Seven Things People Get Wrong About Cargo Insurance

There are things people incorrectly believe about cargo insurance. Regrettably, for a product so many businesses use, there is little training and education given to procure and use it. In this article, I am going to single out the misconceptions I have seen most often over the years.

Cargo insurance insures everything to do with a shipment.

Nope, it is only the physical loss, devaluation, or disappearance of the cargo itself caused by a covered peril. Cargo insurance does not apply to any form of liability other than the freight itself. One noted exception is in the case of ‘General Average,’ which I will cover a bit later. On one occasion, I received a request from a shipper to file a claim for an excavating machine on a flatrack. The flatrack, stowed below deck, came in contact with other cargo causing some damage. The main damage to my shipper’s machine was the breakage of several hydraulic fluid lines. The damage done to the machine was ridiculously cheap to fix. However, the hydraulic fluid that leaked everywhere in the hold contaminating everything it touched was another matter. The shipper wanted to file a claim against the cargo insurance to deal with having the contamination cleaned up. As we now know, ‘no can do.’ I directed them to their commercial liability.

In the event of a covered loss, a loss payee will receive the full face value insured on the cargo insurance certificate less the deductible.

This one may not be an absolute ‘no,’ but is a definite ‘mostly no.’ Cargo insurance only pays approved claims for covered perils on what can be a substantiated lost. If you have not lost it, you can not claim it. The example I will use was a shipper who shipped a machine breakbulk a few years ago I was involved. They insured the shipment CIF + 10%. In short, this means the value insured covered the cost of the machine, the insurance, the freight costs to transport the machine, and an additional 10% which can cover unforeseen costs related to a loss. The shipper’s machine incurred damage along the way. While not a total loss as the machine was repairable, it was dinged up pretty bad. The good news was the damage was caused by a covered peril which would be covered and was repairable at the destination. When I received the claim, it was for the complete cost to repair (sounds reasonable), but the claim also included the cost to transport plus and additional 10%. I explained to the loss payee since the cargo did not require to be re-transported; they never incurred that cost.
Additionally, there were no expenses other than the damage repair. While the shipper could have filed a claim with the insurer, the claim would have been declined for transport cost and any additional percentage as those things were never lost. The loss payee wasn’t thrilled. They mistakenly looked at cargo insurance like life insurance where the full face value of the policy is paid for loss of life. Since there is no such thing as ‘a little deceased, ’ it makes sense. It’s an all or nothing game. However, cargo insurance will only pay amounts lost caused by covered perils and actual losses, which can be less than the full insured amount.

Each container shipped requires a cargo insurance certificate.

If you are shipping only one container, well yes, the above statement is accurate. If you are shipping more than one container in a single booking, it is not accurate. Marine insurers don’t view a container as an insurable shipment; the individual booking is considered the shipment. While a booking can be one container, a booking can also be fifty containers. In the case of a shipper who books fifty containers valued CIF + 10% of each container of $10,000 on one booking, for cargo insurance purposes, that translates to once cargo insurance certificate for $500,000 to cover all fifty containers included in the booking.

There are also instances of shippers who ship large amounts of similar ocean containers or LTL truck shipments (or both) monthly all with different bill of lading or booking numbers. In this case, instead of needing a large amount of cargo insurance certificates or being forced to purchase a yearly policy, it can be arranged with the insurer for the shipper or forwarder to report all shipments monthly. The insurer issues one certificate to cover all shipments at the end of each month. This tool is called ‘direct reporting’ and is a great labor and time saver. Keep in mind before installing ‘direct reporting,’ an agreement must be carved out with the insurer for agreed coverage and rates.

General average is an archaic law that no one uses anymore.

Since there are endless articles on General Average, *I won’t beat the subject to death. Long story short is an ocean carrier could, and likely will, hold all shippers liable for losses incurred on, and to, a vessel during a General Average event. It was a tough storm, the vessel was forced to jettison containers overboard, the vessel incurred damage, and it was determined a General Average event, means shippers whose containers were delivered safely will be responsible for their contributable portion of the losses. You will know the ocean carrier is serious when they won’t let you pick up your unharmed container without paying a deposit. I have a customer who previously did not believe he needed cargo insurance until he had to pay his share of losses for a General Average event. He believes he needs cargo insurance now.

My staff doesn’t have time to arrange cargo insurance for each shipment.

