Strike or lockout = loss. (Special Report: Marine/Aviation).
There may not be much of a difference in whether the labor dispute with the West Coast dockworkers is defined as a strike or a lockout. Insurance isn't likely to cover losses--which are estimated to be as much as $1 billion a day for the 10-day lockout--as a result of that dispute.
Despite increasing losses associated with catastrophic weather events, the insurance industry has not systematically incorporated global warming and climate change into its risk models. Insurers could reduce risks by investing in the renewable energy market.
Late in September, a work stoppage by West Coast port workers culminated stalled contract negotiations that had stretched out for five months. The Pacific Maritime Association (PMA), which represents employers, locked about 10,500 union longshoremen out of port facilities, alleging the lockout was in response to widespread work slowdowns by members of The International Longshore & Warehouse Union. The lockout ultimately lasted 10 days, ending only after President Bush invoked the Taft-Hartley Act to intervene, citing the need to prevent the lockout from potentially damaging an already fragile U.S. economy. A court-ordered truce, it was reported, would keep the ports open and goods moving at least through the holiday shopping season, and ideally allow both sides enough time to resolve their differences.
Yet despite the fact that the action was addressed relatively quickly, the economic losses resulting from the lockout were estimated to have cost the American economy in excess of $1 billion per day. The lockout, which closed about 30 ports stretching from San Diego to Seattle, left hundreds of vessels stranded with containers full of goods, while the recipients of those goods were likewise compelled to begin a waiting game of their own. Truckers and trains also sat idle, unable to transport the goods sitting on ships that were so close--yet frustratingly so far. Inventory sat in a virtual limbo, unable to move in either direction. Soon, perishable goods began to spoil, while other items, that should have been sitting on shelves for the public to buy, remained instead in dark container holds. And manufacturers, lacking certain key parts, began to slow their production lines down. Three work shifts were cut to two-and the domino effect escalated.
Ron Thornton, president and CEO, Inland Marine Underwriters Association, New York, says problems were compounded by an "evolution in inventory management"--the concept of "just in time delivery" adopted by growing numbers of businesses that set extremely tight delivery dates, thereby reducing their need to store large amounts of inventory. Additionally, as vessels began to back up, efforts to divert them were largely unsuccessful as port facilities both north and south of the U.S. were unable to accommodate the influx. A physical hurdle also slowed movement of merchandise as some of the larger vessels couldn't pass through the Panama canal.
With each passing day, recalls Thornton, came increasing economic and industry problems, and the potential losses resulting from these developments first appeared as "a blip on the radar screen" that insurers began to watch.
Anecdotal evidence confirming the anticipated economic fallout from the lockout likewise began to emerge. There was the joint GM-Toyota plant in California that shut down its truck line for lack of parts. There was the Greek specialty grocery store owner pointing to empty shelves, lamenting the impact of delayed inventory on his business. Shelves were also looking thin in Hawaii, which depends heavily on imports flowing from U.S. west-coast ports. Reports from that state indicated residents were already panicking, beginning to hoard nonperishable foods.
Additionally, several national retail clothing chains, whose goods come from Asia, announced that inventories were dangerously low. And one major toy company cautioned that even though the lockout was over, it might not be able to play catchup in time to shelve stores by the November 28 Thanksgiving holiday, potentially missing out on a selling season accounting for 45 percent of its sales.
Surely, one would assume a huge insurance exposure to reside directly in the midst of all that chaos. Yet the insurance industry has remained surprisingly at ease--keeping an eye on the radar screen but not particularly alarmed by it. In one of those rare instances that has seemed to lift the proverbial albatross off from the shoulders of the insurance industry--disaster is not likely to translate into the widespread payout of insurance claim dollars. Why? Because the act that precipitated all of the economic turmoil was glaringly uninsurable. A lockout, say insurers, is an intentional act--not a covered peril. And in the absence of a covered peril to trigger coverage--no coverage exists.
"While there may be some special coverages (that will be triggered), these will have a very small relationship to the insurance industry," predicts Matt Mosher, group vice president, property/casualty ratings, at the insurance company rating organization A.M. Best, Qldwick, N.J. According to Mosher, "our members have not expressed much concern. This event is not viewed as exerting a material impact on the overall (insurance) picture."
Nicole Mahrt, public relations director, Western Region, for the American Insurance Association (MA), likewise believes that business interruption--the most obvious coverage to be considered in a lockout scenario--is not likely to be triggered for the "cookie cutter" commercial policies, most of which do not cover losses resulting from n strike. The fact that the action was not even technically a strike--but a "lockout," could muddy the waters a bit but is not likely to significantly change the coverage question. Both events, notes Mahrt, are deliberate actions and insurers don't typically cover losses arising out of intentional acts. Equally important, she notes, is that business interruption is generally triggered by physical damage resulting from a covered peril. In the lockout scenario that unfolded on the west coast, there was neither.
