The New Rules of Maritime Risk Management

As the conflict between the United States and Iran continues its seemingly never-ending dance between smolder and blaze, the prolonged closure of the Strait of Hormuz has captured the attention of maritime businesses seeking relief from the current turmoil and insight into the next geopolitical upheaval. Assuming current trends continue, international relations also appear to be moving toward more protectionist, nation-focused trade policies and away from the previous paradigm of globalism. 

Maritime businesses and insurers should familiarize themselves with the world’s major chokepoints and prepare for potential disruptions or blockages.

The U.S. Energy Information Administration defines maritime chokepoints as “narrow channels along widely used global sea routes.” The Strait of Hormuz, a narrow passage between Iran and the Omani Musandam Peninsula, has caused considerable and intractable economic hardship because it is among a small group of major chokepoints with no practical alternative route.

The second Trump administration has taken steps to reestablish U.S. influence over the Panama Canal, North America’s infamous manmade chokepoint. Questions have also emerged about the stability of the Strait of Gibraltar, the passage separating Spain and Morocco that connects the Atlantic Ocean and the Mediterranean Sea. In Southeast Asia, the Straits of Malacca and Taiwan have come under increasing tension as the U.S., China, India, and other powers compete in industries such as semiconductors, artificial intelligence, petrochemicals, natural gas, and automobiles.

Maritime chokepoints vary in their capacity to disrupt maritime trade. A blockage of the Strait of Malacca, similar to the disruption affecting the Strait of Hormuz, would have serious economic consequences. However, vessels could still reach their destinations by taking a longer route around the corridor separating Malaysia and northern Indonesia. Such a disruption would increase freight costs, voyage times, and exposure to other perils at sea.

Determining which aspects of marine operations depend on a maritime chokepoint allows businesses to assess operational and logistical risks proactively. Planning for bottleneck disruptions requires evaluating a business’s sensitivity to delays and the extent to which its operations and growth depend on an uninterrupted chokepoint. Because maritime chokepoints are not a new phenomenon, risk management should center on proactive planning rather than reactive measures.

National and International Sanctions

The current international trade environment illustrates the need for maritime businesses to monitor relevant sanctions and implement effective compliance and risk-management procedures.

Maritime businesses must keep abreast of the evolving sanction regimes affecting each major global maritime region. In the U.S., the Treasury Department’s Office of Foreign Assets Control (OFAC) administers and enforces certain countries, individuals, entities, vessels, and activities. The European Union similarly imposes sanctions involving individuals, vessels, and countries.

Compliance with these multifaceted authorities cannot be relegated to a quick review or checklist item. Because sanctions are issued, modified, and updated rapidly, businesses need procedures that allow them to respond quickly to changes.

Given the number of sanctioned individuals, entities, vessels, cargos, and countries, maritime businesses should understand both longstanding restrictions and recent developments. Guidance reviewed even a few weeks before a transaction may no longer be current. This can create exposure for maritime businesses and insurers involved in transactions with newly sanctioned parties, insuring cargoes prohibited at a port of call, or relying on exemptions that no longer apply. Legal and operational teams should therefore work together to conduct sanctions due diligence throughout a transaction.  

Exposure Assessment, Analysis, and Adaptation

Maritime Businesses. Maritime businesses face distinct challenges that require dynamic problem-solving and risk-management solutions. Chokepoint disruptions and international sanctions can leave corporate executives, in-house counsel, and insurance directors unsure of the best next step.  

There is no one-size-fits-all solution. Each company must assess its operational capacity, strategic alternatives, growth plans, risk tolerance, and ability to absorb higher costs or supply disruptions. Businesses should document these assessments and work closely with their legal departments to evaluate current business projections and develop strategies for potential disruptions.

For chokepoints, the goal is not to maximize resilience against every potential risk, but, as the Boston Consulting Group explains in its report, “Maritime Chokepoints: Five Lessons from the Strait of Hormuz,” to strike the “right balance between risk and cost.” Maritime businesses should consider how blockages, delays, and transit tolls could affect their ability to operate. Executives should also understand the cost of rerouting vessels and identify viable opportunities to diversify their operations.
Given the uncertainty surrounding the world’s major chokepoints, maritime risk management should include:

1. Clearly disclosing relevant chokepoint risks to current and prospective investors, members, partners, and customers;
2. Revisiting standard contract language to address potentially imbalanced terms established before the current economic and political climate;
3. Assessing how a disruption to a particular chokepoint could affect a business’s operations and viability.
   
   

Insurance Analysis. Marine insurance requires the evaluation of complex and uncertain risks. Insurers must take care not to provide coverage to sanctioned individuals or entities designated under applicable sanctions regimes. Providing insurance to sanctioned party could result in fines, legal penalties, criminal charges, or the blocking of property and future transactions. Insurers must also monitor whether an insured is engaged in conduct or transactions that may run afoul of applicable sanctions.

An insurer’s risk-assessment process should bring together its coverage, underwriting, claims, and legal teams to evaluate a particular business or transaction. This coordinated approach can help ensure that the underlying facts, potential coverage, insured entities, and risk factors comply with applicable sanctions regulations. Ongoing assessment of both the insurer’s and insured’s compliance is essential.

Insurers should also request information about whether a maritime business has considered its ability to operate following a key chokepoint disruption. They should clearly define coverage prerequisites, coverage exclusions, and assess how heavily the business depends on uninterrupted access to a particular route. Reviewing a business’s sanctions compliance program and contingency planning can provide a more complete picture of the risks being underwritten.

Conclusion

Maritime chokepoints and sanctions compliance present different challenges that require distinct solutions. Chokepoints are fixed locations with known constraints that may remain manageable until a disruption occurs. Sanctions, by contrast, are constantly changing and require businesses to respond quickly to new rules and restrictions. Sanctions may shift with political developments, but like the ebb and flow of the tides, maritime bottlenecks remain an enduring feature of global trade.

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Disclaimer: This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create an attorney-client relationship between Galloway and any recipient. Recipients should consult with legal counsel before taking any actions based on the information contained within this material, which may be considered attorney advertising in some jurisdictions.