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For Shippers

Cargo insurance: Do I need it? When and why?

Cargo insurance covers loss or damage of goods during shipment, and applies to transportation by air, sea, or land. Even when freight forwarders, shipping lines, airlines, and truck drivers do their best to take good care of your cargo, loss and damage can occur on occasion.

From natural disasters to pirate attacks on commercial ships (yes, this still happens - the most recent occasion was in April 2017 near African shores, according to NY Times), it is prudent to expect the unexpected. Thus, your goods need insurance, just like you need a health insurance despite the fact that you are in good health.

You do have the option to ship your cargo without insurance; however, in case of damage or loss, you would absorb the entire financial burden. Without insurance, you still could proceed legally against your freight forwarder. However this is a very long and difficult route, and could also face limitations with international law.

DHL explains that the limit of liability is based only on the weight or package count of the cargo, which is probably less than the commercial value of your goods. Keep in mind that “freight forwarders and carriers only pay compensation if you can establish they were at fault, which can be time-consuming and expensive.” Storms, flooding, lightning strikes, and earthquakes – so called ‘Acts of God’ – are not reimbursed under international conventions, so an insurance policy would be the main way to recoup a loss in any of these cases.

Policies for cargo insurance can vary from country to country, and some can be customized for specific shipments. Insurance companies, like AIG, provide different coverage extensions such as: warehousing, storage, consolidation risks, domestic movements, or processing.

Types of cargo insurance

The duration of your coverage over your cargo does not depend on the type of cargo itself. However, the period of time of your coverage is stated in the insurance policies, and it should begin in advance of the departure of your cargo from its place of origin, and it should close after the cargo is received at its destination.

The main types of insurance you can find can be summarized into two:

  • Open Coverage

This coverage is more convenient for companies who are consistent importers or exporters. The coverage is annual and can cover several shipments at once, shipped to and from different origins and destinations. The value covered can be open, or specific for a year with a renewal once the amount insured is used. Open Coverage is a type of insurance used by freight forwarders, since they have to insure themselves against airlines or shipping lines (more of this will be explained later in this article).

  • Single Coverage

This one applies for single shipments and is convenient for small businesses and individuals who do not have regular freight. It covers only one specific shipment and “travel” from the origin to destination.

Who pays for it?

When you hire a shipping service from a freight forwarder, you protect your cargo by having insurance that covers an eventual damage or loss. But let’s remember that a freight forwarder also buys the services and/or space from a shipping line (i.e.: Maersk, Hapag Lloyd, COSCO, MSC, etc) or an airline/cargoline (i.e.: American Airlines, United, DHL Cargo Line, etc). Therefore, a freight forwarder is also covered with an insurance policy that protects against damage and loss of your cargo while it is transported in those ships or airplanes. Since a FF has no control of those transportation means, and has no ownership but responsibility over your goods, they are the most interested in having an insurance policy. The shipping and air lines have their own insurance policies, too.

Everyone pays for insurance, and everyone has the possibility to respond for any damage or loss.  You pay for your shipments’ insurance, your freight forwarder pays for an open coverage of all the shipments they handle, and the carriers pay for an insurance to cover their transportation assets and the cargo carried at the moment of a loss or damage situation.

Where can you get your cargo insurance?

Most freight forwarders offer an insurance package built together with an insurance broker with whom they have a history. This is the most used and convenient insurance policy to get since they can do a quick sale. In the event of a claim, you can expect quicker responses because of their partnership with the insurance brokers.

You can also decide to go directly with a broker, but this will be easier for businesses who have consistent shipping volumes.

Calculation of your costs

The rates offered to cover your cargo will vary according to the type of risk your products involve. For example, if you import mobile phones or laptops –which are high-tech and FMCG, the insurance rate will be one of the highest because of their value and the risk of losing them (it’s not so difficult to steal 1 mobile phone out of 100).  On the other side, if you import simple plastic toys with low commercial value, your insurance rate might be one of the lowest. Please note there will always be a minimum insurance cost to pay, which can be from ~$10 to ~$80.

The calculation of the cost is done with the value of your cargo and the value of the freight. Let’s consider the following variables:

  • Commercial Invoice value of your goods
  • Insurance rate provided by the issuer (%)
  • Freight (shipping costs)

 

Calculation example:

  • Commercial Invoice value: $5,000
  • Insurance rate: 0.6%
  • Freight: $1,200

Steps:

  • Insurance cost: Commercial value x Insurance rate: $5,000 x 0.6% =  $30
  • CIF value: Cost + insurance + freight: $5,000 + $30 + $1,200 = $6,230
  • Total Insured Value: $6,230 * 110% (10% goes for any unexpected costs) = $6,853
  • Total Insurance cost: $6,853 x 0.06% = $41.12

Procedures

It’s best that you request the procedures to follow directly from the entity from whom you have purchased the cargo insurance, whether it is a freight forwarder or an insurance broker. They should give you a set of instructions that you need to read carefully in case of cargo accidents. However, there is one piece of advice that you should always follow: Take exceptions on the delivery receipt that the trucker asks you to sign. If there is visible damage to cartons, make note of it and take photos of the damage. Contact the policy issuer immediately. The steps to follow will vary depending on the issuer’s procedures.

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