Just one decade ago the number of organizations selling cargo insurance to freight owners for their cargo transported was a fraction of the number today. Back in those heady days, TJO Cargo was on page one for the search term ‘cargo insurance,’ and I knew many of my competitors, this is not the case today.
Over the past ten years, cargo insurance has become big business with almost limitless choices of places it is available. The growth in the number of vendors is good for rate competition, but it also comes with an inherent risk. Namely, does your cargo insurance vendor know what they are doing and is the insurer they use a good insurer?
Here is why the insurer matters.
Not all insurers are created equal. Sure, most insurers in the market are good insurers, but some are not. Some time ago I was contacted by a friend who asked if I could help a client of theirs who was trying to file a claim for cargo they received damaged in Jacksonville, FL. I did not provide the shipment cargo insurance certificate but since it was a friend I agreed to look into it. I spoke to the insured who told me the insurance was provided by the seller who sold them the goods in an Incoterms CIF (Cost Insurance Freight) deal. Visit https://www.export.gov/article?id=Incoterms-2010-Reference-Chart for more information on Incoterms.
The seller, based in India, purchased the cargo insurance certificate from a local insurer who maintained a claims office in the USA. Unfortunately for the Jacksonville loss payee, the insurer who underwrote the certificate, while technically an insurer, was mostly a shell that provided cargo insurance certificates with coverage stripped down to almost nothing through exclusions in the terms and conditions. Moreover, the USA claims office turned out to be a P.O. Box and an unattended phone in Seattle Washington. I have little doubt the purchaser of the insurance certificate got a great deal on the certificate. It was my unpleasant job the tell the loss payee collecting on a claim wasn’t likely and reasonable options were few.
To protect your interests make sure the insurer behind your coverage is an A-Rated insurer with a true presence in your home country or at the very least has representation in the destination country. While few insurers have actual offices in every country, most contract claims management companies who do. Whether you are choosing the insurer or not, it is well worth your while to perform due diligence. In the ,event you are purchasing goods CIF (Seller pays freight and insurance to your port of entry), supplying the seller with minimum insurance requirements such as ‘ICC Clause A’ for 110% of cargo value’ and an approved list of insurance companies to select from is a good way to save yourself the heartache.
Cargo insurance is like Avon; everyone knows someone who sells it.
Who you choose to use to purchase insurance is almost as important. While it is true, whether it’s a forwarder’s policy or per shipment certificates, much of the time vendors supplying cargo insurance are not required to get directly involved shipments, there are however occasions they do, or at least should. It is a fact it’s difficult for insurers to know all cargo intimately. During the normal course of business, insurers must depend on the information provided to them by brokers and policyholders. Insurers set terms and conditions, rates, and deductibles based on the information provided to them when the insurance is arranged. If there is a loss, underwritten by an insurer, the information provided to the insurer counts when it comes to a claim. If a cargo survey and or claims adjuster reveal the shipment was not within the parameters of the risk agreed to by the insurer based on the information provided, a claim can, and likely would be, be declined by the insurer.
This statement may sound backward, but if your cargo insurance provider isn’t a little bit of a pain in the neck regarding the asking of questions, they may not be doing you any favors. While most insurance companies do their best to keep the rules of engagement as simple as possible, the simple can sometimes be complex. Line items such as what are Incoterms of a deal, the mode of transport, packaging, what the commodity is and what inherent vices does it possess, and more count. When a cargo insurance provider is setting you up as a customer or arranging coverage for a shipment, they should be asking questions about your cargo and its transport.
Here is an example. Let us say a USA shipper exports full containers of silica sand Incoterm DDP (Delivery Duty Paid) internationally in ‘super-sacks’ (think of a giant bag with strap handles). First thought logic is, it’s sand. What can happen to it? ICC Clause C limited coverage should be fine. If a container takes a hit and the commodity shook, it’s still bags of sand. ICC Clause C, right? Let’s ask a question. Can the commodity get wet and not lose value? The answer is no; it can not get wet. Right out of the gate, ICC Clause C won’t fit the commodity best. ICC Clause C does not cover washing overboard or any intrusion of sea, river, or lake water into the container. The cover must bump up to ICC Clause A or ICC Clause B to include those perils.
How about a USA exporter shipping auto parts overseas and agreed in the deal to provide the cargo insurance? The shipper (exporter) purchases a cargo insurance certificate and names themselves the loss payee. Let’s ask a question. What are the terms of the deal? The answer, FCA (Free Carrier). FCA Incoterms only requires the shipper to deliver the shipment to a ‘named place.’ The shipper’s (seller’s) risk only extends to that named place such as the port of exit terminal. Once the first carrier, likely a truck, is unloaded at the port terminal, the risk transfers to the buyer. Too bad the buyer doesn’t possess a cargo insurance certificate naming them the loss payee for the remainder of the transit.
In summary, if your cargo insurance provider doesn’t ask questions or can’t provide you, and help you understand if needed, a copy of the insurer’s full terms and conditions, consider looking elsewhere for your cargo insurance needs. Make no mistake, not all businesses that bring on cargo insurance as a new service are bad. Although as the number of businesses increases that choose to add cargo insurance sales as an additional profit center, the higher risk there will be of your needs being serviced by someone who doesn’t possess the knowledge and experience to serve your best interests. Resist the temptation to procure your coverage without thought from the cheapest source. Considering the risk, not performing due diligence when it comes to cargo insurance can cost you.