Cargo Insurance

What is cargo insurance?
Cargo insurance (also called marine cargo insurance) covers physical damage to, or loss of yourgoods whilst in transit by land, sea and air and offers considerable opportunities and costadvantages if managed correctly.Unfortunately, many UK traders do not want to become involved in arranging this type ofinsurance because they feel they do not have sufficient knowledge. They see it as anunnecessary expense involving extra administration, and make the mistake of allowing suppliersor customers to control this vital area of business. This loss of control not only increases thedifficulties of implementing an effective trade risk management strategy, but can also have farreaching effects on profitability. Fortunately, this attitude is changing, with more and more companies following the lead of manyof the 'blue-chip' manufacturing and trading giants of the UK economy who tend to take fullcontrol of this type of insurance.When you are looking at the types of cargo insurance available, you may come across the termGeneral Average. This is one of the oldest principles of cargo insurance and relates only toocean and sea voyages but is still relevant in today's trading environment. General Averagecovers the situation where damage or loss of certain goods occurs so that the remaining cargoand the means of transport are saved. For example goods may sustain water damage during firefighting. In this situation, if General Average is declared, all the parties involved must contributeto covering the loss. Cargo insurance is usually provided by the means of one of three Institute Cargo Clauses - A, Bor C, plus War Clauses and Strikes Clauses. Simply put Cargo Clauses A provide the most coverwith B and C giving less coverage which is reflected in reduced premiums for the lower cover(somewhat similar to car insurance cover with comprehensive, third party, fire and theft, and third party policies). Also there is an Institute Cargo Clauses (Air) for movement by air, which isequivalent to the A clauses. Your insurance company or broker will be able to give details ofexactly what cover is given by each clause so you can choose the most appropriate for yourbusiness needs and trading patterns.

Why do traders need cargo insurance?

Exports
Many major UK exporters and trading companies sell on Cost Insurance and Freight (CIF) orsimilar terms, which allows them to arrange marine cargo insurance in the UK - usually on an'open cover' basis. Because this insurance cost is legitimately passed on to the customer, whoalso gets the benefit of the insurance, this virtually amounts to free insurance which the exportercontrols.Many foreign buyers see this as essential service provided by the exporter, given that cargoinsurance rates in UK are often cheaper than those available to the overseas customer in hislocal market. Indeed, exporters who do not provide a 'package' which includes insurance, canlose business to competitors who do. The other side of the coin is where UK exporters allow their customers to arrange the insurance.This can range from selling on Ex Works terms to exporting on Free on Board (FOB) or Cost andFreight (CFR) terms. An Ex Works sale represents the minimum obligation for the seller, who hasmerely to make the goods available at his premises for collection by the buyer's designatedcarriers. However, what tends to be overlooked is that the exporter is totally reliant on the buyer arrangingadequate insurance on goods which have probably not been paid for. If the goods arrivedamaged or if the buyer's insurance does not cover the loss, the exporter may not receivepayment. Additionally if the goods or shipping documents are rejected on arrival at destination,the insurance risk can often revert to the exporter who may not have taken out any insurance.

Imports
Many importers assume that the suppliers are including the marine cargo insurance for freewhen, in fact, the cost is included in the purchase price. In addition, obtaining information fromsuppliers about these costs and whether they are being loaded can prove difficult.Another important issue is the type of cover being provided - is it comprehensive 'all risks' or just'total loss' only? Is it on a warehouse to warehouse basis or just warehouse to UK port? Withoutthis information, importers may not realise they are paying too much for insurance which doesnot meet their needs, and may leave them with uninsured exposure. A further issue is who is actually insuring the goods? The security of some overseas insurersmay not compare favourably with the security of insurers in the highly regulated UK market. Inthe event of goods arriving damaged in the UK, the importer will probably deal with the UK agentof the overseas insurance company - an agent who will be working for the insurer, not theimporter. This can lead to delays in processing and settling claims.If the importer takes control of cargo insurance they can arrange the necessary cover in the UKmarket, which is often more comprehensive and price competitive than in overseas markets.

What types of cargo insurance are available?

Open Cover
This is the most usual type of cargo insurance, where a policy is drawn up to cover a number ofconsignments. The policy can be either for a specific value that requires renewal once theinsured amount is exhausted or an permanently open policy that will be drawn up for an agreedperiod, allowing any number of shipments during this time.

Specific (Voyage) Policy
Although not the norm for cargo insurance, you may from time to time need to approach aninsurance company (or broker, or other intermediary) to request an insurance policy for aparticular consignment. This is usually referred to as Voyage Policy as the insurance covers onlythat specific shipment.

Contingency (seller's interest) insurance
As an exporter you may often sell goods on terms where your customer (as the importer) isresponsible for insuring (or at least bearing the risk of damage of or loss to) the goods, forexample under FOB and CFR Incoterms 2000. In these cases you are exposed to the risk ofdamage to the goods while in transit and your customer refusing to accept them. In the worsecase your customer may not have insured the goods. If this happens and your customer attempts to avoid liability, you could seek redress through thelegal system. However, this can prove very expensive, and may often be pointless. Seller'sinterest insurance, usually for a small premium, will cover you for this contingency. For validcommercial reasons you may not wish your customer to know you have taken out such a policy.

Where can I get cargo insurance?

You can obtain cargo insurance direct from an insurance company, or some freight forwardersand other trade service intermediaries. Also you may find that your bank will offer cargoinsurance as part of a trade finance package. However, best practice adopted by manycompanies has shown that using a specialist (marine) cargo insurance broker provides value-added services when arranging cover and gives additional benefits when dealing with any claimsand settlement procedures. The British Insurance Brokers’ Association (BIBA) has a search toolto help you to identify insurance brokers at http://www.biba.org.uk/consumer/findbroker.asp.SITPRO does not sell cargo insurrance or recommend insurers.

What other options are open to me?

There are several other ways to approach the risk involved in the physical movement of thegoods you trade across international borders:
• do nothing and carry the risk yourself. If an incident occurs resulting in damage or loss to thegoods you could take action against the carrier. But you should remember that carrier liabilityis strictly limited by internationally agreed conventions. Also you will need the expertise andperseverance to sustain a successful claim. This could have an impact on your business;
• as an exporter you can let your customer insure the goods;
• as an importer you can let your supplier insure the goods.

The factors you must consider for either of the final two options have been described earlier inthis Briefing;

How much will it cost me?

Like all insurance cover (premises, employer's liability, credit) you will have to pay for your cargoinsurance services. Premium is usually calculated according to the value of the consignment(plus a percentage mark up for profit margin), the type of goods (danger or hazard) and otherspecific risks (mode of transport, route, destination, etc.) from the insurer's perspective. As withall insurance cover, you should spend time researching the market and getting quotes from arange of cargo insurance providers.

Conclusion

More and more companies recognise the long term advantage of buying cargo insurance in theUK and using the services of specialist cargo insurance brokers. If you are a small or mediumsized trader you need to look more closely at this area of your international trading operations.You could reap benefits for your business through enhanced protection of your interests,improved international trade administration, better trading relationships and increasedcompetitiveness, resulting in greater profitability.