Ocean Pte (owner) and Synergy Marine Pte (manager), both of Singapore, Group Club Britannia (P&I insurer), and Denmark-based Maersk (the charterer).
The incident appears to have been related to an electrical power failure on the vessel, but it is still being investigated by the National Transportation Safety Board (NTSB) whose deliberations will also involve a review of the bridge design, which was built in 1972.
Prompt actions by the crew in calling a mayday alert enabled the bridge to be closed to traffic shortly before the collapse happened. Notwithstanding this, the six construction workers who were working on the bridge at the time refilling potholes, and who were on a break at the time of the incident, all died. Five of the bodies have now been recovered. On board the vessel itself, one crewman was injured.
Subsequent actions
Grace Ocean and Synergy have asserted that they had no “privity or knowledge” of faults with the vessel and have petitioned that, under the US 1851 Limitation of Liability Act, any liability for the incident is limited to $43.67m. Gallagher Specialty observed that “whilst this seems an archaic act, it has been under subsequent review and was in fact codified as recently as 2022 under Title 46 of the US Code. The question of whether this petition stands, or whether limitation can be broken, will no doubt take many years to resolve”.
The USA is not a signatory to the 1976 IMO Convention of Liability for Maritime Claims (LLMC). , However, Singapore, the flag state and the domicile of both owner and manager, is a signatory. Using the calculation matrix under the 2012 amendment to the 1996 protocol to LLMC, liability under this convention would be limited to approximately $57m for property damage, and $114m for personal injury and loss of life.
On April 12th 2024 General Average was declared, with Richards Hogg Lindley the appointed average adjuster. This will have the effect of shifting a greater share of the cost of the casualty onto cargo interests. In deriving the $43.67m limitation amount, the limitation petition from the owner and the ship manager estimated salvage costs of $19.5m, as well as repair costs to the vessel of $28m.
Insurance implications
The overall cost of the incident, including hull repairs, GA/salvage, loss of life, crew injury, repairs to the bridge, business interruption etc have been variously estimated at between $2bn and $4bn. Even at the lower end, this would make the incident most likely the biggest maritime casualty ever, exceeding the costs of cruise ship Costa Concordia (January 2012) or container ship Ever Given (March 2021) to cite recent examples.
The question therefore is, who pays? Gallagher Specialty pointed out that “central to the question is whether the limitation petition can be sustained or broken”. If the shipowner limitation value is sustained, then this will by definition limit the P&I Club exposure – although clearly there will be significant claims handling costs involved as well.
In the extreme (but not impossible) scenario of the casualty exceeding the reinsurance limit of $3.1bn then the additional costs will overspill back to the individual clubs to collect from the membership – subject to any overspill reinsurance that may be in place. Gallagher Specialty said that it understood that guidance from the International Group on this matter would be forthcoming shortly. “This in itself will take many years to unravel, but looking forward this may lead one to wonder if the current limit of $3.1bn is still adequate”, said Gallagher Specialty.
Limitation or not?
Whatever the ultimate legal determination of limitation, getting there will be a lengthy legal process. Whatever the verdict of the lower court, it will be subject to appeals. A non-marine incident of some similarity in terms of the scale of loss was the World Trade Center attack on September 11th 2001. A major legal dispute hinged on whether the destruction of the two towers was a single insurable event, or two separate events. Given the amount of money at stake, the cost of the legal teams (which ran into many many millions over the years) was less relevant than those costs would be if there were a dispute over, say, a $50m claim. In the case of the Baltimore Bridge disaster, with limitation of liability the key issue, similar considerations are likely to apply. If a legal avenue remains to either side, no matter how narrow the route, then the case will continue to be disputed.
Gallagher Specialty observed that there might also be a question of choice of jurisdiction. “Whilst the US legal system will naturally seek jurisdiction, the owners and operators are not US corporations and thus might also seek limitation under the IMO LLMC convention, albeit under which there is a higher limit”. Since there will be no quick resolution of this question, the claim itself will take a long time to hit the primary insurers – let alone the reinsurers.
“Whilst it may seem irrational for such a sophisticated reinsurance market as we see today to react to the claim in its infancy, both IG reinsurers, individual Club non-poolable programme reinsurers and the wider reinsurance market may see it differently”, the broker said.
Loss allocation structure, premium implications
Gallagher Specialty said that it did not see the P&I club core premium hardening significantly as a result of this claim – whether the limitation ultimately is successfully achieved or not. The first $10m of the claim will be retained by the holding club, subject to retention reinsurance. The next $20m will fall into pooling and anything exceeding this will fall on, sequentially, Hydra (as reinsurer of the next $70m of the pool, subject to a secondary club retention of $3.75m), Hydra (as reinsurer of the AAD) and the excess reinsurance market.
The impact of the claim on owners’ core premium will be little different to that of any other modest pool claim, said Gallagher Specialty, “and so, we believe that general increases in the autumn of 2024 should not be particularly influenced by this claim, and our projection across the market remains averaging at a 5% general increase (inflationary based) for the 2025-26 renewal”.
However, the impact on the cost of the group reinsurance charge passed on to members is at the moment more difficult to assess or determine. This charge includes two elements:
How will the clubs reflect the cost of Hydra’s involvement in the claim in this charge, and how will the open market reinsurers react? The answer to these two questions may be different, with one perhaps more nuanced than the other. “There may be some talk of a kneejerk reactions in the market, but it may be that the decision-makers will adopt a wait-and-see attitude”, said Gallagher Specialty.
Looking back to the Costa Concordia casualty in 2012 (a $1.5bn P&I casualty), the reinsurance market reacted with a sharp increase in 2013. This was due in part to the fact that the passenger operators were few and far between, in gross tonnage (gt) terms, compared to conventional blue water operators.
The reinsurance premium in 2012 versus what is paid to the market in 2024 has also changed significantly. The world fleet tonnage also increased by 54% (730m gt) between 2012 and 2024. “Therefore logic would imply that the pay back to the reinsurance market on a $2bn-$3bn claim will be much quicker. We expect to see some GXRI movement in reinsurance costs at the next renewal, but not necessarily as high as those seen, in the wake of the Costa Concordia casualty”, the broker said.
However, as we are at the early stage of the claim, Gallagher Specialty warned that this might not be the case in a consistent fashion. “Many separate elements define the composition of the charge for reinsurance and these elements will differ if the limitation is successful or not”, the broker said.
The pay out of the claim will be spread out over many years as the case continues to evolve. Pre-accident, Gallagher Specialty would have expected to see reinsurance rates drop again for the 2025-26 renewal, but the Dali incident could influence this expectation.
Finally, Gallagher Specialty noted that incidents of this kind of magnitude demonstrated why P&I insurance and the International Group Club system were so important in supporting the shipping industry as a whole during incidents with high potential exposures.
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