During the COVID-19 pandemic, the global shipping industry encountered several challenges. Port congestion was a major issue as delays were experienced during loading and unloading due to reduced workforce and health protocols. Container shortages also occurred as available units were stuck in locations where they were not needed, leading to imbalances in supply and demand. Additionally, logistical challenges emerged due to restrictions on movement, leading to disruptions in the transportation of goods and impacting the overall efficiency of the supply chain. These challenges collectively contributed to delays as well as increased costs for shippers and buyers.
As a result of these disruptions, a particular pain point for shippers was issues with demurrage and detention (D&D) practices. Demurrage and detention are terms commonly used in the shipping and logistics industry. Demurrage refers to the charges applied when a container is not picked up from the port or terminal within the agreed free time. These charges are meant to compensate for the use of the port or terminal facilities beyond the allocated time.
On the other hand, detention refers to the charges incurred when a container is not returned to the shipping line or container owner within the agreed free time. These charges are meant to compensate for the use of the container beyond the allocated time. Both demurrage and detention practices are used to encourage efficient use of port, terminal, and container resources and to prevent unnecessary delays in the shipping and logistics process.
The pandemic-related disruptions made it difficult for shippers and cargo owners to retrieve containers from congested ports within the standard free time allowed, leading to an increase in demurrage charges. Similarly, delays in returning containers due to various pandemic-related factors also resulted in higher detention charges.
Beyond their control
Overall, port congestion created a contentious mess, a situation beyond anyone’s control. Certainly, many shippers felt that, especially as far as D&D charges were concerned. Their containers were stuck in place. Even so, some transportation providers and/or terminals applied a demurrage and detention fines. Docks and terminals levying these charges argue that they are not applied arbitrarily but rather to offset costs associated with delays and capacity constraints. Conversely, shippers contend charges were not fair, reasonable or commensurate with the supply chain challenges. Complaints were made by shippers stating they were charged for not collecting their containers, but they were unable to access the terminals or book a slot to make a pick up.
The uptick in demurrage and detention charges prompted regulatory bodies, including the Federal Maritime Commission (FMC), and industry stakeholders to consider potential reforms to ensure fair and reasonable practices during such exceptional circumstances.
The result was the Ocean Shipping Reform Act (OSRA), signed into law by President Biden on June 16, 2022. This bipartisan legislation is intended to provide relief to U.S. importers, exporters, freight carriers, port operators and other companies experiencing sharp spikes in shipping costs and supply chain disruptions since the beginning of the COVID-19 pandemic.
Part of its’ reforms are focused on the need for consistency and reasonableness in the application of demurrage and detention charges. It requires carriers and terminal operators to consider certain factors, such as weather-related events, port congestion, and other circumstances beyond the control of the shipper, when assessing these charges. This provision’s intent is to prevent the imposition of unfair penalties on shippers for events that are outside of their control, thereby promoting a more equitable and balanced approach to demurrage and detention practices.
OSRA required the FMC to issue interpretive rules regarding what constitutes "just and reasonable" practices with respect to detention and demurrage. It also aimed to enhance the FMC's oversight and enforcement authority in relation to these charges. In February 2024, the FMC released for D&D charges. The final rule established new requirements for how common carriers and marine terminal operators must bill for demurrage and detention charges, providing clarity on who can be billed, within what timeframe, and the process for disputing bills.
In addition to promoting transparency and reasonableness, it also included provisions aimed at addressing disputes related to D&D charges, establishing a process for shippers and other parties to seek recourse in cases where they believe that they have been unfairly charged or treated. In June 2024, what may be the largest complaint to date with the FMC claiming some 96,000 “erroneous” D&D charges.
Impact on cargo insurance
Ocean cargo insurance typically covers the risk of physical loss or damage to the cargo from an external peril but it may not automatically cover detention and demurrage charges without a physical damage coverage trigger. Delays in shipping are usually addressed through separate contractual arrangements between the parties involved in the shipment, such as the carrier, shipper, and consignee. That being said, cargo that is delayed or held at a port increases the risk of loss or damage.
Efficient management of D&D can help mitigate potential financial losses and minimize the impact on cargo insurance claims. Effective logistics planning and proactive measures to avoid unnecessary delays can contribute to reducing the risk of incurring detention and demurrage charges. This ultimately impacts the overall risk profile and potential insurance costs for the cargo owner.
Some cargo insurance policies, however, may include extensions or provisions to cover such additional costs resulting from delays. It's important for cargo owners to review their insurance policies to understand the extent of coverage for detention and demurrage charges.
A win for cargo insurers too
The passage of the Shipping Reform Act of 2022 also has its benefits for cargo insurers. As the act aims to modernize and improve the efficiency of the shipping industry, it also included provisions to enhance safety and security measures within the shipping industry, reducing the risk of cargo loss or damage. This could ultimately lead to fewer insurance claims and lower insurance premiums for cargo insurers.
The act also addressed regulatory and compliance issues within the shipping sector, providing more clarity and consistency in the legal framework.
Not only did the Shipping Reform Act of 2022 provide a more equitable operating environment for shippers, but it also provided a more structured and secure environment for cargo insurers to operate in, thereby contributing to a more stable and favorable business landscape for both parties.
Final thoughts
Overall, the U.S. Shipping Act of 2022 represents a significant step towards reforming D&D practices and regulations in the U.S. By promoting transparency, reasonableness, and dispute resolution mechanisms, the act aims to create a more balanced and fairer framework for the assessment and application of demurrage and detention charges. These changes have the potential to benefit shippers, carriers, and other stakeholders, including cargo insurers, by reducing costs, improving operational efficiencies, and fostering a more collaborative and sustainable shipping industry.
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