On August 10th 2016 I wrote the ‘Export University’ blog article about the ‘Export 101’ seminar that takes place here in Jacksonville. Keeping with the academic theme I thought I would put out a piece with some helpful information about cargo insurance. The information below should be considered general and may not apply to your specific situation. If you have a cargo insurance or freight risk question, please reach out to me. I still answer questions for free.
What cargo insurance is and what cargo insurance is not.
Cargo insurance is insurance designed to protect the insured from financial loss due to physical damage or loss of the shipment due to a covered peril.
Cargo insurance is neither designed nor intended to cover general liability nor liquidated damages related to a shipment.
What types of cargo insurance are there?
There are typically two types of coverage used in today’s market. Clause A ‘all-risks’ coverage and Clause C ‘total loss’ coverage.
Clause A covers all perils but does not cover items the policy specifically excludes. Examples of common standard exclusions are listed below,
inherent nature of the goods insufficient or inadequate packing
ordinary wear and tear consequential loss or loss of market.
Clause C covers ONLY the perils that it states it covers, perils not stated as covered are excluded.
Regularly Clause C cover is deemed to ‘total loss’and given the severity of the perils below the cargo usually is totally lost, however the cover will also pay for partial losses attributable to the perils. Examples of Clause C Coverage items are listed below.
fire or explosion
vessel or craft being stranded grounded sunk or capsized
overturning or derailment of land conveyance
collision or contact of vessel craft or conveyance with any external object other than water
discharge of cargo at a port of distress
loss of or damage to the subject-matter insured caused by
general average sacrifice
jettison
Quite often the Clause C coverage is extended to cover theft of the whole shipment or conveyance. Ask your provider if this is the case with their coverage.
Do you need cargo insurance?
International air and ocean transportation includes little, if any, cargo insurance type compensation on shipments. If you can’t afford to lose it, insure it. It is a misconception the ocean or air carrier holds full liability for freight losses. In fact you would be very fortunate to obtain a full recovery following a loss.
What if my cargo isn’t high value?
Consider ‘general average’ risks and the policies of your ocean carrier. Most ocean going cargo vessels hold the right to declare ‘general average’ if the vessel, the crew, or cargo is jeopardized. General average is the maritime law that allows the vessel to jettison cargo it sees fit to save life, the vessel, or other cargo. It is agreed by all shippers that the expense of the jettisoned freight be shared by the rest of the shippers. Similar maritime law can go right up to the shared expense of the loss of the entire vessel. Also consider for lost freight, re-shipping may be required. In the event of a general average your cargo may be held for a long period of time even if it is not damaged until such time that you provide a financial guarantee. Cargo insurance would usually provide this guarantee for you to enable you to obtain your goods.
If you need cargo insurance when should coverage start and stop?
In most cases cargo insurance should run parallel to your risk and the terms of the transaction. When you relinquish ownership your risk ceases and so will the cargo insurance.
How do I value my freight?
Value is typically calculated CIF + 10% (C= Cost of goods I=Insurance F= Freight) Your situation may be different. The CIF + 10% is used on the standard that if you own the freight it cost you money, if you insured the freight, it cost you money, and if you shipped the freight, that cost you money as well. If the shipment is lost, you would incur those expenses all over again. The 10% is to allow for the incidental costs of shipping. Although no claims can be paid for amounts not actually lost.
Does the type of freight I am shipping impact the rate or terms?
Yes it does along with where you are shipping to. Shipments heading to a first world country may have a lesser premium than a shipment headed to a third world country where risk can be higher. What you are shipping can impact the premium as well as deductibles and conditions. Complex cargo that may contain more delicate precision instruments may have a higher rate or higher deductible than a shipment of hard to damage machine parts. Resist the temptation of fudging the description to save a buck as it may end up costing you many of them.
The seller is providing insurance while I am at risk and is supplying insurance so I am covered, right?
Positively maybe. Trusting sellers and buyers to secure coverage on your behalf can be risky. The other side of the transaction may only purchase limited risk coverage from less than reputable sources. This may leave you attempting to file a claim with an overseas claims agent who does not answer their phone or even in another language. I have a friend who received a copy of a certificate in Mandarin and was asked if it was suitable! Even if the other side is securing the insurance, be sure to carve your terms to mandate Clause A ‘all risks’ coverage from an approved insurers list. If the event they balk, bring the insurance to your side if you are the one at risk. Sometimes it would also be wise to amend the terms of sale so that you are responsible to insure or the alternative could be a ‘contingency cover’.
Who should the loss payee be?
The loss payee for the transport coverage must be the entity who is at risk of a loss in the event of a covered incident at the time of the incident. In short, it is who owns the freight at the time of a loss. As an example, if a USA exporter (US) sells their product to a United Kingdom importer (UK) and the terms of the deal have the ownership changing at the USA port of exit, (risk) changes from USA shipper to UK buyer at that time. In the event the USA shipper secured cargo insurance from their door US to the door UK and named themselves as the sole ‘loss payee’, the coverage stops when the freight changed ownership. This could leave the shipment uninsured for the remainder of the transit unless the UK buyer secured separate cover to insure from the point they took ownership at the port of loading. Be aware of the terms of sale and when you are, and are not, on risk and arrange your insurance accordingly.
My company has a blanket policy for all of our shipments so we are set, correct?
Absolutely could be. Policies selected years ago to fit your company’s shipping needs may fall short today. Be sure to contact your insurance carrier and get a full accounting of what your insurance covers and what it does not. Many existing policies cover domestic ground shipments but fall short on international shipments. Another example is many policies don’t pay for re-shipping when necessary after a covered shipment is lost. Be sure to compare available coverage for international shipments to make sure it fit your needs.
What about over dimensional shipments?
When shipping an over dimensional shipment, be sure to alert your insurance provider. Many insurers exclude over dimensional freight in their general policies. Quite often underwriters will approve over dimensional shipments, but require the opportunity to review the details prior to shipping. Without letting your insurance provider know you’re shipping an over dimensional item, your cargo insurance certificate may be at high risk of being a worthless piece of paper.
Does it matter if my shipment stowed above deck?
All containerized ocean freight is considered under-deck freight by most insurance companies no matter the location on the vessel. In the event your freight is breakbulk or roll on roll off (not containerized ), it does matter whether it is stowed above deck or below deck. In the event you secure Clause A ‘all risks’ coverage for your ocean breakbulk/roll on roll off shipment, most insurers policies automatically revert to the lesser cover of Clause C cover in the event the freight is transported above deck when not containerized.
How do I become familiar with the coverage offered by an insurance vendor?
There are two portions to the average insurance coverage for marine insurance sold by most vendors, the policy and the terms and conditions of the policy. Good vendors should be able to provide you with a copy of the ‘terms and conditions’ of the policy. The terms and conditions will outline exclusions and conditions that guide the policy.
In closing, consider your cargo insurance much like a parachute carried in an aircraft. No one really thinks about the quality until they need it. The time to find out you are wearing the lowest of three quotes on your back should not be as you jump out of the plane.