In a 2017 survey research study we conducted, we found that the number one complaint of shippers was cargo damage. It’s often unavoidable and after it happens it can be difficult to place the blame on any one party. What’s even worse is the fact that some people are not eligible to file a claim for damaged cargo if they have signed their cargo in apparent good order and condition. Here is our perspective on the importance of purchasing cargo insurance for those who are not ecstatic to pay hundreds or thousands of dollars in cargo damage.
Cargo insurance, just like homeowner, car, or life insurance is a form of insurance that mitigates the financial risk of any international or domestic shipments that are damaged while in transit. United States’ law requires that all carriers have a minimum amount of cargo insurance known as carrier liability. However, as one would expect, carrier liability insurance has a very low degree of overage, and thus carriers and shippers are often encouraged to purchase cargo insurance to protect their goods from theft, damage, and natural disasters while in transit.
Cargo Insurance Limitations
Unfortunately, there is no one type of cargo insurance that covers everything. Cargo insurance does have its limitations. If you are shipping on a truck in the U.S., your cargo insurance will not protect you against all losses that a motor carrier might be liable for under the Carmack Amendment. Also, a certificate of insurance that states a motor carrier has a degree of insurance does not mean that the shipper/broker’s valid claim will be covered by the said insurance.
There are a ton of different types of cargo insurance made available to shippers and brokers. All-Risk, Broad Form, Legal Liability, Motor Truck Freight and so many others all provide different types and degrees of coverage to shippers, so understanding what your company and cargo truly needs in important.
Types of Cargo Insurance
Cargo insurance has options for both domestic and international freight, as well options for different modes of transportation. Boiling it down simply, these two can be grouped into these categories of cargo insurance:
Land Cargo Insurance
Land Cargo Insurance coverage includes theft, collusion damages, and a variety of different risks. The insurance is intended for cargo that is transported within the United States and generally covers trucks and other small utility vehicles.
Marine Cargo Insurance
This insurance covers transportation carried our either in sea or by air. Here, means of transportation and goods are covered from damage due to cargo loading/unloading, weather contingencies, piracies and other relevant issues. Mostly, this insurance covers international transportation. Under these insurances, there are some policies which can help you in understanding the concept of cargo insurance in a profound manner. These policies are:
Unlike land cargo insurance which is intended for domestic shipments, marine cargo insurance is intended to be applied to international shipments. Primarily those being shipped by sea and air. Due to the differences in potential risks of international transport over domestic, marine cargo insurance covers damage due to cargo loading and unloading, weather conditions, piracies, and a few other potential risks. Within marine cargo insurance, there are different policies which will help you understand the overarching concept more conclusively:
Open Cover Cargo Policies
When insurance holder opts for coverage against various consignments, then open cover cargo policies get activated. These policies are segmented in two categories namely renewable policy and permanent policy. Renewable policy is required for a particular value requiring renewal after policy expiration. Most of the single trip or voyages fall under this category. Permanent policy can be drawn up for a decided time period permitting countless shipments in that period.
Specific Cargo Policies
When a company approaches an insurance company or broker for insuring a particular consignment, then it can fall under the category of specific cargo policies. These policies are also termed as voyage policies because only shipments are covered under them.
Contingency Insurance Policy
There are certain cases where customer, not the seller is responsible for insuring the goods against loss or damage. There are perils associated with it if goods get damaged during transit and customer refuses to accept them. In few cases, some customers do not insure the goods and tend to avoid the liability. Under such circumstances, affected sellers can seek rectification with the help of the legal system. This can be very costly for them and sometimes, they may lose the case. Therefore, sellers are advised to go for contingency insurance which have a very less premium rate. For testing and verification, sellers need not tell about it to their customers.
Importance of Purchasing Cargo Insurance
Hopefully we don’t have to fully describe to you why it is important to purchase cargo insurance. Your goods are being trucked or thrown on an international vessel which exposes them to a variety of risks. All of these can cause for direct negative impacts on your company’s bottom line. Here are a few reasons why:
Containers Lost at Sea
That may sound like it’s really out there, but the truth is, in 2011-2013 there were 733 containers lost on average each year. That’s only counting the containers that were legitimately “lost”, not those that were subject to catastrophic events and damage. This is a large increase since the previous period of 2008-2010, during which only 350 containers were lost per year.
Cargo gets damaged very frequently. We can’t emphasize that enough. As stated before, our own internal market research studies indicate that damaged goods was the number one complaint of shippers.
There are certainly steps you can take as a shipper to help avoid cargo damage such as blocking and bracing your cargo, however, there is never any guarantee that proper preparation on the shipper’s part will prevent them from experiencing cargo damage. Cranes drop containers, trucks get in accidents, hurricanes and tornados happen, gensets fail – it’s all part of the game.
Limited Carrier Liability
Carriers, by law, are not responsible for many common causes of loss that occur in transit (for example, acts of God, General Average, etc.). Even when carriers are liable, carriers’ liability in the event of a loss is limited – either by contract in the bill of lading or by law.
In most cases, shippers will only recover cents on the dollar from the carrier. Shippers should never count on the carrier that is shipping their goods to cover losses or damage that may occur over the course of a container ship voyage.
By law, carriers aren’t required to cover the common causes of cargo loss while in transit. These could include events such as an “Act of God” or General Average. Even when a carrier is liable for the damage or loss, their liability is often limited (by law or Bill Of Lading) to recover cents on a dollar.
Shippers should never rely on their carrier for financial security when it comes to shipping. Limited liability keeps your security low. Very low.