Insurance is essential for any entrepreneur transporting goods internationally. While the common carrier is responsible for any loss or damage to the goods in its possession (except in certain cases such as acts of God), the bill of lading (B/L) usually limits the carrier’s liability for most risks to which the goods will be exposed. Thus, transportation insurance is required, because in some situations it will be an exporter’s only legal means of recovering the full cost of lost, damaged or stolen cargo.
The term “marine cargo insurance” is used in international trade—somewhat misleadingly—to include air, rail and road insurance, or more specifically, ancillary transportation (by air, over land or waterway), that is, before or after the actual use of marine transportation.
Common legal insurance terminology includes:
- “insurer” – the person insuring a particular risk;
- “insured” – the person who is being insured against a particular risk;
- “insured goods” – the goods which are the subject of the insurance against a particular risk;
- “insurance policy” – the contract of insurance between the insurer and insured where the insurer promises to pay the insured for damage to or loss of the goods due to a particular risk;
- “insurance premium” – the amount of money the insured must pay to the insurer in consideration of the insurer entering into and issuing the insurance policy; and
- “beneficiary” – the person to whom the insurer must pay money if damages to or loss of the goods occurs.
Know the right kind of international cargo insurance for your global trade needs
The legalities of cargo insurance are complex, technical, and extremely important. As such, most exporters have a marine insurance broker help them select the appropriate coverage. Most importantly, a reliable and knowledgeable marine insurance broker can assist in the selection of the appropriate insurance policy for the entrepreneur.
There are many different types of insurance policies with various limitations and inclusions.
Taking out the wrong type of insurance may mean that a loss is not fully covered or perhaps not even covered at all. On the other hand, some entrepreneurs take out more insurance than they really need simply because they did not understand the various policies available.
Even more confusing is the fact that different insurance companies have policies that appear similar but have significant differences upon closer inspection. A reliable and qualified marine insurance broker will be familiar with these policies and their differences.
Taking out the “wrong marine insurance policy” is the most common problem that entrepreneurs encounter when not using a marine insurance broker. Even experienced entrepreneurs who have gained significant knowledge about marine insurance still often prefer to use marine insurance brokers. The broker can keep track of the latest industry changes and can often help find the best price for a particular type of insurance policy.
Let’s look at your marine cargo insurance options
An insurance policy can be obtained to cover most losses resulting from unforeseen events such as war, riots, strikes and lockouts. The policy can also cover special hazards associated with the specific type of cargo (for example, the spoilage of fruits and vegetables).
There are two types of coverage to protect marine shipments against loss or damage in transit: open cover policy and special cargo policy.
Open cover policy
Under an open cover policy, the exporter takes out a master (“floating”) policy that applies automatically to every shipment once the insurer is properly notified of the carrying ship’s identity. For each shipment, the exporter completes a copy of the policy, which serves as an insurance certificate. An open cover policy is generally preferred when there are recurrent shipments, because a new policy need not be executed for each shipment. Certificates are provided that can be executed as needed and then forwarded to the insurance company. As a result, the cost of an open cover policy per shipment tends to be lower. The policy usually covers risks from the point of shipment (i.e. factory, store or warehouse) to the point of destination.
It is important to ensure that the correct ship is identified to the insurer. If a freight forwarder is used, then the freight forwarder should ensure that this is properly carried out.
Special cargo policy
Under a special cargo policy, insurance is negotiated and an insurance certificate is issued separately for each shipment. The policy is usually made in favour of whomever the B/L is made out to (for example, the shipper of the goods). If the insured is sending only a few shipments on an infrequent basis, a special cargo policy might better suit his/her needs. Even if the insured already has an open cover policy, if the shipment is one of extraordinary risk or of particularly high value (higher than normal), it may not be covered under his/her regular open cover policy. In this case, the insured may wish to obtain a special cargo policy for this particular shipment.
The shipper can insure the cargo for the invoice value of the goods, plus freight and other charges. Most insurers offer insurance at 110 percent of the CIF value (the additional 10 percent being included as compensation for loss of profit). Generally the beneficiary of the insurance policy determines which risks should be covered by insurance, and attempts to negotiate to include that degree of coverage in the sales contract.
It is rare to obtain insurance for more than 110 percent of the CIF value of the goods. The purpose of insurance is to compensate the insured for loss or damage, not to provide profit to the insured for the accident or event that led to the loss or damage.
Who takes out the policy?
Usually the terms of the sales agreement indicate which of the parties must obtain insurance. For example, the current Incoterms CIF definition requires the seller to obtain, at his/her own expense, cargo insurance as agreed in the contract. It also stipulates that the buyer, or any other person having an insurable interest in the goods, shall be entitled to claim directly from the insurer, and that the seller shall provide the buyer with a copy of the insurance policy or other evidence of insurance coverage.
Most insurance brokers are familiar with the requirements applicable to each trade term. These ramifications should be investigated before entering into any contract that contains an unfamiliar trade term. Insurance can be quite costly, and in some cases unavailable.
Who will be the beneficiary of the policy?
Insurance policies should generally be endorsed in favour of whomever the B/L is made out to. For example, if the B/L is made out to an exporter, the insurance policy should also be made out to the exporter. Generally speaking, this will make sense in most cases because it is usually the person to whom the B/L is made out that is taking possession of the goods and assuming the risk. Thus, that person wants to ensure the risk is covered by insurance.
The complexity and technical nature of the language used in these insurance policies emphasizes why insurance brokers with specialized knowledge are often used by entrepreneurs to assist in selecting the most appropriate type of insurance.