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What are the COVID-19 vaccine risks for air cargo operators?

Aerospace
COVID 19 Coronavirus

March 16, 2021

COVID-19 vaccine distribution is an opportunity for airlines, but are there additional risks for carriers and their supply chain?

COVID-19 vaccine distribution may be an exciting new opportunity for cash-strapped airlines. But carriers and their supply chain partners should work with insurers to ensure any policies are suited to the new risks, even if all parties are experienced in the transport of pharmaceuticals.

The sheer size of the logistics operation now required to deliver enough vaccine for our planet’s 7.8 billion people, scattered across some of its most remote regions, is daunting. Indeed, the scale of the challenge is unprecedented.

The International Air Transport Association (IATA) suggested in October that the equivalent of 8,000 B747Fs (each capable of carrying 100 tonnes) would be needed to deliver enough vaccines for the global

The International Air Transport Association (IATA) suggested in October that the equivalent of 8,000 B747Fs (each capable of carrying 100 tonnes) would be needed to deliver enough vaccines for the global population. Others believe that the entire global fleet may need to be involved in some capacity, including a significant number of ground-handlers who may lack experience in the specialist ‘cold’ supply chains that typically move most temperature-sensitive shipments.

Traditionally, global pharma shipments that are transported by air to the end-user destination are in the minority, but the ‘speed-to-market’ requirements of the COVID vaccine is expected to put unprecedented strain on the supply chain, including airports, ground-handlers and freight forwarders.

Three of the vaccines’ biggest manufacturers - AstraZeneca, Pfizer and Moderna – are estimated to have the collective capacity to produce 5.3 billion doses by the end of 2021, enough for approximately 40% of the world’s population

Three of the vaccines’ biggest manufacturers - AstraZeneca, Pfizer and Moderna – are estimated to have the collective capacity to produce 5.3 billion doses by the end of 2021, enough for approximately 40% of the world’s population (acquiring immunity will require two doses for some vaccines).

For air-transport providers and their partners in the supply chain, the pharmaceutical industry has always required specialist infrastructure and knowledge; at a minimum temperature-controlled environments (Pfizer’s vaccine must be stored at -70°C, for example) and a secure chain of transport are required.

This has kept the greatest proportion of the market in the capable hands of a small number of experienced ‘cold’ cargo carriers. But pressure to deliver the vaccine as quickly and widely as possible is expected to require new, less-experienced operators to assist in the distribution, adding a series of new supply-chain risks.

The logistical challenges will not be the only liabilities of which carriers and insurers need to be wary. Shipment values are expected to be significantly higher than the standard international shipments covered by insurers in accordance with the limits of the Montreal Convention (‘the Convention’). The Convention limits damage-related cover for these consignments to ’22 Special Drawing Rights’ (SDR) per kilogram, or a value equivalent to about US$30-32.

Exactly how the vaccines will be valued by the market is unclear but the possibilities range from the units’ manufactured costs to their retail costs

Exactly how the vaccines will be valued by the market is unclear but the possibilities range from the units’ manufactured costs to their retail costs. The latter has been estimated by some manufacturers at $20-$25 per vaccine (which may double if two doses are required); given that the vaccines are comparatively lightweight cargo, this would see shipment liabilities far exceed the cover available under the limits of the Convention.

Most air carriers transport freight under the provisions set out in the Convention. But those limitations can be broken if a claimant is able to prove the carrier has acted recklessly, and with knowledge that their actions are likely to lead to the loss or damage of the cargo.

In such circumstances, claimants can seek an indemnity based on their actual loss, which could be the current market value of the goods. The Convention also allows for freight to be transported under Special Declarations of Value (SDV), which are often the market value of goods; however, most carriers prefer not to offer SDVs in order to limit their legal exposure and that of their insurers.

A carrier’s decision to go the SDV route should be discussed with insurers, as a typical policy may not cover third-party claims that exceed the Convention’s standard limits. In short, insurers and their agents should be made aware of any material changes in risk.

It remains to be seen if parties contracting to transport the new vaccines will lean on the carriers to move them under SDVs. In the interim, in the event of loss or damage to vaccines, insurers will anticipate having to offer compensation based on weight limits.

IATA and the World Health Organization both believe it is likely that as much as 25% of the vaccines will be ruined every year due to poor temperature control

IATA and the World Health Organization both believe it is likely that as much as 25% of the vaccines will be ruined every year due to poor temperature control, a proportion that could greatly increase liability for all partners.

The practise of transporting pharmaceuticals by air is not new to aviation; so the insurance market has solutions readily available. However, the pandemic has the potential to gather a perfect storm of risk.

Vaccine distribution will spur demand for cargo capacity at a time when a significant proportion of international cargo capacity is sitting idle; IATA latest numbers indicate capacity on international routes in October 2020 was down about 25% year on year.

Given the anticipated time constraints on delivery for the vaccine, this may see the responsibility for distribution migrate into the hands of less experienced cold-chain handlers (with less suitable equipment); there will also be increased demand for distribution to remote areas with which even experienced handlers are unfamiliar.

Also, with many skilled professionals on furlough as the aviation industry looks to cut costs, pilots, ground-handlers and cold chain expertise may be in short supply.

There have also been early indications that vaccine distributors could be targeted by cyber attacks.

With risks and liability expected to rise throughout the supply chain, airlines hoping to capitalise on vaccine distribution should be prepared to discuss material changes in risk and to answer a comprehensive set of questions from their insurers/brokers, which may include:

  • What is the insured’s experience in transporting pharmaceutical products?
  • Will the insured be responsible for the temporary storage of the vaccine (under the airway bill) at the airport location prior to loading, or at the destination airport after unloading?
  • Will the insured be responsible for the loading and unloading of the aircraft? If not, is the contract with the ground handler subject to IATA’s Standard Ground Handling Agreement?
  • Will the insured be responsible for maintaining the temperature of the vaccine while in transit or will it be in containers that maintain and monitor the temperature?
  • What is the total value of the vaccine to be transported and what is the maximum value of the vaccine on any one flight and at any one location?
  • How is this value calculated – cost price; sale price; replacement value, etc.?
  • Is there a requirement for declared value cargo, or will the Convention limits of 22 SDR per kilogram apply?
  • Does the policy allow for declared value cargo and is there an automatic premium charge?
  • Will the insured only have one flight per vaccine consignment, or will two or more flights be required to reach its location?
  • Will the insured benefit from any waivers of ‘subrogation’ or ‘hold harmless’ provisions?
  • Does the contract exclude consequential loss (by third parties)?
  • Does the insured buy specific cargo ‘all risks’ insurance?
  • Will there be temperature and humidity monitoring and a data-logging system for the duration of the transit?

Insurers and their brokers would be well counselled to begin working closely with their airline and ground-handling clients to fully review their liability exposures arising out of the transportation of the vaccines, from operational and contractual perspectives, to ensure their insurance policies respond accordingly.

Contacts

Philip Clayton
Head of Claim Advocacy, Aerospace

Andy Bowman
Associate Director & Claims Advocate, Aerospace

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