Cargo Insurance Basics and Myths

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Second ReviewBusiness Analysts

Copyright2009Second Review Business Analysts

CARGO INSURANCE MATTERS

Excerpts from FreightMatters Canada


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INSURANCEIndex

Introduction

Limited Liability

Errors & Omissions

All Risks & War

Obtain Cargo Policy

General Average

Claims

Terms

F.P.A.


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INSURANCEIntroduction

The risk of transporting cargo

regardless of the mode, is theowners risk and not the carriers.This principle is thousands of yearsold and holds true today.


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INSURANCEIntroduction -2

Carriers do carry insurance however this is verylimited and not intended to transfer all risks tothemselves.

It is expected that importers and exportersundertake sufficient cargo insurance to coverdamage, loss, war, acts of god and generalaverages although this is not mandatory.


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INSURANCEIntroduction -3

Cargoes that have an inherent vice are normallyuninsurable or subject to very high premiums,

deductibles and restrictions as insurancecompanies do not insure risks that are likely tooccur.

The owner of the cargo must take all actions to

reduce or minimize any loss or damage, whetherby utilizing special containers, bracing, correctpacking, or choice of route.


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INSURANCELimited Liability

Limited Liabilityis a limit placed on any liabilityincurred by a carrier, NVOCC and freight forwarder.

The limits are explained in print in the carriers conditionsof carriage or standard trading conditions issued by theforwarder.

The majority of forwarders adopt the CIFFA (CanadianFreight Forwarding Association ) trading conditions whoselimit is two SDR per Kg. (See Glossary General)

Airlines normally offer $20 per Kg.

Steamship lines normally offer $500 per CustomaryShipping Unit e.g. container


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INSURANCEErrors & Omissions

Errors & Omissions or otherwise known asProfessional Liability Insurance is carried by mostfreight forwarders and protects them and ultimately theclient from risks of

The expenses to reduce the damage

The expenses to complete the shipment The penalties The survey expenses Physical or financial damage or loss of the third party

caused by the freight forwarder

The damage or loss of the customers caused by the failureof the freight forwarder

A small flat fee is normally charged by theforwarder


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INSURANCEAll Risks & War

Open Cargo Policy

All Risks Open Cargo Policy is the broadest form ofcoverage available, protecting against all risk ofphysical loss or damage from any external cause.

Loss or damage due to delay, inherent vice, pre-shipment condition, inadequate packaging, or loss ofmarket is not covered but the following is included:General Average, War Risks , Civil Riot Clauses, Partialor Total Loss, Warehouse to Warehouse coverage,salvage and survey expenses.


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INSURANCEWhere to obtain Open

Cargo Policy

Importers/Exporters could obtain an open cargo policydirect from an insurance provider and would handlemonthly reporting themselves. Certificates would not

be required in most cases. as this is designed forcontinuous cargo movements.

Alternatively they could purchase All Risks insurancefrom the freight forwarders own open policy wherethey would handle administration and reporting.Premiums and Minimum charges would be higher inthis case.


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INSURANCEGeneral Average -1

An Ancient principle of equity in which allparties in a sea adventure (ship, cargo, andfreight) proportionately share losses.

The 3 required elements are :

1. A peril to the common venture For example: A storm at sea,which threatens the vessel itself, cargo carried on board (some ofwhich may be yours) as well as the lives of the passengers and

crew. Together these constitute the common venture .

2. An extraordinary sacrifice or expenditure to avert the peril Thiscould involve jettisoning cargo to lighten the vessel, orengagement of a salvage tug to tow the damaged vessel, etc.


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INSURANCEGeneral Average -2

3. The successful preservation of the venture If thevessel is not preserved, you may be presented with aconventional marine claim and not a General Average.

When the vessel owner declares a general average,the vessel owner and all of the cargo interests willshare the expenses associated with the generalaverage on a pro-rata basis. These expenses are

covered under the Open Cargo Policy


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INSURANCEF.P.A. Free of Particular

Average

Marine insurance provision which limits the liability ofan insurance company to only those losses thatexceed a specified percentage of the value of the

goods.

It is similar to the deductible clause included in othertypes of insurance, but is not applicable where a coverfor total loss is in force. FPA conditions are applied

where the goods are extremely susceptible todamage, or are rendered almost worthless fromexposure to water or heat.


