May 22, 2023
Transporting goods across the world is typically a seamless process when you partner with a reliable freight forwarder. However, many cargo owners are unaware of the risks that natural disasters, piracy, and unforeseen mechanical issues can pose to their freight. For the uninsured cargo owner, these things can financially devastate their company. That’s why cargo insurance exists. In this blog, we will help you understand your liability, analyze your risk, and explain how cargo insurance helps keep your shipping strategy seamless.
Definition of Cargo Insurance
Cargo insurance is a type of insurance that protects cargo owners against financial losses resulting from damage, theft, or loss of cargo during transit. It provides coverage for goods that are being transported by various modes of transportation, including ships, airplanes, trucks, and trains. Cargo insurance typically covers a range of risks, including physical damage to the cargo, complete loss of goods, and harm caused by circumstances like natural disasters, theft, acts of war, or accidents. By providing protection against these perils, cargo insurance ensures that cargo owners can navigate the complex landscape of global trade with confidence, knowing that their valuable assets are shielded from potential setbacks and liabilities.
Why is Cargo Insurance Important?
Many cargo owners assume that the carrier or the freight forwarder is responsible for any losses to their freight, but that is not the case. Carriers are not always obligated to cover losses that occur beyond their control, and their liability is typically limited. This means they are responsible for only a portion of the losses, leaving the cargo owner responsible for the rest. Cargo insurance is important to have so that you can minimize your financial loss in the event that your shipment is damaged or lost.
Common risks faced by international traders today include:
- Ships sinking
- General Average
- Inclement weather
- Faulty equipment
Understand Your Liability: Mode-based Exposure
If the worst happens and your cargo is damaged or lost, it’s important to understand which parties are liable and to what extent. When carriers or other supply chain partners are found legally liable for loss and/or damage to cargo, their liability is limited in most cases to an amount less than the full value of the cargo at risk. There are internationally accepted standards that outline these limits of liability:
There is a principle that is specific to maritime shipping called General Average. This law allows for the distribution of losses and expenses incurred during a sea voyage among all parties with a financial interest, including other cargo owners and sea vessel owners. It is based on the idea that the cargo and the ship are interdependent and that all parties should share in the costs of losses incurred to save the ship and its cargo from peril. This principle dates back to ancient times and has been part of maritime law for centuries.
Under the general average principle, if a ship’s crew jettisons (discards) some cargo in order to save the ship and the rest of the cargo, the owners of the saved cargo must contribute to the losses of the discarded cargo. Similarly, if the ship is towed to safety after suffering damage, all parties with a financial interest in the voyage may be required to contribute to the costs of the towage.
In the event that General Average is declared by the ocean carrier, the allocation of the losses is determined by an “average adjuster,” which calculates the cost in proportion to the party’s financial interest in the voyage. Essentially, the more valuable the cargo you have on a ship, the larger your financial responsibility in the case of General Average.
The likelihood of a general average being declared during a maritime voyage depends on several factors, including the type of voyage, the cargo being transported, and the risks involved. Some voyages and cargoes are inherently riskier than others and may be more likely to result in a general average declaration. For example, voyages through areas with a high risk of piracy or severe weather conditions may be more likely to result in general average declarations. Similarly, certain types of cargo, such as hazardous materials, may pose a higher risk of damage or loss during transit and may increase the likelihood of a general average declaration. Any affected cargo will not be released to the cargo owner until the General Average guarantee has been provided.
It is worth noting that general average declarations are relatively rare. They are typically only declared in situations where the losses incurred are significant and where it is necessary to distribute the losses among the parties with a financial interest in the voyage in order to ensure the safe and efficient completion of the voyage. However, it is important for all parties involved in maritime shipping to be aware of the general average principle and to have appropriate insurance coverage in place to help mitigate the financial risks associated with a general average declaration.
How to Analyze Your Risk
There are multiple things to consider when determining your risk:
- What are the terms of sale? In most cases, terms of sale are not an indication of who will be responsible for insurance, so it should be agreed upon in writing by the buyer and seller. Even when the Incoterms specify the responsible party, it’s a good idea to communicate with your client/vendor to ensure there are no incorrect assumptions or misunderstandings.
