Anatomy Of A Shrimp Loss

Not all seafood insurance is the same

When it comes to protecting income and profits, many shrimp importers are quickly coming to realize that all seafood insurance is not the same, for temperature abuse losses.  Additionally, they are finding just how ineffective “refrigeration breakdown” coverage is when spoilage losses occur.  Moreover, shrimp importers are finding it difficult to prove whether they have coverage for a spoilage loss.  And with the ever-increasing popularity of IQF shrimp, there is greater potential for temperature abuse loss, due to the nature of IQF shrimp, contrasted with block frozen.  IQF shrimp are simply more vulnerable. 

A very important aspect as to why IQF shrimp is more vulnerable can be found in the actual transportation voyage.  Let’s look at a typical container shipment from Thailand to the USA and a resulting loss.

International Voyage History
The typical transit voyage from a shrimp processor in the interior of Thailand to New York and thereafter to a local area public warehouse takes as much as fifty-seven (57) days. 

2-days for shipper to stuff container
1-day for truck transport to outport
2-days awaiting and loading feeder vessel
7-day feeder voyage to link with mother vessel
11-days at terminal awaiting arrival of mother vessel
22-days ocean voyage to New York
11-days at NY awaiting release to consignee
1-day transport to local public warehouse

Domestic US storage & transit History
46-days at a local public warehouse
1-day transport to customer
3-days at customer before discovery of loss

Analysis of the Loss

In the case cited above, it took 106 days to discover  a temperature-abuse loss after the shrimp was loaded into the container in Thailand.  The most significant problem was determining where the loss occurred.  Additionally, this loss exhibited only minor damage.  The majority of these types of losses average about $40,000.  Most of the IQF shrimp exhibited varying degrees of temperature abuse.  Some of the cartons examined contained shrimp that, at first glance, was undamaged but after being removed from the carton, showed damaged glaze in the form of ice crystallization, clumping, and slight dehydration.

The shipment was vulnerable to temperature abuse under varying conditions at seven different points.

1) During container stuffing
2) Awaiting loading onto feeder vessel
3) Feeder vessel voyage to link with mother vessel
4) Terminal storage awaiting arrival of mother vessel
5) Ocean voyage to New York
6) Terminal storage at NY awaiting release to consignee
7) 46-days at a local public warehouse

Troubling facts in this case were as follows.  There were no temperature records available for (1), (2), (3), and (4) above.  Records might be made available in the future (several years) for (5) but only after much legal wrangling with the steamship company.  Temperature records were available during (6) and only partial records were available during (7).

An actual physical check of the temperature of the shrimp only took place upon arrival at the first warehouse in the US.  At the warehouse, the return air temperature on the refrigeration unit of the container was checked.  An infrared thermometer was used to measure the temperature of the load.  No deficiencies were reported by the warehouse.  The surveyor’s report said, “We have not been able to determine at what point in the chain of custody the temperature abuse occurred.  It is possible that the product was subjected to elevated temperatures prior to, or during the ocean voyage, or while in storage at the warehouse.”  Clearly, this statement is not encouraging. 

Another aspect of this loss was the fact that there were no temperature-recording devices placed in the container by the foreign exporter or the US importer.  These are excellent risk management tools but are currently eschewed by exporters and importers as too expensive.  Placing recorders in the container would have either showed that the loss occurred during transit from the exporter or, if not, leaving only two other possibilities—before shipment or after receipt of the shrimp by the first warehouse in the US.  Additionally, if the right temperature recorder was used, it would have divulged whether the loss occurred during storage in the warehouse.

Confronted with an unhappy customer and poor evidence of where the loss occurred or who was responsible, the US importer is faced with a troubling set of facts to both satisfy the customer and be made whole in the transaction. 

Given the circumstances, it is highly unlikely that the importer can make a case against the various carriers transporting the shrimp to the US because proof is required and proof is lacking.  Even if the case can be made against the US public warehouse, the best recovery would be $0.50/lb for the damaged goods—an unsatisfactory recovery.  At best, it will be a long time before the US importer collects anything from the logistical suppliers. 

The C & F value at the US warehouse of the container of shrimp was $101,260.  The selling price was $109,360.  Assuming the industry average of 8% gross earnings, mark-up came to $8,100.  The total value of the loss was $9,316.  The loss has stripped away all the gross earnings and part of the cost value of the shrimp. 

It can not be over-emphasized.  This was a minor temperature abuse loss with minor damage, involving small shrimp sizes.  

Insurance To The Rescue?
Maybe not!  Remember the surveyor’s comments.  He gave a whole range of possibilities of where the loss occurred from a pre-shipment condition to abuse in the public warehouse. 

In our first coverage analysis, let’s make the assumption that one has a traditional cargo policy issued to shrimp importers covering international transit, warehousing, and inland transit.  Such a policy provides limited temperature abuse coverage.

If you purchased traditional cargo insurance, you are not likely to be paid in this case.  Let’s look more closely.

