While the over dimensional crowd gets to post really cool pictures and stories of large project freight moves, I get to talk about cargo insurance. It can be compared to a CPA following a firefighter on career day at their kid’s grade school. It’s pretty hard to sell good finance skills when compared to running into burning buildings and driving giant red trucks at high speeds. Although it’s a very well-known fact the opposite sex finds knowledge of cargo insurance a very attractive trait. With this in mind I felt compelled to share some of the reasons cargo insurance is a ‘must have’ international shippers.
01. Because yours truly provides cargo insurance services, that’s why. Now that the most important and obvious reason is out of the way, let’s look at some other reasons.
02. If you own the cargo while it is in transit you are at risk.
If you are an exporter your shipment is worth something. If it wasn’t worth anything you wouldn’t be able to sell it. Whether your cargo is valued at $8,000USD or $8,000,000USD, that is your direct loss if your cargo is destroyed, lost, stolen, or you get bitten by ‘General Average’. For more information on General Average read https://www.tjocargo.com/everything-you-wanted-to-know-about-general-average-but-were-afraid-to-ask for the nuts and bolts of it. If you can’t afford to lose it, insure it.
03. Even if your cargo holds limited actual value, the whole of your expenses add up.
There are quite a few instances cargo is not highly valued in itself. Some scrap, raw materials, and earthen products such as minerals or clay, among others, are just not worth a large amount of money. It is also a fact total transport costs can add up to a dollar figure that will get your attention. Depending on the transportation origin and destination the cost of getting your export shipment to the buyer’s port can be a larger amount of money than the cost of the actual freight. When the transport costs and the freight value are added up, it’s not an insignificant number anymore. For this reason it is most often suggest CIF (Cost, Insurance, Freight) + 10% as the formula to use when insuring your shipment. It’s the industry standard for a good reason. If you ship a container to your buyer and it is lost in route while you still own it, you will likely have to ship another container to make good on the shipment that was lost.
04. Even for the big guys self-insuring isn’t as attractive as it used to be.
It used to make sense for larger organizations to self-insure and sometimes still does. Insurance companies have to make a profit so as a result insurance companies are structured to take in more premium dollars than they pay out in claims. If it were the other way around there wouldn’t be insurance companies anymore. Realizing this, some large companies decided to ‘self-insure’ and they had good reason to. Over the long haul they would save money paying for losses over paying premiums as there would be no insurance company profit in the mix. This sound logic is now getting reexamined. The reason it is being reconsidered is something called ‘accumulated risk’. In the past companies had a quantifiable finite risk, if their cargo including transport costs was valued at $30,000USD Per container, the self-insuring companies could count, almost to the dollar, what their maximum risk was on a particular vessel. If they had ten containers on board a vessel they could estimate their maximum exposure at $300,000USD for that sailing. In today’s ocean transport market the accumulated risk is trending higher and is not crystal clear. Due to ocean carrier alliances and the expanding use of Triple E mega vessels that can carry a zillion TEU’s, it’s harder to pin point accumulated risk or limit the number of containers on any one vessel. Okay, maybe not a zillion TEU’s, but 18,000 TEU’s is not exaggerating. Now a larger exporter may end up with fifty containers on a vessel and have an exposure of $1.5 million dollars. Keep in mind, it’s not how much you can afford to lose, it is how much you can afford to lose at any one time. $1.5 million would make anyone swallow hard, even in a large company. It may not knock the company to the ground, but it sure would blow a divisional or program budget. For a small or medium sized operator the number could mean the end.
05. Most cargo insurance is cheap.
When you bought your last major purchase in a retail store you were undoubtedly asked is you wish to buy some type of insurance protection plan. The cost of the protection could range from 10% to 15% of the product cost itself. Not so with cargo insurance. When compared to the overall costs in getting your commodity from point A to point B, cargo insurance is such a small fraction of the investment, it almost becomes invisible. Shipping high risk commodities or to and from high risk regions raises the cost, but it’s still a sound investment. While it is impossible to throw out s specific number, consider your $95,000USD worth of inventory, plus $5000USD worth of transport costs ($100,000 total value), to and from major countries for a general merchandise commodity can be insured for less than the cost of filling the fuel tank of the semi-truck that brought your container to the port. If you want a specific number of how low of a cost your cargo insurance would be you can contact me at (firstname.lastname@example.org) for a quote.
