Germs, Shipping and Force Majeure

Germs, Shipping and Force Majeure

Feb 12th, 2020

A discussion on Germs, Shipping and Force Majeure seems appropriate given the corona virus epidemic evolution and our experience. Indeed clients have asked us to perform risk assessments and business interruption quantifications of harbors, wharves, and ships loader-unloader in many occasions.

Germs, Shipping and Force Majeure

 Germs, Shipping and Force Majeure

If we are looking to quantify business interruption of a shipping facility, we have to break the informational silo. Looking at categories of hazards one by one would limit the resulting understanding of the risk landscape. Indeed, cyber hazards, natural, and man-made (including sabotage, terrorism) hazards of various types require evaluation in a convergent way. They can hit the infrastructure, the logistic networks and, of course the ships. 

Now we are reading in the news that corona virus epidemic is shutting down Chinese ports. Let’s discuss at what point, if any, this will become a Force Majeure scenario. In addition, we will also look at the difference between “business as usual” hazard scenarios and “runaway” ones.

Epidemic and quarantine

The scenario of an epidemic creating business interruption is above the credibility threshold. It is indeed very credible and predictable insofar humanity has seen numerous epidemics. In addition, closing access to afflicted areas is a common and useful strategy.

Quarantine began in the night of time to contain lepers and plague, for example in Lyon and China, around the year 600. In 1348, Venice, it became a well-structured process, to protect coastal cities from plague. Ships arriving from infected ports waited at anchor for 40 days before landing. The practice is called quarantine from the Italian words quaranta giorni which mean 40 days.

With antibiotics and routine vaccinations, large-scale quarantines likelihood reduced significantly. However, today bioterrorism potential threats and diseases like SARS and now Corona Virus have resurrected this custom. In the case of Corona Virus we see quarantines deployed at scales not seen since quite a long time.

Framing the likelihood of a quarantine

 Actually, we can frame the likelihood rather easily. Although epidemic of a certain scale are quite common, likely between 1/20 and 1/50, we can estimate major ones with wide spread quarantines as follows. From a site gathering historic data we count ten occurrences world-wide in a period of roughly 400 years, leading to an estimate of 0.025 per year (2.5%), mostly in harbor cities and logistic/commerce/business hubs. We have excluded from our count two blatantly politically or racially cases.

Is quarantine a Force Majeure case?

Amazingly analyst oftentimes disregard quarantine, a rather predictable hazard as shown above because of the “information silos syndrome”.

Now, foreseeability is the facility to perceive, know in advance, or reasonably anticipate that damage or injury will probably ensue from acts or omissions. A foreseeable event or situation is one whose consequences can be known about or guessed before it happens.

Are the consequences of the predictable event of a large scale quarantine foreseeable? Can we foresee the damage generated by a (predicted) hazard hit based on present or future mitigation and policies/actions?

The answer is positive. We can foresee what a quarantine will generate by looking a Business Interruption and the interdependencies within the system and outside the system. The consequences will of course depend on the entity requiring the evaluation: is it a shipping company, the government of the afflicted area, etc.?

Like usual it would be misleading to evaluate consequences as “one number”. Multiple scenarios are necessary.

So, in conclusion: quarantine is not a Force Majeure case, unless it becomes extremely long and the consequences can be considered to be unforeseeable.

Usual and divergent hazards

“Usual” hazards, including their “usual extremes” are predictable and foreseeable with a relative narrow margin of uncertainty. That is of course provided interdependencies and systemic amplification are properly considered. Temperature, rains belong to this category including centennial, bi-centennial and “one in a thousand” extremes.

Divergent hazards are unpredictable insofar their frequency (at a given magnitude level) “explodes”, e.g. Second 1,000-Year Flood In Two Years or third 500-year’ flood in 3 years. An example of this are the storms in Houston

Their foreseeability may also reduce, as “wounded systems” are less robust and consequences may get amplified in unforeseeable ways. Think for example about massive fires leading then to large scale erosion, slopes failures etc. in case of rain.

Our risk assessments routinely include “usual” and divergent scenarios, oftentimes with multiple sub-scenarios to deal with climate change, political changes (tariffs), etc.

Closing remarks on Germs, Shipping and Force Majeure

Convergent risk assessments integrate areas that are significant to an organization, such as operational risk generated by various hazards or compliance, within a single framework. The goal is to provide a holistic view of risk for the organization. They eliminate informational siloes and foster a 360-view of the risk landscape surrounding the organization. This increased visibility, fosters the ability to manage sometimes competing goals and interests.

Germs, Shipping and Force Majeure offers an interesting platform to discuss important and very present issues.

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Category: Risk analysis, Risk management, Uncategorized

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