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INSURANCEClaims (1)

Always inspect cargo on arrival and ensure apparentor suspected damage is noted on your delivery

receipt. This is a vital component of your claim.

In the case of water damage, if cargo arrives in acontainer, inspect the container, door and roof.


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INSURANCEClaims (2)

Hold all carriers, forwarders and delivery companiesresponsible immediately. Be sure to indicate file numbers,airway bill and house bill of lading numbers so that the

transaction can be identified easily and provide initialestimate of damage. Notify all parties by email or fax.

Take pictures - its worth a thousand words.

Ensure quick, preventative action is taken to preventfurther loss, e.g. Leaking barrel,


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INSURANCEClaims (3)

Contact the Surveyor they may or may notdetermine whether the goods are to beinspected. The insurance company will

provide a list of local surveyors /agents.

Complete the claim form. This will beprovided to you by your insurance provider.


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INSURANCEClaims (4)

Provide the shipment documentation.*Bill of Lading / Air Waybill* Commercial Invoice* Insurance Certificate

* Copy of notice of claim lodged against carrier* Documentation relating to out-turn / receipt of goods* Local Carriers Waybill, where applicable* Copy of temperature records, where available* Invoices to confirm salvage / sale price, where

applicable* Copy of instructions to carrier regarding carriagetemperature, where applicable


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INSURANCETerms (1)

Act of GodA natural event, not preventable by any human agency,

such as flood, storms, or lightning. Force of nature that a carrier has

no control over, and therefore cannot be held accountable for

Approved MerchandiseGoods that are not particularly susceptible to

loss or either by reason of their nature or because they are wellpacked. This term embraces practically all manufactured articles or

new merchandise.

Certificate of Insurance (Policy of Insurance) Document issued on

behalf of the Underwriter stating the terms and conditions of the

marine insurance. Issued when evidence of insurance is required,as by the bank issuing the Letter of Credit (especially on export

shipment.)

Concealed Damage Damage to the contents of a package which is

externally in good condition.


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INSURANCETerms (2)

Fire Statute 1851 U.S. Statute that provides no ship owner can be

held liable for any loss or damage to merchandise on board his

vessel by reason of fire on board unless this fire has been caused

by the design or neglect of the ship owner

F.O.B/F.A.S. Endorsement If a merchant sells on F.O.B., F.A.S.,C&F, or similar terms, it is the buyer's responsibility to place the

marine insurance. However, if the buyer purchases marine

insurance that does not have a "Warehouse-to-Warehouse" Clause,

or Marine Extension clauses, the coverage may not attach until the

cargo is placed aboard the vessel. If the merchant has an OpenCargo Policy, an F.O.B./F.A.S. Endorsement provides automatic

coverage on such shipments until such time as the buyer's policy

attaches. A type of Contingency coverage.


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INSURANCETerms (3)

Inherent Vice A loss caused by the inherent nature of the thing

insured .

Insured Value Value of the merchandise, freight, haulage, packing,

documentation, insurance,

Loss of Market A situation in which, sound cargo is no longerwanted by the consignee when it arrives. This is a "business loss"

not recoverable under a Marine Cargo Policy; e.g. Christmas trees

arriving in January undamaged.

Named Perils Policy Any marine policy limiting coverage to perils

specifically listed in the policy;Salvage 1) The service rendered by a third party for assistance in

saving cargo from peril.

2) The monetary award granted for such service. 3) That which

is saved.


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INSURANCETerms (4)

Subrogation The operation by which the insurance company (onpayment of a claim) assumes all of the assured's rights to recoveryfrom any third parties; substitution of one creditor for another.

War Risks Those risks related to two (or more) belligerents engagingin hostilities, whether or not there has been a formal declaration of

war. Such risks are excluded by the F.C. & S. (Free of Capture andSeizure) Warranty, but may be covered by a separate War RiskPolicy, at an additional premium

Total Loss Actual Total Loss:Total loss of property insured due to :1. Total Destruction: Physical destruction of the property, 2.

Loss of Specie: Property is so badly damaged that it ceases to berecognizable e.g. bags of cement wetted by sea water andhardening. 3. Irretrievable Deprivement: The owner of theproperty has been deprived of the use of the property, even throughit may be undamaged, as when a shipment of silver ingots is lostoverboard.


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CARGO INSURANCEMATTERS

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Cargo Insurance Basics and Myths