This article is a bit long. You should get a coffee before you start. If you still need to get lunch, grab a sandwich as well. Today, I am writing about the three big things people sometimes get wrong about marine cargo insurance. I have been in cargo risk mitigation and marine cargo insurance for many years. In those years, I have seen many of the same mistakes made by companies that need, use, and sometimes even sell cargo insurance.
Why does this happen? Maybe they never fully read or understood the policy and conditions in the first place. There is also the possibility of staffing changes within the company, causing organizational brain-drain with others taking over and doing their best without proper training. There is even a chance a rogue sales representative was writing checks with their mouth to close a deal that cargo insurance couldn’t cash operationally. These sorts of things can happen and go unnoticed when it comes to risk mitigation; cargo keeps moving, regardless of whether the cargo insurance is correct. It becomes essential only after a loss and the cargo insurance is not done correctly.
One of the rules I live by is that there are no absolutes in our lives, but one absolute that comes to mind is that there is seldom such a thing as an absolute. I said, “There is seldom,” so the absolute rule is intact. Sure, there are things we know and sometimes depend on to be consistent and dependable, and they are until they are not. The absolute rule should be kept in mind when reading this article. I will cite standards for cargo insurance management, but the information is not absolute. There can be slight variations from insurer to insurer and different situational applications.
It is now time for a smooth segue from the introduction to listing three things I see people most often sabotaging themselves regarding cargo insurance.
What It Is
Marine cargo insurers want to know what they are insuring. Often, the insurers categorize cargo by level of risk. The insurers adjust to the risk level by requiring different premiums, limits, conditions, deductibles, or all four. This is why a shipment of porcelain tubs, toilets, and sinks may have a higher premium or deductible. Porcilin bathroom fixtures have a higher risk of damage from rough handling than a shipment of lumber used for framing houses. They are both used in building houses but are worlds apart in fragility level.
Another example would be a shipment of high-value computers and servers being at a higher risk of being stolen than a shipment of paper shredding machines. Both are used primarily in the office, but thieves would covet the computers much more highly, and insurers know it. How does cargo get miscategorized? There can be the instance someone noticed the premium for porcelain bathroom fixtures was higher than the premium for general building materials and decided ‘it didn’t make a big difference’ and would be okay to save a buck. Yeah, it does make a difference. Another reason is yearly policyholders can fall into the trap of not updating their policy to match the growth in the number of products sold. The company started out selling paper shredders, pencil sharpeners, and office supplies. Still, over time, it added photocopiers and office computers to its product line, which changed the nature of the commodities it shipped, and it never thought to update its insurer.
What is the moral of the story? Pay attention to what you are shipping compared to what you told the insurance company you are shipping. If you misidentify your commodities when securing insurance, it isn’t likely anyone will stop you. But if a shipment of computers is stolen and your policy or cargo insurance certificate only states ‘office equipment’ as the commodity, don’t expect a paid claim. Of course, insurance policies can be had for F.A.K. (Freight All Kinds) shipments where no one freight category is the majority. In this case, the insurer would cover everything or a broad group of cargo with the exception of what it states as excluded. This structure is not an inexpensive premium, depending on the scope of what needs to be covered.
Speaking of What it is, is it New, Used, or Used But Refurbished as New?
Here is one error I see often from trading companies, freight forwarders, and transportation intermediaries. Insurance companies want to know if an insured commodity is new, used, or used but refurbished as new. It seems like a useless question, the value is the value, right? Yep, if you have a supportable market value, that is the value you can state on the cargo insurance certificate, but whether the commodity is new, used but refurbished as new, or used counts too, and few people seem to ask. Insurance providers should ask because each of the three (new, used, or used but refurbished as new) gets different levels of coverage and or conditions.
As you would expect, new merchandise can be insured by unadulterated I.C.C. Clause A ‘all risks’ marine cargo insurance if it is not an excluded commodity. After all, it is brandy-new and in perfect condition, often packed in the manufacturer’s packaging. On the other hand, used but refurbished as new condition commodities won’t be perfect because they are not new. Refurbished commodities can still get I.C.C. Clause A coverage, but the coverage is modified to exclude things you may see on a refurbished item, including light scratching, marring, rub marks, or any sort of wear and tear. But the coverage is still good old I.C.C. Clause A at its core. One addendum to the subject of refurbished goods is that when the insurance companies say refurbished as new, they mean it. Insurers expect to see things like servicing, new parts installed as needed, and new paint kind of stuff to call refurbished as new. Be prepared to show receipts, a record of the process to support the refurbishment, or a receipt showing it was bought refurbished to be safe.