I have heard this one mostly from freight forwarders, and 3PL’s who manage LTL shipments. Not too many years ago, the statement would have been accurate, but things are changing. Personnel at forwarders and 3PL’s are busy. Busy enough the small profit margin made on each cargo insurance certificate didn’t seem worth it, Thus, stopping to input information into an online account or sending the information to a vendor was often skipped by staff booking shipments. To date, many have not heard this problem is indeed becoming a thing of the past.

Forwarder, 3PL’s, and larger shippers use what is called Transportation Management Systems (TMS). The TMS is the software that helps them to manage everything to do with the mountain of shipments they book daily. Just like most software of every industry, accounts, sales, AP and AR, execution, and more, are all tracked by the TMS software. Today, cargo insurance can be integrated right into the TMS. This integration allows forwarders, 3PL’s, TMS portal users, and major shippers, to request the cargo insurance using only a few keystrokes when booking a shipment. How it works is we provide your TMS vendor with the easy steps needed to update your TMS screen to include cargo insurance. Then you are securely connected to our A-Rated insurer’s system to request insurance for a shipment. There is no heavy data input needed; almost everything needed is already in the TMS system. While the TMS integration of cargo insurance is not yet broadly available, there are companies like TJO Cargo who provide the service with the promise of more availability coming.

My carrier has my back.

Ahhh no, they don’t. The majority of forms of transportation do not take full liability for the cargo they carry. While some forms of transport take a bit of liability, it is a sinfully small fraction of the actual value. In the case of air carriers who typically operate on a tariff to control the rules of engagement, there is little, if any, cover given. Many air carriers will allow you to ‘declare value’ to extend carrier liability, but it will cost you, and there will be limits. You can expect to pay about $0.85 per hundred dollars of declared value. Ocean carriers limit their liability to $500 per package. One shipping container is viewed as one package by the ocean carriers as a rule of thumb. Fighting the one package is one container logic is a well-worn path.

Like many air carriers, LTL (Less Than Truckload) companies operate on a tariff which set the rules. By shipping and signing over your shipment to the carrier, you automatically agree to the tariff, LTL ground transport companies include carrier liability for cargo by the pound tied to the freight class. The higher the freight class, the higher the carrier liability per pound, but the transport rate increases and typically freight values rise as well. If the LTL carrier is paying in the neighborhood of a fifteen cents for lower classification freight, and up to a dollar a pound for higher freight classes, it can turn out to be a small fraction of the value. It’s a great deal if you are shipping styrofoam bricks.

Conversely, contract truckload carriers often have $100,000 of cargo coverage, although it is worth checking with each carrier. Carriers are not required by law to keep cargo insurance included or the freight they carry other than limits required by the Carmack Amendment, but often do have additional coverage. Keep in mind; not all carriers are obligated to follow the rules of the Carmack Amendment. Carriers who operate on tariffs such as LTL carriers cover liability in their tariff by weight as mentioned earlier. Also, ‘Acts of God’ are almost always excluded from carrier liability.

Cargo insurance is too expensive to fit in the deal.

Okay, this one is subjective. People can come to any conclusion they would like. However, the thought cargo insurance is too expensive is similar to thinking a new set of luggage is too expensive for your around the world three-month vacation. The amount the luggage cost would be the smallest expense of the trip and would protect the stuff you paid a fortune for to go on the vacation. Cargo insurance rates are very situational; costs vary depending on the risk. Shipping a container to Tanzania will demand a higher insurance rate than shipping the same container to the United Kingdom. Shipping a container of auto parts will be less insurance cost than shipping a container of computers.
Okay, so cargo insurance is too expensive. Let us ship a 40’ container of auto parts from Atlanta, GA USA to Turkey with the cargo insured for $65.000. Included in that $65,000 insured, the cost of the transport the insurance would cover would be trucking the loaded container to Savannah $950 (496 round trip miles), and ocean cargo and fees of about $5,000. That’s almost $6,000 in transport costs. Let us say the cargo insurance cost in the neighborhood of $163. That totals up to less than 1% of the transport cost and 0.25% (yep, one- quarter of one percent) of the total deal to mitigate the risk of up to a $65,000 loss. While still subjective, it feels pretty affordable to me.

There you have it, the top seven misconceptions I see most from cargo insurance buyers. While you may not have a Masters in cargo insurance from Starfleet Academy now, I hope the information helps to make you a savvy cargo insurance buyer. Wherever you procure your cargo insurance, don’t hesitate to ask questions. The time to ask questions is not after a loss; the time to ask questions is when you are considering cargo insurance vendors and coverage. If your vendor, or prospective vendor, won’t, or can’t, answer all of your questions, find a different source.

*If you would like to learn more on the subject of general average, follow this link to the TJO Cargo Blog for more information.