Shipping goods from a place A to a place B come with risks. The journey around the world could be complex and international transports come with a long list of hazards such as theft, natural events, or ship accidents. The question to know whether I need to buy cargo insurance is often overlooked by small and medium size companies once the sales contract is signed and the transport arranged. In the below article, we give you all the necessary tools to take the right decision.
I – What is cargo insurance?
Cargo insurance covers your goods during their transport by air, sea, or land against a certain type of events. It will reimburse the amount you are insured for if your goods are destroyed during the transport.
They are two main types of cargo insurance: all risks cover or named perils cover. The all risks cover (clause A of the Institut Cargo Clause, ICC) is the broadest form of coverage. This type of policy will cover all losses occurring during the journey except the one who are excluded such as:
- Willful misconduct of the Assured
- Ordinary leakage or loss in weight or volume
- Ordinary wear and tear
- Insufficient or unsuitable packing arrangements
- Inherent vice or nature of the goods insured
- Insolvency of ship owners or charterers
- Use of nuclear of atomic weapons
- Unseaworthiness of vessels/crafts or containers
- War risk
- Strike and terrorism risks
The other type of insurance is a named perils policy (Institute Cargo Clauses B and C). It will only cover the perils (events) named in the policy such as fire, natural events, collision, theft and few other more.
The Cargo insurance is a totally different insurance than the one the carriers or the freight forwarder will buy to cover their own exposure.
II – What about the carriers’ liability and its insurance?
First of all, this is very important to understand that freight forwarders or carriers are only liable for loss to the goods due to their own negligence or mistake. As a consequence, all losses to the goods caused by any other reason than their negligence, such as a natural event as instance, will not fall under their liability.
The other important element to consider is that their liability is often (very) limited by international convention. These international conventions have been set up to facilitate international transport and spread the risks among the different participants to the supply chain. If the risk of loosing the goods who lays only on the carrier, the cost of the transport would be much higher especially for the high value items.
To have an idea on the level of liability, we mention below some of the most famous international convention for the transport by Air and by Sea.
- Air transport
In the transport by air, the 2 most important convention are the Warsaw Convention and the Montreal Convention. Under the Montreal Convention (which is the most commonly applied nowadays), the limit of liability is 22 SDRs per kg which is equivalent to USD 31.78 per kg (as of today, 14 Jan 2020).
- Sea Transport
There are a certain number of Convention that could apply here. The most common one is the Hague Convention whereby the limit of liability is of 2 SDRs per kg (USD 2.88) or 666.66 SDRs per package (USD 963). The higher limit will apply
III – What are INCOTERMS?
Another important point to consider is the incoterm agreed for the sale or purchase contract. Incoterms are universal terms and conditions which define the obligations of each parties to the sales contract in respect of the transport.
The table below mentions for each incoterm where the transfer of the risk takes place and the obligations of each parties.
Source = https://incodocs.com/blog/incoterms-2020-explained-the-complete-guide/
In respect of the insurance, we could see that only 2 incoterms stipulate an obligation to provide insurance placed under the seller (CIP and CIF). For all the other incoterms, the insurance is negotiable.
Whatever terms applies, what is important is to know when the risk shift from the buyer to the seller and make your choice regarding the insurance accordingly.
IV – How do I purchase the cargo insurance?
Your freight forwarder or your carrier could sometimes arrange the cargo insurance on your behalf. It may be a good solution especially when you are not doing regular shipping as you will avoid some minimum premium that insurance companies could require. If you choose this solution, it is still important to check few points:
– claims services and the claims procedures
– the rate of premium of the cargo insurance
– the adequacy of the cover to your risk profile (excess provided, scope of cover)
If you have some question about the Cargo insurance provided by your carrier, dont hesitate to submit us the elements described above and we will be happy to give you our opinion.
If you shipping goods regularly, it may be worth setting up a open cargo insurance to cover all your goods during their transport. In this case, the insurer will set up a annual policy covering all your risks from warehouse to warehouse (or to the final destination). At Clema, we would be happy to present you the best solution that would fit your needs and risk profile.
Still having question about the Cargo insurance
If you are still unclear whether you need to buy cargo insurance, please send us an email with your contact details.
You can also visit our website to find out about the other insurance services we offer.
Comments are closed.