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Your Guide to Cargo Insurance

This introductory guide will familiarize you with the basics, outline the options, and explain why it’s rarely wise to try and ship internationally without it.

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Guide to Cargo Insurance for Small and Medium-Sized Enterprises

An Introduction to Cargo Insurance and Why You Need It

For SMEs engaged in international trade, shipping typically generates a large proportion of overall business costs. It is understandable then, that the extra expense of cargo insurance can seem a costly addition that's rarely likely to offer returns.

However, it might only take one significant incidence of cargo loss, damage, or even delay to impact an enterprise's ability to operate. Moreover, such incidents do occur in international transportation—more often than you might imagine.

Ultimately, the decision whether or not to insure your cargo is yours to take—but not to take lightly. It is one best made with a sound knowledge of the role of cargo insurance, and why one day, it may save your business.

What is Cargo Insurance?

Cargo insurance is no different from the coverage you might take out for your home, your car, or your business. However, it can be a little more challenging to understand. Fortunately, you don’t need to become an expert to benefit from an insurance product for your international freight shipments.

Some knowledge of the basics will help you to determine your needs, and discuss them with freight forwarders when arranging to ship your goods.

Cargo insurance will cover the cost of damaged goods should unforeseen events occur during transportation by air or sea. Similarly, it will protect you from the financial harm of cargo theft or loss in transit.

Carrier Liability is Limited… and Rarely Sufficient

It’s a common mistake for SMEs to confuse cargo insurance with the liability insurance provided by carriers and freight forwarders. They are not the same at all. Typical carrier or forwarder liability is limited, in some cases to no more than $2.00 per kilogram of stolen, lost, or damaged cargo, and coverage contains many exclusions.

If the value of your shipment exceeds the level of carrier or forwarder liability cover, you would be wise to procure dedicated cargo insurance.

It will provide you a more comprehensive level of protection, and enable you to recover the full value of goods that are lost, damaged, or stolen. You may even be able to ensure against other expenses, such as those arising from delayed shipments.

When Do You Need Cargo Insurance?

Generally speaking, you will only need to consider cargo insurance if you are the liable party under the incoterm agreed for your sale or purchase.

Each incoterm (explained in detail in another Knowledge Series article) used in global sales specifies that either the buyer or the seller will be responsible for shipping risk.

Some incoterms shift the risk from seller to buyer at specified points in the transportation. Whatever term applies though, you should know when liability falls upon your business, and make your cargo insurance choices accordingly.

As an example of why it matters, consider this scenario:

You are an exporter, and are shipping goods to your overseas customer under an incoterm that places liability on you during shipping. Your customer has not yet paid for the purchase. Your shipping container falls overboard from the vessel transporting it.

Now your goods are gone, your buyer is certainly not going to pay you, and might not wish to order a new consignment to replace that which was lost. Your carrier or forwarder will only reimburse you according to their legal obligations of liability, and then only if the carrier accepts responsibility for the loss of the container. At best, you will receive pennies on the dollar for the inventory that you lost.

Cargo insurance

Types of Cargo Insurance

In discussing the most common insurance types, we will focus on marine cargo insurance, which often covers air freight too. Note though, that it’s also possible to buy specialized insurance cover for air freight.

Marine cargo insurance is available with various levels of cover. You will need to decide what type of insurance is most appropriate for your business, goods, and severity of risk involved in transportation. Again, it will be an easier decision to make if you know a little about each option.

The first decision will be whether to purchase single or open coverage.

Single Coverage: This type of insurance is purchased on a per shipment basis. It only covers a single shipment and is usually the best choice for businesses that make infrequent international shipments. However, if your company ships frequently, it might not be cost-effective to make insurance arrangements for each consignment.

Open Coverage: This is a cargo insurance product that covers your shipments for a specific period, typically one year. You can cover all your goods movements under the same policy, making it a more efficient way to manage risk if you ship frequently.

Having determined if you will take out insurance policies for single or open coverage, you will need to consider the level of cover that you require. A complete guide to policies would require a much longer article than this one, so we’ll concentrate on the most common types of cargo insurance coverage.

All-Risk Cover: Applicable both to air and ocean cargo insurance, all-risk coverage, as its name suggests, offers financial protection in the event of most events leading to cargo damage or loss. You should be able to purchase all-risk cover for most types of goods, provided they are new, and not inherently vulnerable to breakage, spoilage, or loss.

However, even all-risk insurance is typically subject to some exclusions, such as:

• Negligence on the part of the importer/exporter

• Customs rejections or delays

• Loss or damage arising from war, strikes, riots, or civil unrest (WSRCC)

• Damage or loss as a result of acts of God (earthquakes, for example)

• Failure of customer to pay, or of the seller to collect payment

Named Perils Cover: In contrast to all-risk insurance, named perils cover is limited to risks that are stated explicitly in the policy. Hence, this type of insurance is less comprehensive. Its primary benefit is that you can arrange cover for perils not included in all-risk insurance.

Named perils can include:

• Cargo theft

• Acts of God

• Bad weather

• Collisions at sea or the sinking of a vessel

• Non-delivery of the cargo

General Average and its Significance: If you typically ship by way of ocean freight, the general average principle in maritime transportation is an issue to be kept in mind. As counterintuitive as it may seem, you should consider covering it as part of your cargo insurance strategy.

The principle stipulates that if some cargo is lost, jettisoned, destroyed, or damaged, due to a problem at sea, owners of all cargo aboard must share the cost of recouping the losses. Therefore, even if your goods survive the incident, you are liable to contribute towards compensating those whose cargo was lost.

Why Ask for General Average Insurance Cover?

As you might imagine, the application of general average can generate liabilities of hundreds of thousands of dollars. Furthermore, the carrier is entitled to retain custody of your cargo until it receives your share of the payment. If you do not pay, the carrier can legally take ownership of your shipment.

It’s entirely possible to purchase insurance against general average, but the cover is not included as standard in cargo insurance policies. Therefore, you will need to request the cover as an additional inclusion.

The cost of this insurance is not exceptionally high. Besides, it’s well worth purchasing when you consider that a general average liability can amount to a sum far higher than the value of your cargo.

Cargo Insurance: A Cost Worth Carrying?

Except where you have a contractual obligation to insure, you’re free to accept the risks of shipping and the scant cover offered by carriers or to protect your interests with cargo insurance.

At Shipa Freight, we recommend that you take out a level of insurance cover appropriate for your circumstances. After all, cargo theft is not uncommon on a worldwide basis, and incidents at sea or in flight, while rare, do occur—and when they do, can result in substantial financial losses.

Even if your business is not the risk-owner in an international sales transaction, keep in mind that the liable party may not buy insurance, or could under-insure the goods. Taking out additional cover yourself, as a contingency, can, therefore, make good business sense.

Shipa Freight is an online freight forwarding platform that helps SMEs to ship goods around the globe. We’ll be pleased to advise you on appropriate types and levels of insurance for your shipments. To get your questions answered, contact us by phone, email, or via our 24/7 live customer service chat feature.

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