06. Ocean carriers limit their liability
The age old phrase ‘you broke it you bought it’ does not apply to ocean carriers. As a matter of fact it doesn’t apply to air carriers, LTL carriers, or even some truckload freight to one degree or another. Even when there is carrier liability it is often cents on the dollar. Ocean carriers go by the Carriage of Goods by Sea Act (COGSA) which limits the carrier to a $500USD limit per package, if not package per shipping unit, as carrier liability. This often translates to $500USD per container even if there is carrier negligence. In some cases you can argue the point your bill of lading states 20 pallets of ‘parts’ and that one pallet is the package. Although keep in mind ocean carriers have spent years arguing this point and they are very good at it. Even if you win the argument after thousands of dollars of legal fees, using our $100,000USD insured value used in reason number (04.) and the 20 pallets example used in this paragraph, you have just spent thousands in legal fees to collect 10% ($500USD Per Pallet) of the value of your freight lost. Pretty cool deal for the ocean carrier I would say.
07. Cargo Insurance is flexible.
Cargo insurance is not one size fits all, or shouldn’t be. Different shippers and their commodities may have different needs. You don’t have to pass on cargo insurance because the ‘standard policy’ doesn’t fit your needs. An exporter selling new machine parts will have different needs than an exporter selling scrap metal. While seawater intrusion would be a concern for the new parts seller, it wouldn’t be for the scrap seller. No one cares if metal scrap gets wet. Why pay for coverage you don’t need? Moreover, an exporter handling four shipments per month will have different best practice transaction needs than a shipper that ships four-hundred shipments per month. If you currently do purchase cargo insurance and your vendor does not recognize these variable needs, you need a new vendor. Worry not, ‘I know a guy’. Insurers like, and want, steady shipper relationships. If there is an opportunity to earn a steady relationship, an insurer will in fact tweak the coverage to suit your specific needs. As a consumer, developing a continuing relationship with an insurer will serve you best. One of the first questions an underwriter asks when something ‘out of the box’ comes up is “Is this a repeat customer, or will be a repeat customer, or a ‘one off’ who will be a transient purchaser of services?” If you are a ‘one time wonder’ an insurer may not be eager to handcraft your cover.
08. If you don’t arrange cargo insurance someone else will.
For most international transactions of any significance cargo insurance is required contractually or by Letter of Credit. Overseas importers and banks know whether they are at direct risk or not during transit, a catastrophic loss will impact them regardless. Overseas importers spend time, money, and effort to identify resources, review products, negotiate deals, line up funding, and arrange for acceptance of the cargo. If an uninsured shipment is the victim of a transportation peril and the seller vaporizes due to the financial hit, there is little recourse for the buyer other than start over; for this reason cargo insurance is often worked into the deal. Why you need to control the cargo insurance is simple, you know what you are getting. Not all insurers are created equal and not all coverage purchases have quality in mind and can be more price driven. If cargo insurance were a parachute for you, which in a way it is, would you want someone purchasing it that is looking for the lowest price possible?
09. Ocean carriers want you to insure your fright.
Even though ocean carriers don’t mandate that you are required to insure your shipments, they want you to have cargo insurance. It means fewer headaches for them in the long run. The first reason is less abandoned freight. Cargo insurance, if valued properly, can include relief for costs of moving damaged cargo to a safe location or sometimes include salvage partners to dispose of damaged cargo. Being insured decreases the chance of shippers walking away from a shipment. Second, now that you have read the ‘General Average’ article I referenced in reason number 02., you know the line can charge you for other shippers losses during a ‘General Average Event’. You did read the article, didn’t you? Shippers hit with general average charges who insured their shipments are much easier for the line to deal with as General Average is indeed covered with cargo insurance. Lastly, in the event of a loss shippers who are insured are much less likely to give the line a challenge. Once the initial required claim is filed with the ocean carrier, the shipper looks to the insurer. Uninsured shippers may be apt to start a debate how much liability the line holds and start the argument I mentioned in reason number 06. earlier. Just because the ocean carrier is well versed in the battle doesn’t mean they want to fight it.
10. Cargo insurance can put an ‘extra pair of eyes’ on your shipment.
Any cargo insurance vendor arranging cover and or issuing certificates who is worth their pocket protector should be looking at your shipment. Cargo insurance policies have conditions of insurance. Many of these conditions have the objective to ensure shipment risk is mitigated as much as possible. For instance, when we deal with a shipper we just don’t arrange the insurance. We want to hear about their commodity, the mode of transport, and how it’s packaged. In doing so we are looking out for your risk exposure. You’re shipping Grandma’s china via rail? How is it packaged? You are shipping soybeans in bulk in container internationally, that is a vented container, right? Commodities have vices and modes of transport and packaging have their best practice uses. While it is true most shippers know their commodities and cargo insurance is not a true form of quality control, having one more layer of process looking for specific things doesn’t hurt.
There you have it. You have now completed reading ‘10 Reasons You Want Cargo Insurance’. Even though there will be no test on the subject, I know at least some of you possess more cargo insurance knowledge than before you read the article. You are now more attractive to the opposite sex and carry this burden going forward. Use the power wisely.