Why cargo insurance and insurers matter..

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Cargo insurance is a type of insurance that covers/compensates a buyer or seller of goods against cargo damage or loss of cargo..

Despite insurance having been around for centuries, there is still a feeling that any form of insurance is a “grudge purchase”..

By its nature, insurance is an intangible benefit, one that can only be tested under adverse circumstances and there is nothing more adverse than cargo damage..

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From a

  • Local (Street to Street, City to City, Town to Town) shipment;
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  • to Regional trade within regional trade blocs like EU, BRICS;
  • to Global trade between countries

there are several modes and types of trade/shipments around the world..

Although it may seem obvious, it is shocking to see how many customers still do not take the right Cargo Insurance to cover their cargo comprehensively..

I don’t think this lack of proper insurance cover is intentional, but may be due to ignorance or lack of knowledge on the part of the client as far as Cargo Insurance goes..

So when I read an article from Tom O’Malley of TJO Cargo, I felt I had to share it with my readers for a better understanding of Why cargo insurance and insurers matter..

So here is the article reproduced with permission from Tom..

Just one decade ago the number of organizations selling cargo insurance to freight owners for their cargo transported was a fraction of the number today.

Back in those heady days, TJO Cargo was on page one for the search term ‘cargo insurance,’ and I knew many of my competitors, this is not the case today.

Over the past ten years, cargo insurance has become big business with almost limitless choices of places it is available. The growth in the number of vendors is good for rate competition, but it also comes with an inherent risk.

Namely, does your cargo insurance vendor know what they are doing and is the insurer they use a good insurer?

Here is why the cargo insurer matters.

Not all insurers are created equal. Sure, most insurers in the market are good insurers, but some are not. Some time ago I was contacted by a friend who asked if I could help a client of theirs who was trying to file a claim for cargo they received damaged in Jacksonville, FL.

I did not provide the shipment cargo insurance certificate but since it was a friend I agreed to look into it. I spoke to the insured who told me the insurance was provided by the seller who sold them the goods in an Incoterms CIF (Cost Insurance Freight) deal.

Have a look at this reference chart for more information on Incoterms.

The seller, based in India, purchased the cargo insurance certificate from a local insurer who maintained a claims office in the USA. Unfortunately for the Jacksonville loss payee, the insurer who underwrote the certificate, while technically an insurer, was mostly a shell that provided cargo insurance certificates with coverage stripped down to almost nothing through exclusions in the terms and conditions.

Moreover, the USA claims office turned out to be a P.O. Box and an unattended phone in Seattle Washington. I have little doubt the purchaser of the insurance certificate got a great deal on the certificate. It was my unpleasant job the tell the loss payee collecting on a claim wasn’t likely and reasonable options were few.

To protect your interests make sure the insurer behind your coverage is an A-Rated insurer with a true presence in your home country or at the very least has representation in the destination country. While few insurers have actual offices in every country, most contract claims management companies who do.

Whether you are choosing the insurer or not, it is well worth your while to perform due diligence. In the ,event you are purchasing goods CIF (Seller pays freight and insurance to your port of entry), supplying the seller with minimum insurance requirements such as ‘ICC Clause A’ for 110% of cargo value’ and an approved list of insurance companies to select from is a good way to save yourself the heartache.

Cargo insurance is like Avon; everyone knows someone who sells it.

Who you choose to use to purchase insurance is almost as important. While it is true, whether it’s a forwarder’s policy or per shipment certificates, much of the time vendors supplying cargo insurance are not required to get directly involved shipments, there are however occasions they do, or at least should.

It is a fact it’s difficult for insurers to know all cargo intimately.

During the normal course of business, insurers must depend on the information provided to them by brokers and policyholders. Insurers set terms and conditions, rates, and deductibles based on the information provided to them when the insurance is arranged.  If there is a loss, underwritten by an insurer, the information provided to the insurer counts when it comes to a claim.

If a cargo survey and or claims adjuster reveal the shipment was not within the parameters of the risk agreed to by the insurer based on the information provided, a claim can, and likely would be, be declined by the insurer.

This statement may sound backward, but if your cargo insurance provider isn’t a little bit of a pain in the neck regarding the asking of questions, they may not be doing you any favors. While most insurance companies do their best to keep the rules of engagement as simple as possible, the simple can sometimes be complex.

Line items such as what are Incoterms of a deal, the mode of transport, packaging, what the commodity is and what inherent vices does it possess, and more count.

When a cargo insurance provider is setting you up as a customer or arranging coverage for a shipment, they should be asking questions about your cargo and its transport.

Here are some examples

Example 1: Let us say a USA shipper exports full containers of silica sand Incoterm DDP (Delivery Duty Paid) internationally in ‘super-sacks’ (think of a giant bag with strap handles).

First thought logic is, it’s sand. What can happen to it? ICC Clause C limited coverage should be fine. If a container takes a hit and the commodity shook, it’s still bags of sand.

