When the freight or cargo is in transit, it is susceptible to damage due to unpredictable events on the road or sea. In case of an explosion due to road accidents or the sinking of container ships, the carrier's liability will not be enough to compensate for the loss of cargo owners. Cargo or freight insurance safeguards these owners from bearing heavy losses and indemnifies the claimant to the extent insured.
What is Cargo Insurance?
Cargo insurance is an exemplary risk management tool that protects against financial losses due to lost or damaged cargo. Thecargo insurance coverageincludes events mentioned in the policy like vehicle accidents, cargo renunciation, damage due to natural calamities, acts of war, piracy, etc. It covers up to the limit of an amount insured and is different from carrier liability.
Why is it Important to Have Cargo Insurance?
Opting for preventive measures before the r cargo is damaged is a prerequisite for businesses that ship frequently. Cargo or freight insurance offers advantageous solutions to decrease financial liability when there is any damage to a shipment.
Shipments in possession of a shipping line or airline are exposed to various types of risks. The uncontrollable external factors can bring great loss to a business. Moreover, in most cases, the carrier's liability is less than the total value of the goods, which makes cargo insurance quintessential.
What are the Types of Cargo Insurance?
Generally, cargo insurance is of two types – marine and land cargo insurance.
Land Cargo Insurance
As the name suggests, land cargo insurance is for the cargo which uses the road as its mode of transportation and is usually shipped in trucks and other utility vehicles. This insurance offers coverage in incidence related to collision damages, theft, and other risks in freight shipping. This type of insurance is for the shipment of goods within the country's geographical boundaries.
Marine Cargo Insurance
Marine cargo insurance is used for international shipment through sea routes and covers the air portion when it is part of that same journey. This type of insurance offers coverage on any damages due to bad weather conditions, loading and unloading of goods, piracies, and other possible losses involved while the cargo has the Airline and Shipping line.
In addition, this freight insurance has several kinds of policies which are mentioned below in brief:
1. Single Coverage
Single coverage policies are also known as specific coverage policies and offer coverage on a single shipment basis. Generally, small business owners who have started getting sales or businesses who send shipments infrequently use a single coverage policy.
2. Contingency Policies
Contingency policies are the ones where a consumer has a liability to bear the cargo insurance cost. A lot of times, customers avoid liability for the damage and refrain from accepting the goods. However, this involves getting assistance from legal bodies that will pass an order for a consumer to pay on being proven responsible. Hence, for these reasons, the contingent policy includes additional charges and requires time.
3. Open Coverage
This kind of policy is suitable for companies that send shipments through airlines and shipping lines frequently. Open coverage is opted for covering more than one shipment for a year or specific period. This effective instrument used for risk management has two types:
4. Free from Particular Average
Also known as named peril policy, this kind of ocean cargo insurance covers the major damages that all-risk coverage policy does not cover. This includes Force Majeure or unpredictable events, rough weather conditions, theft or piracy, collision, damage due to sinking, non-delivery of the cargo, etc.
5. All-Risk Coverage Policy
The all-risk coverage covers a wide array of damages that are caused due to uncontrollable external factors. This insurance policy covers primarily new products and is not easily vulnerable to any damage, leakage, or spoilage. Some of the damages that this policy does not cover are:
This policy offers the industry's best coverage rates and has easy accessibility under any circ*mstances.
6. General Average
The general average is quintessential for marine freight as the principle of this concept helps businesses to a great extent. As per this policy, even if the cargo of a specific owner does not go through any damage or loss due to any turbulence during transit via sea, they will be liable to pay for damages of other cargo. In other words, owners of surviving merchandise on board the same ship must share the cost of loss or damage if some of the goods belonging to other owners are in bad condition or lost completely.
The policyholder must separately include a general average in a policy as it will not be present by default. Statistically, though this type of claim happens every 8-9 years, it puts an owner of a damaged cargo in an advantageous position.
How does Cargo Insurance Work?
Cargo insurance coverageis based on the clauses outlined in the policy. The primary objective of the policy is to cover the damages caused due to the incidences specified in the clauses. Upon payment of the premium upfront, a policyholder can claim for damage or loss that occurred during transit.