- What are the terms of payment? If you are the seller and offer credit terms to your client, you may wish to be responsible for insuring the cargo. This will allow you to retain control of the claim filing process and get paid directly by the insurer if the buyer defaults.
- What is the mode of transport?
- Trucking (Domestic US) – Each carrier publishes their limit of liability. The industry standard is $0.50 / pound. If you contract with a truck broker rather than directly with a motor carrier, the truck broker must assist in facilitating a claim, but they have no liability.
- Air Freight – Although the air carrier limit of liability is relatively high, it is important to remember that it is limited to the move that is covered by the air waybill. Any transportation from point-of-origin to airport-of-departure, and destination airport to final destination, is subject to the limits of liability of the carrier providing that transportation.
- Ocean Freight – The number of “shipping units” is determined by the quantity indicated in the “number of packages” column/field on the bill of lading. When the bill of lading indicates “1” container, the number of shipping units is “1” and the carrier liability is $500. Unlike airfreight, depending on how the “place of receipt” and “place of delivery” are indicated on the bill of lading, the ocean carrier limit of liability might cover the entire shipment from point of origin to final destination.
- Are there extreme risks? Determine whether:
- any place along the route is prone to piracy, war, or civil unrest
- seasonal weather events might contribute to the possibility of vessel peril
- seasonal temperatures and/or precipitation could contribute to damage to cargo
- cargo is packed in such a way that it might be apparent that it is high-value
How to Get Cargo Insurance
Once you are ready to look for cargo insurance, there are a few options you should consider:
- Self-insure – Some cargo owners choose to self-insure, which means they assume the risk of any loss or damage to their cargo without purchasing a specific insurance policy. Self-insuring can be an option for cargo owners with substantial resources and a high tolerance for risk. However, it’s important to carefully assess the potential financial impact of potential losses and ensure adequate resources are available to cover any potential damages.
- Obtain it through your freight forwarder (recommended) – Many freight forwarders offer cargo insurance through their open policy. Negotiating cargo insurance can be challenging and time consuming, so many cargo owners view insurance offered by their freight forwarder as a value-added service that lends convenience and peace of mind. The freight forwarder provides the expertise needed to evaluate risk and navigate cargo insurance terminology, policy terms, and claims processes.
- Purchase your own policy – Cargo owners can purchase their own cargo insurance policy directly from insurance providers specializing in cargo insurance. This option provides greater control for the cargo owner but requires a significant upfront investment of time and resources. The cargo owner is responsible for the financial burden of premiums and deductibles as well as the administrative burden of policy maintenance, claims filing, and documentation management.
- Declare the value to the carrier – In some cases, cargo owners may choose to declare the value of their cargo to the carrier and rely on the carrier’s limited liability coverage. This is typically done by completing a bill of lading or other relevant shipping documentation. However, it’s important to note that not all carriers may be able to offer adequate coverage, and the premiums assessed by those that can are typically much higher than the premiums from insurance procured by separate means.
Each of these options has its own considerations, and the choice depends on the cargo owner’s risk appetite, financial resources, specific cargo requirements, and preferences. It’s recommended to assess the risks, review available options, and consult with insurance professionals or advisors to determine the most suitable approach for securing cargo insurance.
At OpenRoad, we always advise our customers to obtain cargo insurance and we offer robust coverage should they choose to leverage our cargo insurance services. Here are a few reasons why most of our customers choose to receive cargo insurance through us:
- We don’t require them to deposit money in advance like insurance companies do when they open a cargo policy. Many cargo owners prefer “pay-as-you-go” versus payment upfront.
- We ease the administrative burden of preparing insurance forms and reporting them to the insurance company.
- Our experts provide in-depth knowledge of the insurance process, and we make it easy to get great coverage with little effort on their part.
- Should there be a loss, we facilitate the filing and oversight of the claim process.
Cargo insurance plays a vital role in the wise cargo owner’s transportation strategy as it provides essential protection against the risks and uncertainties associated with global shipping. Whether you self-insure, obtain it through your freight forwarder, purchase your own policy, or declare value to the carrier, it’s important to understand your liability and the risks and benefits involved with each option. By taking proactive steps to analyze and mitigate risks, cargo owners can safeguard their cargo and maintain a seamless shipping strategy. Remember, investing in cargo insurance is an investment in protecting your valuable assets and ensuring a smooth journey for your goods from origin to destination.
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