Taking Back Control

Getting to the Root of Breakbulk Cargo Claims

By David Whitehouse

Routine insurance claims for alleged shortages in breakbulk cargoes of bagged rice, flour and sugar in West Africa show the need for charterers to take a more active role in showing that shipments are accurately tallied.
Les Rice is an ex-mariner turned consultant to protection and indemnity clubs and cargo insurers. He investigates insurance claims that have been made against carriers and, in major cases, serves as an expert court witness.

Rice has investigated 268 major claims on bagged rice in the last 36 years. Major cases that he has worked on include a claim on a bagged rice cargo for US$42 million in Benin in 2008 and a claim for US$22 million in Liberia in 2015. As he was interviewed for this article, he had several files on his desk relating to recent claims on bagged rice in excess of US$1 million, all relating to cargoes shipped from Asia to West Africa.

The basic problem, he said, is that receivers, shipowners and/or charterers are all carrying out their own separate tallies of shipment quantities. These tallies, he argues, are mostly incompetently made and unreliable. On-the-ground investigation shows that bags are usually not even counted, while damage to bags through moisture or chemicals is also not properly measured, he said.

“The whole point of a tally is that the bags are counted,” but rates for doing the work are so poor that there is no incentive to do it properly, he said. Tally figures are often decided before a ship is unloaded, and at some West African ports there is coercion to undercount the cargo. Agents and insurance company representatives, he said, get a slice of the pie when customs services impose a levy for shortage. He has surveyors openly asking: “Where is my customs fine?”

John Dalby, who founded Maritime Risk Management in 1986 and is based in Sierra Leone, is an expert in loss control and fraud prevention in oil and dry bulk cargoes. He argues that “there is an accepted degree of loss” that is usually resolved “in a gentlemanly way.” Dalby sees a problem in the use of ‘allegedly’ independent surveyors by underwriters, who build in a percentage for loss in transit – this loss can be deliberate, or the result of inexperienced tallying, he said.

False Economy

Marine insurance provider Skuld gives the example of a cargo of bagged rice shipped from Ko Sichang, Thailand, to Abidjan, Ivory Coast. A shortage of 8,922 bags was recorded on completion of discharge, leading to an insurance claim of US$437,500. The local agent responsible for payment of the fine to customs demanded a guarantee for his costs before allowing the vessel to leave. No pre-loading survey had been conducted, so the owners were unable to prove the quantity or condition of the rice which had been loaded. They therefore had no grounds to defend the shortage claim.

The claims that end up being paid by insurers are “essentially a discount of the sale price,” Rice said. “Insurance has been used as a way of getting a discount. Some people see insurers as an ATM machine.”

Many insurers, he argues, take the path of least resistance by making a counteroffer to get the claim down. If they can show that the claim has been reduced, it’s an easy way of appearing to have performed well in a “tick-box claims culture.”

“Insurers try to keep the costs down,” he said. “The cheapest option is to go to a guy who doesn’t even go to the ship.”

Rice argues that coordination between all parties is needed to ensure consistency. In 2019, he was able to achieve that for a major rice trading company shipping rice to West Africa. He drew up a protocol under which tallies were agreed on a hold-by-hold basis, with discrepancies being discussed and reconciled. He was able to implement the protocol despite “huge resistance” by refusing to allow the ship to unload until the cargo inventory had been agreed by the receiver.

“It’s doable, but there has to be the will,” he said. “It all comes down to cooperation.” The charterer has to be the driving force which brings that cooperation about.

Taking Back Control

Philip Norwood, senior underwriting executive at The Lloyd’s Market Association in London, gave a cautious welcome to Rice’s idea. West Africa, he said, is not the only region where the problem arises. Tallies for shipments to Japan can vary widely. A shipmaster should be doing his own checks rather than relying on others, and shared tallies “would be an extra precaution,” he said. The proposal would enable discrepancies to be localized and show that they had occurred at destination. “It pins down the point of the problem. Anything that aims at certainty would avoid a number of losses.”

However, agreeing on the inventory wouldn’t eliminate all risk, Norwood said – particularly in the hands of customs services who, on the ground, enjoy “a degree of omnipotence.” That’s an obstacle that isn’t going away. According to P&I Club Correspondents Budd Group, Senegalese customs in 2019 started appointing their own surveyors to check the quantities of cargo and levy fines. This simply reflects a strict interpretation of the Senegalese Customs Code, Budd Group said. The group even gives a case where an excess of cargo discharged resulted in a fine. Budd Group advises denying customs boarding before the tally declaration has been completed and checked and to delay lowering the gangplank if necessary.

The receivers, Rice said, are the key to ending customs omnipotence. Insurers in London and New York, who face pressure from brokers to settle the claims, have to learn to manage the system, Rice argued. In West Africa, “the cargo receivers control what happens on the ground.

“Insurers are driving the claims by paying out” on the basis of “toilet paper reports,” Rice said. He can only recall ever seeing one western lawyer in a West African port in the last 15 years. “They rely on local firms and accept everything at face value.”  

David Whitehouse, a freelance journalist in Paris, is business and finance editor at The Africa Report.

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