The claim, once submitted, is reviewed to check the viability of that incident by a claim adjuster. If the damage is covered under the clauses of the policy, the claimant will receive a settlement check to the limit insured. While making a claim, a business must be sure of certain information like:
What does Freight & Cargo Insurance Cover?
Different types of unforeseen incidents can occur during transit via road, sea, or airline. To safeguard a business from bearing heavy physical losses due to loss or damage of shipments, here are the primary coverages that cargo insurance companies provide:
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Besides the scenarios mentioned above, cargo insurance companies offer lucrative security to shipments in other cases that may vary across insurers.
What Does Freight & Cargo Insurance Not Cover?
Cargo and freight insurance firms do not cover the loss of shipments that shippers could have control of. The restrictions specified by the insurer in the policy prevent any fraudulent claim. Most of the policies exclude certain scenarios, like:
The policy does not cover any losses if it is found that the packaging of goods was not proper. For this reason, many shipping companies mention packaging guidelines for fragile or certain types of goods based on their weight and volume.
Some policies only cover shipments via ship, large utility vehicles, or airplane. The policy may not include some specific mode of transportation for shipments. Hence, businesses need to go through every clause of the policy beforehand to know which modes of transportation the policy covers.
If established by an insurer that the goods sent contain faulty or broken parts, the policy will not cover any such damages.
There are insurance companies that do not cover fragile or hazardous goods. Certain types of electronic products, metal items, and highly-valuable goods might not be covered under the policy as well.
Air andmarine cargo insurancecoverage are based on the clauses specified by the Institute of Cargo Clauses. The specifications under this governing body only bear the damage due to constructive total and actual total loss, general average, liability due to collision, partial loss, etc.
How much does Cargo Insurance Cost?
Generally, the cost of cargo container insurance is approximately 0.15% of the total value of goods. This is as per the commercial invoice. However, this cost may vary across insurance companies and their offerings.
How is Cargo Insurance Calculated?
The process of calculating cargo insurance policies involves the conventional CIF+10% formula. This is a standardized calculation technique where;
C = Invoice value (consider selling cost if the client is a seller or purchase cost if he is a buyer)
I = Insurance premium.
F= Freight and associated charges, which mostly include custom clearance charges
Adding 10% of the additional cost is due to inflation in the freight cost.
Hence, theCIFvalue of a shipment consists of three different values –Commercial InvoiceValue, insurance costs, and freight charges. For example, if the Commercial Invoice Value is USD 60,000, the Insurance is USD 300, and the shipping charge is USD 1,000, then CIF is USD 61,300.
In the final step, based on the percentage granted by an insurance company, identify the rate to complete the calculation of the total insurance payable.
What are the Benefits of Cargo Insurance?
Fundamentally, the benefit of cargo insurance covers the business's liability when it encounters any unforeseen events. To safeguard shipments, this insurance offers a certain amount of the cargo's value as claim money and protects the carrier to the extent possible.
Overall, freight insurance provides the following other benefits to businesses:
What is the Difference Between Cargo and Freight Insurance?
Usage of these two terms, freight, and cargo, refers to goods transported for commercial purposes by a business. Though the perception is that these two terms can be interchangeably used; both hold significant differences:
In the insurance sector, freight and cargo are separate terms, and coverages are available accordingly. Hence, businesses must avail of the appropriate policy based on the maximum usage of a particular transportation mode.
When Do You Need Cargo Insurance?
Businesses that ship frequently and deal in cross-border trades mostly must get cargo insurance e from the initiation of operation. Even after opting for a plethora of safety measures in packaging and shipping; accidents, calamities, and even custom rejections can bring in great loss.
Moreover,freight insuranceensures that a business's profit generation is nearly constant, even after damage or loss of shipments. Based on a business's nature and the products the business deals with, owners must choose the insurance policy mindfully. Cargo insurance is an astounding tool for managing liabilities as it involves high-reward coverage to share financial liabilities of unanticipated damages.