ICC Clause C, right? 

Let’s ask a question.

Q: Can the commodity get wet and not lose value?

A: The answer is No; the cargo must not get wet. 

Right out of the gate, ICC Clause C won’t fit the commodity best. ICC Clause C does not cover washing overboard or any intrusion of sea, river, or lake water into the container. The cover must bump up to ICC Clause A or ICC Clause B to include those perils.

Example 2: How about a USA exporter shipping auto parts overseas and agreed in the deal to provide the cargo insurance? The shipper (exporter) purchases a cargo insurance certificate and names themselves the loss payee.

Let’s ask a question.

Q: What are the terms of the deal? 

A: The answer, FCA (Free Carrier).

FCA Incoterms only requires the shipper to deliver the shipment to a ‘named place.’ The shipper’s (seller’s) risk only extends to that named place such as the port of exit terminal.  Once the first carrier, likely a truck, is unloaded at the port terminal, the risk transfers to the buyer. Too bad the buyer doesn’t possess a cargo insurance certificate naming them the loss payee for the remainder of the transit.

Finally,

If your cargo insurance provider doesn’t ask questions or can’t provide you, and help you understand if needed, a copy of the insurer’s full terms and conditions, consider looking elsewhere for your cargo insurance needs.

Make no mistake, not all businesses that bring on cargo insurance as a new service are bad.

Although as the number of businesses increases that choose to add cargo insurance sales as an additional profit center, the higher risk there will be of your needs being serviced by someone who doesn’t possess the knowledge and experience to serve your best interests.

Resist the temptation to procure your coverage without thought from the cheapest source.

Considering the risk, not performing due diligence when it comes to cargo insurance can cost you.


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8 thoughts on “Why cargo insurance and insurers matter..”

  1. Hi Tom, it is possible to have a basis of valuation on a marine policy of delivered cost at final destination plus a percentage, this percentage being the anticipated profit of the insured had the goods arrived in a sound condition.

    The delivered cost shall be all costs incurred to get the goods to the destination which includes duties, ocean freight should it not have been included in the seller’s invoice and payable at destination, road haulage from the port/terminal to the destination, agent’s fees, etc. The percentage mark-up can be considered profit which was anticipated.

    Some policies state that in the event of the goods being lost prior to arrival at the port of discharge, the basis of valuation shall be all costs incurred plus 10%. Once again, the 10% can be considered as profit.

    There are also hidden costs for which there may be no paperwork giving any proof of the amounts. The mark-up takes these costs into consideration.

    Trust that this clarifies the statement of profit in marine cargo insurance.

  2. Hello Alexander, thanks for the comment. While transactions governed by a good LC offer protections to achieve much of what you state, there are of course transactions which do not have the benefit of a letter of credit.

    The main difference in our two statements is there is ‘the way things are supposed to be and the way things are.’

    The ‘internet of things’ have brought more small companies and individuals into the import and export arena than ever. This growth brings with it the unethical and the inept. It is noted and agreed, CIF states a cargo insurance certificate should name the buyer as the loss payee along with other requirements.

    Although in the absence of a well monitored LC, the inept may very well make the mistake of not doing so and the buyer may not pay attention or even know the difference.

    While it is true there are obligations via the structure of Incoterms, enforcement after the event of a loss in a international platform sometimes is just not practical. I often see cargo abandoned at the port of entry rather than the buyer fighting it out with the seller. It is regretful cargo insurance is often an afterthought.

    As Hariesh Manaadiar eloquently wrote in his article “any form of insurance is a “grudge purchase.” Cargo insurance is indeed sometimes a forced purchase with no thought of the protection and value it brings, this makes for sloppy purchasing and application in some instances. The gist of my article was to encourage buyers and sellers to perform due diligence on the subject of cargo insurance as they would for any component of a transaction.

    In regard to Marine ICC Clause A or C allowing claims for potential profit, I am not aware of any broadly available ICC Clause marine insurance that include potential profit as an claimable loss without prior approval from the underwriter.

    I would be grateful if you would reach out to me on this platform or LinkedIn https://www.linkedin.com/in/tom-o-malley-9474a89/ with to educate me on the subject. I will look forward to hearing from you on the subject. – Regards, Tom O’Malley

  3. I note that the article refers to CIF as being ICC “A” at 110% cargo value. in terms of Incoterms 2010 rules, the minimum cover shall be ICC “C” or equivalent at a value of 110% of invoice value. The policy will always be in the name of the seller but the seller must endorse the certificate to the benefit of the buyer. The rule also stipulates that a reputable insurer is to be used.

    Furthermore, as the buyer is effectively paying for the insurance as the cost thereof will be added to the selling price, the buyer is able to dictate the terms and value of the insurance. Remember marine cargo insurance is the only insurance where a claimant can make a profit out of any claim, this being due to the insured value including profit which any buyer anticipated to make from the imported goods.

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