Introduction
The past several years have seen record-breaking numbers of containers that have been damaged or lost overboard in transit due to extreme weather and other contributing factors. More recently, the impact of military conflict In Ukraine on Black Sea shipping and now similar disruption in the Middle East have insurance companies reassessing marine cargo insurance premiums for vessel and cargo owners alike. All this uncertainty and risk is prompting many shippers to question their current coverage.
We have collected a brief list of frequently asked questions, facts, and misconceptions regarding cargo insurance to help generate discussion and ideally leave you better prepared and aware to determine your own risk exposure and insurance requirements.
1. What is cargo insurance and why do I need it?
Marine cargo insurance is the ideal way to protect the value of your goods from physical damage, theft, or loss due to general average (i.e., voluntary jettison of cargo overboard to save the ship in an emergency). In addition to protecting against risk, in some cases the terms of sale (INCOTERMS) may require one of the parties in the transaction to provide insurance to cover risk for part or all of the transportation.
2. But isn’t the carrier, forwarder, trucker, airline responsible for any damage or loss of my cargo?
Not exactly. Businesses that use carriers or freight forwarders to ship their products often assume that the shipping company is liable for any damage to their shipments. Carriers and freight forwarders operate on a strict limitation of liability often standardized based on the mode of transport. Carriers limit their liability to amounts that simply will not cover your shipment’s full financial exposure. In fact, there are instances where carriers could have no liability for your shipment whatsoever.
3. INCOTERMS and Cargo Insurance
INCOTERMS help define and determine risk and the transfer of risk between two parties. Only two INCOTERMS address cargo insurance directly, CIP and CIF, and this does not mean that insurance should be arranged for transactions under these two terms only. A common misconception among buyers (importers) is that the insurance purchased for the transaction by their shipper provides adequate coverage to cover the goods in the event of loss or damage. In practice, however, the shipper is typically required to provide only a minimal amount of coverage. This may not be sufficient.
4. Types of insurance
There are many types of insurance but for purposes of this discussion can be generally grouped into three main categories:
- Marine Cargo Insurance
- Warehouse Insurance
- Domestic Transportation Insurance
Consulting with your transportation partner and freight forwarder such as Laufer Group International, you will be able to determine the scope of coverage required and the best type of insurance to cover your shipments from door to door. Specific terms and benefits are tailored for individual shipments and vary widely in different parts of the world and among cargo insurance policies.
5. Types of Marine Cargo Insurance coverage
A high-level overview of the typical types of coverage include:
- ALL Risk Coverage
- FPA (Free from Particular Average)
- General Average
6. General Average – I hear that term a lot in the news lately. What is it and why should I care?
The law of general average is a legal principle of maritime law according to which all parties in a sea venture proportionally share any losses resulting from a voluntary sacrifice of part of the ship or cargo to save the whole in an emergency.
When General Average is declared, all cargo is confiscated and held until the cargo owner contributes a deposit for their estimated share of the loss. If the cargo owner has insurance, the insurance company will make the deposit. If there is no cargo insurance, then the cargo owner will contribute out of pocket. The shippers’ contribution is based on the value of their goods in proportion to the total value of all cargo laden on-board plus the vessel value.
In the case of a declaration of damage or loss, all cargo holders will be required to post a bond for general average payment in an amount yet to be determined. This will be paid directly by the cargo owner or, if insured, through their insurance provider.
7. Scope of coverage
Depends on the coverage, but in general, with all risk cargo insurance (covering transportation by sea or air), a seller’s/buyer’s risk is insured and covered during the time of storage and transit through and until it reaches the buyer. The clause in the Cargo Policy that defines when coverage commences and terminates is referred to as Warehouse-to-Warehouse Clause. It is the intent of the policy to attach at the time the goods leave the warehouse of origin named in the Policy or Cargo Certificate of Insurance, and to continue while the goods are in due course of transit until delivered to the warehouse of destination named in the Policy or Certificate.
8. I don’t need cargo insurance because our shipments are covered under our company’s commercial blanket/umbrella policy.
Maybe…. but much like an old tv commercial suggested, its best to be sure because “pretty sure” isn’t sure enough. It is best to do a thorough review of your existing commercial policy to determine if it provides the proper type and scope of coverage that will protect your company and cargo interests from transit risks – General Average is a good example. Does your commercial blanket/umbrella policy address that? In collaboration with our underwriter partner, Laufer can offer companies a review of their current policies (blanket/umbrella/other) for comparison and to determine whether coverage is sufficient.
9. OK, I get it, cargo insurance is important. But do I REALLY need it?
Unless it is specifically required as part of your seller/buyer transaction, only you can decide. One thing is for certain, the best time to determine that is now, before damage or a loss has occurred. Some things to consider are the value of the goods and related transportation costs, the value of lost sales and compare those costs to the cost to insurance that value. Most would be surprised how affordable coverage is when compared to the value of their goods.
For more information on this critical topic, please consult our cargo insurance white paper. If you still have questions, let us know. Working in combination with our underwriters, we are here to help find solutions that are the right fit for your business! Please send us any of your general or specific questions to Cargo Insurance