“Cargo Insurance – A Simple Guide
What is cargo insurance?
Marine cargo insurance is the most common method used to protect the value of your cargo from physical damage, theft or general average. Cargo insurance is not always automatically included with all shipments – this usually varies by region. Instead, shippers or consignees can purchase policies for the insurance marketplace from niche suppliers, large brokers, local agents, websites, and freight forwarders.
I often compare cargo insurance to auto insurance. You need to pay insurance premiums for your car due to accidents and theft. You simply can’t always plan for or avoid these types of things. You’re still willing to put a lid on your car, even after years without problems. After all, getting only the most basic coverage could cost you a lot of money in the event of an accident.
This is exactly the same principle as cargo insurance. By choosing to pay a fraction of the value of your item, you can protect yourself the day the unexpected happens.
Is Cargo Insurance a Necessity?
No need to purchase cargo insurance. However, this is highly recommended so you can better protect your cargo from risks – some which can be catastrophic. It is important to weigh the cost of insurance against the potential loss and collateral damage that can occur without insurance.
Remember, even if you prove that the ocean carrier is legally responsible, their limit of liability is $500.00 per package or customary shipping unit, or the actual value of the shipment, whichever is lower. Air carriers only pay 19 SDR (~$24.00) per kilo. As you can imagine, most shipping costs are worth much more than these rates. So without proper insurance, you could lose most of your cargo value
Depending on your requirements, there are different types of cargo insurance and policy types available to cover your cargo.
Here are some points to consider before you purchase cargo insurance.
1) Understand the goods
It is essential to understand the nature of the insured goods, including how the goods are packaged. Ask “”What’s going to go wrong with this shipment?””
Packaging is critical as it is what protects the cargo during the voyage. Is the packaging the normal packaging for this cargo for the intended voyage? Is the packaging sufficient to avoid damage to the goods?
Make sure the package is marked so that it can be identified. This is important for shipments sent by air or LCL/LCL shipments. If the item is a branded item, please do not put the brand name on the package as this will only be an incentive for theft.
2) Know the voyage
This involves more than just knowing which port the cargo will be shipped from to which port. What climatic conditions are expected to have an impact on the condition of the cargo? Are there any political circumstances that could affect the safe delivery and/or payment of goods? Does sailing require sailing near any pirate hotspots?
3) Terms of Goods
As far as the actual insurance of the cargo is concerned, there are three different levels of insurance available for general cargo. These terms are published by the Lloyd’s Market Association (LMA) and the London International Underwriting Association (IUA).
There are also specific terms for various industries, such as frozen meat, frozen produce, wood, coal, oil, and more. Airfreight has its own terms, Institute Cargo Clauses Air (excluding postage).
Types of Cargo Insurance
When discussing the most common types of insurance, we will focus on ocean cargo insurance, which usually covers air freight as well. Note, however, that specialized air freight insurance can also be purchased.
Marine cargo insurance offers different levels of coverage. You will need to decide which type of insurance is best for your business, your cargo, and the severity of the risks involved in shipping. Again, if you know a little bit about each option, it will be an easier decision to make.
The first decision will be whether to buy single or open coverage.
Single coverage:
This type of insurance is purchased on a per shipment basis. It only covers single shipments and is usually the best option for businesses that do not frequently ship internationally. However, if your company ships frequently, it may not be cost-effective to make insurance arrangements for each shipment.
Open coverage:
This is a cargo insurance product that covers cargo for a specific period (usually one year). You can cover all your cargo movements under the same policy, which is a more efficient way to manage your risk if you ship frequently.
After deciding whether you will buy an insurance policy for single or open coverage, you will need to consider the level of coverage you need. A full policy guide would require a longer article than this one, so we’ll focus on the most common types of cargo insurance.
All risk:
As the name suggests, all-risk coverage applies to both air and ocean cargo insurance, providing financial protection in the event of most events that result in damage or loss of cargo. You should be able to purchase all-risk coverage for most types of goods, as long as they are new and not inherently susceptible to breakage, deterioration or loss.
However, even all-risk coverage usually has some exceptions, such as:
• Importer/Exporter Negligence
• Customs refusal or delay
• Loss or damage caused by war, strike, disturbance or civil commotion (WSRCC)
• Damage or loss due to force majeure (eg earthquake)
• Customer fails to pay, or seller fails to collect
Name the Dangerous Cover:
In contrast to full coverage, named risk coverage is limited to the risks expressly specified in the policy. Therefore, this type of insurance is less comprehensive. Its main benefit is that you can arrange coverage for risks not covered by an all-risk policy.
Dangers of naming include:
• Cargo theft
• natural disasters
• bad weather
• Collision at sea or sinking of ship
• Undelivered goods
General average and its meaning:
If you usually ship by sea, the general average principle in sea freight is an issue to keep in mind. As counterintuitive as it may seem, you should consider this as part of your cargo insurance strategy.
This principle states that if part of the cargo is lost, abandoned, destroyed or damaged due to a problem at sea, the owners of all the cargo on board must share the cost of compensation for the loss. Therefore, even if your cargo survives an accident, you are responsible for making compensation for the person whose cargo was lost.
Cargo Insurance: Is It Worth It?
Unless you are contractually obligated to insure, you are free to accept shipping risks and the minimum insurance provided by the carrier, or protect your interests with cargo insurance.
We recommend that you purchase the insurance that suits your situation. After all, cargo theft is not uncommon on a global scale, and incidents at sea or in flight, while rare, do happen – and when they do, they can cause huge financial losses.
Even if your business is not a risk owner in an international sales transaction, keep in mind that the responsible party may not have insurance, or the goods may be under-insured. So, as a contingency, it makes good business sense to purchase additional insurance on your own.
TJ chinafreight is an online freight forwarding platform that helps SMEs to ship their goods worldwide. We are happy to advise on the appropriate type and insurance level for your shipment. To answer your questions, please contact us by phone, email or via our live customer service chat feature.”