That brings us to ‘used’ commodities. Many insurers routinely only offer what is called I.C.C. Clause C or sometimes called ‘F.P.A.’ coverage for used commodities. I.C.C. Clause C is a limited form of coverage. While I.C.C. Clause A offers cover for most everything that can happen to a commodity other than what it excludes, I.C.C. Clause C does not cover any perils other than the ones it states it covers. The coverage is limited and basic and includes damages from things like sinking, capsizing, stranding of the vessel, fire or explosion, overturning or derailing of the land conveyance, discharge at a port of distress, general average, and jettison. While these types of losses are spectacular and often result in the total loss of the cargo, they fall well short of all that can happen to cargo in transit.
Can you get better coverage than I.C.C. Clause C for your used commodity if it is in excellent condition? You can, but you must prove the condition with things like records, inspection notes, and photos. The underwriter would have to consider it. The I.C.C. Clause C coverage does not get changed just because you state it is in great condition after the fact; it has to be proven beforehand.
What is the moral of the story? Know and state in writing to the provider of your cargo insurance whether the commodity is new, used, or used but refurbished as new. Many insurers reserve the right to void the coverage if the commodity does not match the ‘new ’ stated condition if the commodity is not new.
Hitting Below the True Value Bullseye
All things have a value. Well, not all things. The T.V. shows ‘The Bachelor,’ ‘The Bachelorette,’ and most T.V. reality shows, as well as reruns of ‘Keeping Up With the Kardashians,’ are all questionable. Let me rephrase my statement. All cargo has a value. If it didn’t have value, shippers would not be spending money to ship it, and wherever the ‘no value cargo’ was being shipped to, they would get their own, and since it had no value, it would be free for them to get. However, since cargo does have value, it gives you something to lose if the cargo is lost. That is where cargo insurance comes in.
If a shipper chooses to insure their shipment, which I recommend (Did I mention I sell cargo insurance?), some tend to underinsure. It happens mostly with per-shipment shippers who are either new to the game or, if not new, have never had a loss. The mistake occurs because some shippers see the insured value as whatever they pay to buy the goods. For example, they purchase goods to resell for $100,000, which turns into the target number for which they insure their cargo, but that is only part of the value.
As a rule (not an absolute of course), the standard of C.I.F. + 10% is most often used for the valuation of cargo for cargo insurance. C.I.F. stands for ‘Cost’ of the goods, ‘Insurance cost’, and ‘Freight cost’. Anything lower than that is considered underinsured.
The logic behind C.I.F. + 10% is the transport and insurance costs are actual expenses to get the cargo to the destination the shipment is insured to, wherever that may be. Depending on the situation, duties and Customs costs may also be added if paid by the insured party. If the shipment is lost while they are at risk, not only would the inventory have to be purchased again, but the cargo would have to be re-transported, incurring all the same expenses again. The plus 10% comes into play for covered expenses in the event of a loss incurred because of the loss. If a shipper’s cargo were involved in a mishap from a covered peril, leaving their cargo in the middle of a highway, and the shipper had to pay to have the cargo moved to a safe place, a claim for that amount paid could be made using the 10% value uplift.
One of the particularly dangerous new shipper requests to cargo insurance providers, which some misguided providers oblige, is to save on premium money, only insuring half the good’s value. The shipper assumes that if the cargo is genuinely valued at $100,000, they can save premium money if they insure it for only $50,000. Their flawed logic is that if the cargo experienced a partial loss under $50,000, for example, a $40,000 loss from a covered peril, they could file a claim for the $40,000. Since $40,000 is less than the $50,000 value they stated and bought insurance for, they assume they can collect $40,000 on the claim with room to spare. The answer is ‘nope’, they can’t. Suppose they only insured 50% of their shipment’s true, accurate value. In that case, marine cargo insurers will only pay 50% of the claim filed, which, if everything else is to spec, would be a $20,000 insurance settlement, leaving the shipper with a $20,000 loss out of pocket.
What is the moral of the story? Under no circumstance is it good to underinsure cargo with marine cargo insurance. When doubting the final transportation costs, go a little higher than lower. The insurer won’t think you are crooked because you had to estimate. With marine cargo insurance, you can only make a claim for supportable losses up to the insured value limit. If you have not lost it, you can’t claim it, so it is impossible to over-insure if you don’t overvalue above the commercial invoice amount for the cargo.
There you have it. Your coffee and sandwich should be gone by now. You now know the three biggest cargo insurance mistakes I see most often. If you liked this article and found it useful, please feel free to share it with thirty-six thousand of your closest friends. If you didn’t like the article, I will cheerfully refund the fee you paid to read it.