5 December 2008

Export ABCs: Cargo insurance

The following is written by Frank Reynolds, a president of International Projects, Inc., an export management company, and a regular contritubor to the Export ABCs column in the “Journal of Commerce”.

Most people involved in international trade, with the exception of insurers themselves, have only a slight grasp of cargo insurance basics. There are several reasons, and the main one is that most things work. Most shipments arrive where and approximately when they are supposed to with little or no damage. The proof is in the low premium rates insurers charge for most types of cargo shipped on most modes to most destinations.

Terminology itself presents a second reason why many find cargo insurance mysterious. “All risk” coverage doesn't cover all risks. A voyage is an “adventure.” An “average” is a loss. Something “warranteed free of" isn't covered -- precisely the opposite meaning one usually attributes to the term warranty. “Marine Cargo” insurance covers international shipments, possibly including inland freight on both sides, and may be used for air as well as vessel transport. “Inland Marine” insurance covers domestic shipments.

There is also insurance that carriers buy to cover their vessels (“hull”) and carrier liability (“Protection & Indemnity” or P&I). We won't cover these, except to mention that the cost of specialized risk insurance carriers pay for transiting the Gulf of Aden has increased from about $500 in 2007 to $20,000 because of increased piracy.

Another area of confusion: When written on an individual policy basis, insurance is often customized to address the particular characteristics of the policy owner's products and their respective risks. Further, marine cargo, inland marine, liability and other insurable risks are sometimes combined in customized “umbrella” policies.

There are three ways an individual shipment can be insured:

-- An individual shipment-specific insurance policy can be issued, but this is seldom done except for very large or unusual shipments;

-- The shipment can be covered under a master cargo policy owned by the seller or buyer or anyone else with insurable interest (which means a party that stands to lose should something bad happen to the shipment);

-- Coverage can be sold to a party with insurable interest by a master cargo policy owner, such as a freight forwarder. In this case, the master policy owner purchases insurance wholesale from the insurance company and retails it.

Typically, an insurance certificate is generated whenever a shipment is insured under a master cargo policy. This proof of insurance can be provided to the buyer when the seller is responsible for insurance, as under the CIP and CIF Incoterms. It is also a frequently required document under letter of credit payment terms.

A fourth possibility would be purchasing enhanced liability coverage from the carrier. I do not consider this insurance. It's akin to betting against the party transporting the goods. Any claim would be made on the carrier who probably caused the problem, rather than against a neutral third party called an insurance company.

Most cargo insurance, even when written on an “all risk” basis, excludes some perils such as war, strike, riot, civil commotion and terrorism. (This is why so-called “all risk” coverage really isn't.) Additional coverages for these situations can usually be purchased at modest additional premiums.

There are also other exclusions such as inherent vice (loss caused by the cargo itself rather than external causes) and improper packing. Besides exclusions, the net amount of coverage can be reduced by a deductible or franchise (disappea