Cargo Insurance

What is cargo insurance

When a corporation operates across its own borders, it has to deal with a variety of forces that will have an impact on the operations of the company. Cargo insurance is a sub-branch of Marine insurance; a class of property insurance that insures property while in transit against loss or damage arising from perils associated with the navigation of the sea or air and subsequent land and inland waterways. The genre for this type of property is Goods and or Merchandise that indicates traded goods. Although most usually the subject matter insured is raw materials and components coming into the assured or finished products going out, in fact, the property that is the subject of marine insurance can be anything that is being conveyed from one place to another; for instance machinery, equipment, samples and exhibition materials, office furniture, etc. Indeed just about everything has moved can be the subject matter insured under a marine cargo policy. Marine cargo insurance is aimed at removing, as far as possible, the financial burden of the risks of loss or damage associated with the transportation of goods between exporters and importers, and placing it with specialist insurance underwriters skilled in assessing risks and the management of reserve funds made up of premiums paid by others, out of which those who suffer losses can be compensated. By paying an insurance premium, to an insurer, the assured earns the right to claim compensation from the insurer for a loss arising from any of the risks covered by the insurance policy. Unlike most other non-marine insurance policies, a marine policy indemnity is based on a value agreed in advance that may be more or less than the value actually at risk whereas other classes of insurance seldom agree a sum insured in advance and indemnity is more usually based on the actual value lost. To learn more about cargo insurance - Click Here

'All Risks" - Institute Cargo Clauses (A)

With the development of trade, the demand grew to cover extraneous risk. The practice of adding such risks to the cover afforded by the Standard Marine Policy so developed to embrace all the transit risks under one omnibus wording. Institute Cargo Clauses (A) incorporates (B) and provides the most coverage to traders at the highest premium price. Practically, these clauses cover the cargo for all risks of physical loss or damage, except, for instance, wars and strikes. These exclusions may however be reinstated by including appropriate clauses. For more information see our guides; on The Major Exclusions - Institute War Clauses - Institute Strikes Clauses To learn more about the formation of the Cargo Insurance Policy, the major types of policies available, the insurance premium, the assignment of the policy, etc. - Click here

"Intermediate Cover" - Institute Cargo Clauses (B)

Institute Cargo Clauses (B) incorporate (C) and provide cover for loss of or damage to the subject matters insured reasonably attributable to any of the perils covered by Institute Cargo Clauses (C); as well as, against additional risks; such as,

Earthquakes, Volcanic Eruptions or Lightning Washing overboard Entry of water (i.e. sea, lake or river) into the vessel, hold, conveyance, container, or place of storage Total loss of any package lost overboard or dropped during loading or unloading operation.

Normally, insurer will indemnify a cargo owner against the above mentioned certain occurrences. Where necessary, supplementary risk cover can be added, e.g. in respect of malicious damage, non-delivery, theft, pilferage, etc. Learn More - The Major Exclusions To learn more about the formation of the Cargo Insurance Policy, the major types of policies available, the insurance premium, the assignment of the policy, etc. - Click here
"Minimum Cover" - Institute Cargo Clauses (C)
These clauses provide the minimum cover against risks, but the price is lower. Institute Cargo Clauses (C) are generally used for shipment of bulk cargo and cover loss of, or damage to, the goods reasonably attributable to:

Accident to the conveyance, such as crashing of aircraft, fire, explosion, stranding, grounding, sinking or capsizing, overturning or derailment of land conveyance. Collision or contact of the vessel, craft or conveyance with any external object other than water Discharge of cargo at a port of distress Loss of, or damage to, the goods caused by jettison and general average sacrifice General average expenditure and salvage charges.

Normally, insurance companies will indemnify a cargo owner against the above mentioned certain occurrences. Learn More - The Major Exclusions

To learn more about the formation of the Cargo Insurance Policy, the major types of policies available, the insurance premium, the assignment of the policy, etc. - Click here
Institute War Clauses
The purpose of these clauses is to provide cover against the risks of war, warlike operations or activities, e.g. war, civil war, revolution, capture, seizure, etc.

