The hazards of conducting trade around the world, and in particular the risk of losing cargo at sea, has preoccupied the minds of merchants for centuries. Shakespeare built an entire play – The Merchant of Venice – around it. If Shylock had taken out all-risks goods in transit insurance including the possibility of forfeiting a pound of his flesh, it would have been a much shorter play.
The need for cargo owners and shippers alike to lessen the danger of losing their entire businesses led to the creation of Lloyds of London, and the English system of marine insurance principles that still holds sway around the globe. There are policies covering vessels: and cargo insurance policies, which are those that we are outlining here. The multimodal nature of modern freight carriage has led to Lloyds using the acronym MAT (marine, aviation, transit) and it is worth remembering that Marine Cargo Insurance covers in practice any type of carriage, including road, rail and air as well as water.
Why do I need Marine Cargo Insurance?
Whenever goods move, they are subject to risk and their value may be partially or totally lost due to a whole range of reasons. This can be critical to your business.
Whenever you use a freight forwarder, which is a wise move for most exporters, you do pay for them to take a lot of headaches away. Comprehensive insurance is however, not something that they can offer you as standard. They will be insured, but on a limited-risk basis – this is perfectly reasonable because they only take a limited fee for the work that they do. The bulk of the value lies with the actual shippers, and a freight forwarder is only liable for errors made by that company, not by shipowners or hauliers.
You may, depending on the nature of your contract of sale, have some degree of cover supplied by your counterparty – but you need to be very sure of what they cover and do not, and of what limitations exist in their insurance policy.
As we shall see, you are likely to require some form of one-off or annual policy that will provide you with an acceptable degree of protection.
Types of Goods in Transit Insurance
With cargo insurance, you are seeking to cover three main types of risk –
Lloyds categorise shipping insurance into one of three Institute Cargo Clauses – A, B and C.
A – this is the most comprehensive type of ‘All Risks’ policy that will protect you from the effects of most problems, with the exception of wars and strikes. Be aware that if you are dealing with a dangerous zone during your vessel’s transit, then piracy is considered an act of war. Take out specific cover if you want to minimise this or other special risks (and be sure to notify your freight forwarder, using an Export Consignment Shipping Instruction, ‘ECSI’).
B – these policies will cover a basket of common risks on a ‘reasonably attributable’ basis, where it is possible to attribute responsibility or blame between the various parties to a transaction.
C – the most restricted types of policy, that may only cover accidental damage, for example.
They also have specified Clauses that apply to different types of cargo, such as bulk shipments, commodities and frozen goods.
Another way of classifying policies is that they may be either –
Truck Cargo Policies
These cover theft whilst a vehicle is unattended, or damage to the goods due to collisions or movement, etc:
- or they may be –
These apply to sea and air freight and cover loading/unloading, problems with the vessel or aeroplane, weather issues, etc.
Specific types of policy will be chosen according to your commercial situation.
Open Cargo or Open Cover policies
This very common arrangement is ideal for regular importers or exporters. The policy is for an agreed timescale or total value, or both. So if, say, you expect to export £1m of goods in the next 12 months, you can cover that value and the insurer does not need to know when or where the goods are moving.
Irregular traders may opt for specific cover with a policy that sets out the places of origin and destination (not normally the duration, which can vary). Once the goods arrive safely the policy expires and you do it all again the next time around.
Contingent Cargo policies
This is rather more specialist – if you think there is an unacceptable risk that your counterparty may not accept liability or refuse to accept delivery in the event of there being damage, then you might take out a secondary insurance of this kind that kicks in if the primary cover fails to achieve your objective.
Whose Responsibility is it anyway?
It is important to be clear on this point. The accepted international guidelines are provided partly by Incoterms, the set of terms of trade for commercial transactions that are laid down by the International Chamber of Commerce (ICC). For a full explanation of Incoterms, see our article here.
Incoterms determine the split of risk in each case and clarify when ‘delivery’ (defined as the point when risk and liability pass from seller to buyer) takes place. But they only codify terms of sale, not terms of carriage.
Furthermore, only two of the 11 Incoterms actually spell out who is specifically liable for providing insurance – these are CIF and CIP. Both of these (very similar) terms place the liability with the seller. In other cases the contract of sale needs to spell out who is responsible for insurance; for example under EXW (ex works) it is not spelled out – by implication the onus lies with the buyer, as everything else is paid for by him and not the seller – but check the contract and act accordingly.
Finally, if you are liable under CIF or CIP and you are opting for a Class A or B policy, Lloyds state that you must cover 110% of the cargo’s value – this acts as a reminder that policies by no means cover every penny of your goods’ worth. There is a ‘general average’ concept whereby whoever loses out in a mixed consignment (e.g. a container vessel) is compensated collectively by the other cargo owners. There is also likely to be an excess figure in your policy.
Where do I go for good Shipping Insurance?
You can begin by approaching a general-purpose insurance company to get a quote. However, marine freight insurance is a specialist area and it may be wise to seek an expert marine broker registered with Lloyds.
Alternatively, bear in mind that your freight forwarder handles these issues day-in, day-out, and will be happy to arrange quotations – the company’s buying power can often result in you obtaining a better rate than you could do alone, and with considerably less time spent in the process.
It is always good to test the market at renewal from time to time to make sure you have a competitive deal on your Open Cover policy.