1) Based on the evidence provided by the surveyor, there is no evidence that the loss occurred during any of the three policy segments.  This offers an opportunity for coverage denial by the insurer.

2) There are clean receipts or there is temperature documentation demonstrating that there was no temperature abuse in any of the coverage segments.  There is no proof to trigger coverage for temperature abuse. 

3) Moreover, traditional cargo insurance perils for shrimp include a “24 consecutive hour mechanical breakdown” clause.  From the evidence, there is no proof that there was a “mechanical breakdown.”  Even if there was such evidence, it would have to show that there was mechanical breakdown for 24 consecutive hours.  This is a typical case.  It is very difficult to get any recorded temperature evidence from the logistical suppliers, particularly if it makes them the culprit.  Obviously, this loss would be denied.  (See also, www.kscourts.org/ cal10/cases/2001/06/99-3393.htm.)  Moreover, the policyholder, rather than the insurer, has the burden to prove how and where the loss occurred.

Now, we will look at a number of coverage design permutations to see how they respond.

1) Some cargo policies, covering international transit, warehousing, and inland transit, have mechanical breakdown coverage without the 24-hour limitation.  This is not much help, since there is no evidence of mechanical breakdown here to trigger coverage.

2) Another cargo policy, in addition to mechanical breakdown, includes coverage for failure by persons to maintain proper temperature but only after such failure has lasted 24 or 12 consecutive hours.  Again, this is no help since there is no proof that the failure to maintain temperature was caused by persons and, even if there was proof of that, there is no proof that the temperature abuse lasted for 24/12 consecutive hours. 

It should be said that an expert witness, perhaps, might be able to establish that, based on the extent of damage, the temperature abuse lasted for excess of 24/12 consecutive hours and imply that, in the absence of proof that there was mechanical breakdown, the loss was caused by a person failing to maintain proper temperature.  One would have to go to the expense of hiring an expert witness and hope that the aforementioned conditions could be legally proved.

3) Another cargo policy issued to shrimp importers does provide the broad perils necessary to cover this loss but for the following conditions.  It only provides coverage during international transit.  Therefore, a shrimp importer would have to have one or more additional dedicated policies to cover the domestic warehouse or domestic inland transit exposures.  Additionally, this policy also has a unique coverage caveat wherein international transit coverage ceases 5-days after discharge from the overseas vessel.  The need for multiple non-harmonized policies (coverage is not identical from one policy to another) to provide coverage all the way to the customer’s warehouse and the truncation of international transit coverage at 5-days after discharge create conditions that would result in a coverage denial, especially in this case, due to the paucity of proof as to where the temperature abuse occurred.  It sets up a classic finger-pointing exercise between insurers leaving you with no coverage.

4) The worst of the insurance coverage permutations is as follows:  International cargo coverage with a 24 consecutive hour mechanical breakdown clause provided by one insurer; Warehouse coverage, using property and boiler & machinery policies, by a another insurer (with neither policy providing temperature abuse coverage); Inland Transit coverage, included under the warehouse policy, that does not provide temperature abuse coverage, either. 
Not only is the coverage in this permutation provided in separate policies but also the exclusions, conditions, limitations, and warranties make it exceedingly difficult for a business executive to comprehend.  Of course, under the circumstances of our example, there would be no coverage provided by these policies, not to mention that, like (3) above, this situation sets up a classic finger-pointing exercise between insurers.

Are There Solutions?

Of course there are.  The rapid changes in the shrimp importing industry along with intense price scrutiny have brought about the need to focus on the details of insurance coverage to ensure that all the coverage loopholes are closed and that coverage accurately responds to the actual conditions of loss exposure. 

For shrimp importers, who are, now, even less able to afford an uninsured loss, purchasing the RIGHT insurance coverage is paramount.  It is coverage design that gives you peace of mind. 

First, one should understand the coverage problems to be avoided.  An analysis of the coverage pitfalls in all the policy types available for shrimp has been done and can be obtained by requesting an e-mail copy of  “Shrimp – Identification of Coverage Deficiencies or Uninsured Risks” from CRC.

Second, the causes of temperature abuse should be enumerated as a checklist to ensure that the coverage design eliminates  those coverage gaps.  Temperature abuse causes of loss can be obtained by requesting an e-mail copy of “Shrimp-Temperature Abuse Causes of Loss” from CRC.

Third, all of the “escape clauses” (conditions that must be met for coverage to trigger) used by insurers should be eliminated.  Request an e-mail copy of “Shrimp—Claim Denials - Escape Clauses” from CRC.

The easy solution: CRC has employed its over thirty years of seafood industry experience to provide tailored solutions that meet or exceed your expectations and give you peace of mind.  The loss described herein would have been covered by the broad perils insured under CRC’s proprietary seafood insurance policy.

Capitol Risk Concepts, Ltd.  One Water Street, Suite 230  White Plains, NY 10601
Tel: 212-868-8000 (NYC) or 914-946-7161  Fax: 914-683-8048  E-mail: john.keane@crclimited.com