It’s common knowledge that conditions out at sea may get rough, which is why many freight forwarders emphasize on the importance of properly packing and securing your shipment. But given the unpredictability of mother nature, shipments are never entirely safe.
Your lashes are securely in place, your pallets are properly stacked, and your weight distribution is right. You’ve packed and secured your shipment by the book and so well that you’re thinking about teaching a 101 course on how to prepare your shipment. The container door shuts, and off it goes on its oceanic journey. You may now breathe a sigh of relief… or can you?
Why cargo insurance is important
While it’s good (and highly recommended) to take all the preventive measures you can to prevent your shipment from getting damaged, there’re always other factors beyond your control. Unpredictable bad weather conditions and the lack of proper packing by other shipments on board the vessel your cargo is travelling on (for LCL shipments), for example, can easily damage your cargo. The fire that broke out on board the Maersk Honam earlier this year should serve as a good example. In ocean freight, it’s always better to be safe than sorry, and one way to do so is with cargo insurance.
All shipping lines are legally obliged to provide coverage for the cargo they transport on their vessels. But this coverage is very limited, and it’s advisable to buy additional coverage to fully protect yourself.
Different types of cargo insurance
Think of cargo insurance like your health and/or life insurance. As you can imagine, there are plenty of cargo insurance you can choose from, each with its own coverages and limitations. In this post, we’ll give you an overview of the more common types of cargo insurance and their coverages.
Land cargo insurance
Land cargo insurance, as its name suggests, covers your shipment when it’s being transported on land. This is generally when your cargo is on board a truck but also applies to when it’s being transported or managed by other utility vehicles. This insurance is domestic and coverage is only applicable within the country.
Coverage: Theft, damage from collision, and other risks.
Marine cargo insurance
Marine cargo insurance covers the sea (and air for air freight) leg of your shipment’s journey. Unlike the land cargo insurance, this applies to international transportation.
Coverage: Damage from loading/unloading, bad weather, piracy, and other risks.
Marine cargo insurance policies are either renewable or permanent. If you’re not a frequent shipper, it’s better to choose the renewable policy as it applies to one-time, single voyages. These tend to be relatively inexpensive and can end up saving you a considerable sum. As for frequent shippers, a permanent policy will cover you for a determined period of time regardless of the number of shipments you’re sending.
Types of cargo insurance coverage
Cargo insurance coverages include shipment transportation via water, air, road, and rail. But to what extent you’re covered will depend on the type of policy you choose. Pay close attention to the details of your policy and clarify any doubts you may have with your insurance provider before signing the document.
The all risk coverage offers one of the broadest types of coverage with a wide range of protection against external factors. In general, it covers most types of physical losses and damages as a result of the external causes a merchandise may encounter. This is usually for what’s deemed as “approved” or “general” goods, which are goods that are new and not easily susceptible to losses and damages.
- Damage to cargo as a result of negligence. A good example of this would be knowingly shipping time-sensitive cargo to a port that’s known to constantly face congestion problems.
- Inherent vice. This refers to the deterioration of cargo due to its inherent nature instead of external factors. One common trigger for this clause is the shipment of wine and beer as the quality of such products may be affected due to movements and temperature changes during transit.
- Customs rejection
- Cargo abandonment
- WSRCC. Also known as war, strikes, riots, and civil commotions.
- Loss of use/market. This applies when the damaged cargo causes profit losses.
- Failure to pay/collect. Loss of goods as a result of non-payment will not be covered.
- External factors including but not limited to: earthquakes, war, pollution, infestation, etc.
Named perils policy
The named perils policy is also formerly known as the “Free of Particular Average”. Unlike the all risk, it covers only the losses caused by the perils specifically named in the policy. So it’s generally more limited. This policy can include:
- Vessel collision
- Vessel sinking
- Bad weather
- Theft, etc.
General average is a maritime concept that, depending on the outcome of the condition of your cargo following a peril at sea, could anger or relief some.
Legally, general average is defined as:
“A principle of maritime law where in the event of emergency, if cargo is jettisoned or expenses incurred, the loss is shared proportionately by all parties with a financial interest in the voyage.”
Under general average, all losses from damages caused during an unforeseen problem at sea are to be divided among owners of the surviving merchandise on board the same vessel. Meaning that as the owner of a cargo that has not suffered damages, you’re liable to fork out financial compensation to the owner whose cargo has been damaged or lost and/or the shipping line for damages to the vessel.
Importance of general average coverage
By default, general average is not covered under any of the types of cargo insurance mentioned above and need to be specifically included. If you’re thinking of skipping this, we’d recommend you to think twice. According to statistics, general average claims happen every 8 years. Now while that doesn’t seem too frequent, you really don’t want to be stuck with general average and have no coverage, especially given that general average cases can end up costing hundreds of thousands of dollars and take years to resolve.
As a cargo owner whose merchandise has not suffered any damages, the financial compensation you’ll need to pay must be made before you’re allowed to retrieve your cargo on board the vessel. Otherwise, the carrier has the right to take part of all of the cargo as payment.
If you have general average coverage, your insurance provider will be responsible for paying this fee. Without general average coverage, you’re fully liable to contribute your portion of the claim, whose value may be higher the value of your cargo itself.