Mahrt predicts that agents and brokers will likely receive calls from some concerned commercial clients, and encourages insureds to review their policies regarding the coverage issue. But the end result for many of these insureds, she says, is that their insurance will not respond. Adds Mahrt: "It's a very unique circumstance, but there is no covered peril here."
Walter M. Kramer, president of the New York city-based American Institute of Marine Underwriters (AIMU) agrees. "To the best of my knowledge, there are no projected insurance losses due to this event," wrote Kramer in a statement responding to inquiries regarding the coverage question. He outlined the following key points in his written response. First, that losses due to strikes and other similar events are not covered by basic ocean marine insurance policies, and second, that cargo insurance is property insurance and, for the most part, only responds when the goods are physically damaged or lost. Losses due to delay from any cause, such as a strike or lockout, are almost always excluded.
"Obviously," continued Kramer, "when goods spend more time still 'in transit,' the greater the exposure to loss or damage. Transit interrupted by a strike would not necessarily expose a shipment of, say auto parts, to greater losses, but could cause serious problems for commodities such as bananas." Yet Kramer notes that even with regard to the latter scenario in which spoilage occurred and insurance had been obtained, losses due to delay may still not be covered.
"Absent in this event is a trigger," adds Robert P. Hartwig, chief economist, at the New York City-based Insurance Information Institute. For while the lockout will unquestionably result in economic loss to shippers and everyone along the distribution chain, the origin of the loss is, as Hartwig and others have pointed out, "an intentional cessation of activity caused by n labor dispute."
Hartwig also points out that while exceptions exist, the insurance industry has traditionally stayed away from strike coverages--particularly within industries, such as longshore operations, that have had a history of turbulent labor relations. Some also view strike insurance as potentially working against the public good, by reducing the incentive for parties involved in a labor dispute to settle.
Yet that concern, notes Richard S. Betterley, president of Sterling, Mass.-based Betterley Risk Consultants, doesn't pertain to the innocent bystanders to labor disputes--the third parties who suffer financially because their merchandise is delayed through no fault of their own. One possible--and potentially positive--outcome of the lockout, predicts Betterley, could be a heightened focus on the feasibility of developing and offering third-party strike insurance on a more widespread basis.
Some speculate about pockets of potential exposures that may manifest over time. For example, some experts believe strikes, lockouts, or even work slowdowns create a situation ripe for increased workers' compensation claims, when some employees determine it's better to collect workers' comp payments, than to suffer without a paycheck while a labor dispute drags on.
Clark Sietz, executive director, Professional Insurance Agents of Washington/Alaska, with headquarters in Vancouver, Washington, also suggests that insurers may be brought into the fray via breach of contract litigation, which is a possible by-product of the lockout. While he says insurance contracts might also contain strike-related exclusions addressing such litigation, a possibility still exists that "some insurance companies could end up defending or paying (breach of contract) claims."
Additionally, specialty coverage exists that will address losses resulting from delayed deliveries. Spoilage coverage, responding to products perishing no matter what the cause--is available and has no doubt been acquired by some insureds. Likewise, strike insurance is available through specialty companies and may also have been carried by some of the insureds impacted by the lockout. Yet experts point out that these products, which are highly specialized and manuscripted coverages, do not represent a significant portion of the marketplace and shouldn't exert any noticeable impact on the insurance industry from a loss perspective.
Other Strike Impacts
Yet looking beyond the insurance industry, there are many along the distribution chain likely to be financially impacted by the lockout. Lisa Hauser, senior vice president and practice leader for supply chain risk consulting at Marsh, in New York, believes the domino effect resulting from the 10-day lockout is likely to touch many people, and for some time to come. She stresses that the losses associated with the lockout aren't connected solely to the immediate delays in "just getting goods off the dock," but will arise from many other subsequent developments.
She cites, for example, costs associated with: disposal of goods that have perished; restocking perishable goods earlier than intended because delivery delays have shortened their "expiration windows," transporting goods that were diverted to other ports further away from their final destination; delivery delays impacting not only the goods that weren't unloaded over the 10-day period, but merchandise that was subsequently delayed as backlogs intensified; loss of customers who may have looked to alternative sources for undelivered goods; loss of advertising dollars for marketing campaigns that promoted products which weren't delivered; and loss to employees and local economies impacted by the shutdown of manufacturing facilities and other businesses, even if only temporarily. Additionally, reports indicated that weeks after the lockout was officially ended, productivity remained down at several major ports and the backlog of freight had not been significantly reduced--a lingering situation likely to exacerbat e many of the problems Hauser identifies.
While Hauser says the economic impact on the distribution channel resulting from the lockout "is very hard to quantify," she cautions it will be major. Yet it is the consumer, she notes, and who will ultimately bear the financial burden, as costs associated with the labor dispute are passed along from one link of the distribution chain to the next.
Barbara Morris can be reached at firstname.lastname@example.org net.
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|Author:||Morris, Barbara A.|
|Publication:||Risk & Insurance|
|Date:||Dec 1, 2002|
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