These clauses are only applicable for goods being transported by sea, air or international post and does not cover risks during land transit. If you are moving goods to a war zone, the insurance premium would very high.

Institute Strike Clauses

The clauses cover loss or damage caused by the action of strikers, locked-out workmen, civil commotions, and the like; as well as, loss or damage caused by any terrorist or person acting from a political motive. This, however, does not confer full political risk cover, i.e. civil war is excluded. These clauses also cover "General Average" and "Salvage Charges".

The Insurance Premium.

The premium is the amount payable by the assured to the insurer when the policy is issued, i.e. the price of your policy. The payment of the premium to the insurer, provides the assured the right to claim compensation in the event of loss or damage arising from any of the risks covered by the particular insurance policy. It is the concurrent duty of the assured or his agent to pay the premium and for the insurer to issue the policy (The Marine Insurance Act 1906 - section 52).

In the policy form used by most insurers it is stated that insurers agree to fulfill their obligations in consideration of the payment of the premium. In reality, the premium is seldom paid at the time of commencement of cover, which means that cover is granted against the promise of payment. The First Schedule to the Marine Insurance Act gives a model policy form that uses the phrase confessing ourselves paid as though acknowledging the actual unpaid state at the inception of cover. The term Unless otherwise agreed in section 52 allows insurers to defer the payment of premium. Insurance premiums vary according to the extent of cover required. In practice, premium is calculated by applying a rate % percent to the sum insured. The insurer, takes into consideration all the risk aspects of the particular consignment and arrives at the rate percent. The factors taken into consideration by the insurance company for the calculation of the premium are all the risks of the particular consignment, such as, the nature of the goods, the quality of packing, the method of carriage, the prevailing conditions at the point of shipment, the susceptibility of the goods for theft or damage, the voyage concerned, the destination and of course the claims history of the assured. This means you must supply all relevant information about your cargo and its journey at the outset. The insurer needs this information to calculate an appropriate premium.
The premium received by the insurance company is used to pay for reinsurance cover as protection against major catastrophes, to pay for any losses suffered by the assured in terms of the type of cover provided by insurance policy, to set aside prescribed reserves, meet day-to-day administrative costs and (hopefully) leave something for profit as a 'reward' for carrying the risk.

In an "Open policy", depending upon the requirements of the assured, the insurer has an option to charge premium at regular intervals, usually monthly. This is either in accordance with declarations/certificates received during the last 30 days, or by taking a deposit premium usually based upon the estimated annual consignments of the assured to be adjusted at the years end against a declaration of the actual value of goods at risk.
The Transfer of Insurance Policy from one party to another.
When an exporter sells goods overseas he has the option of either selling the goods on terms that leave the insurance to be arranged by him or his buyer, or he can arrange an insurance that covers the entire voyage but the benefit of which passes from him to his buyer when the insurable interest passes from one to the other. Under certain terms of sale, the seller contracts to obtain at his own expense a cargo insurance that the buyer, or any other person having an insurable interest in the goods, shall be entitled to claim directly from the insurance company and to provide the buyer with an insurance policy or certificate for that purpose. This is a notable difference to most other property insurances where ownership remains the same throughout the period of cover. Claims are paid to the person named in the policy. However, the marine policy has to allow for ownership to change as goods, the subject matter of the insurance are bought and sold. The term used to describe this process is assignment; but be aware that a marine policy is assignable unless it contains terms to the contrary - (Marine Insurance Act 1906 - Section 50).

The insurance certificate contains two additional pieces of information. Firstly it provides the name and address of the insurers claims representative in the country of destination and secondly the certificate will be signed, usually on the reverse by the policy holder thus opening up or assigning the certificate to the benefit of the buyer.
This means the buyer can proceed to receive settlement for loss or damage to the goods in transit as though he were the original assured. From an insurers point of view this process means that claims are paid to parties other than the named assured in other countries. So as well as providing evidence of a consignment having been placed under an Open policy cover, it also acts as a document of title enabling the holder of the original version to obtain settlement. It also gives the insurer the necessary detail to apply the policy rate and to charge the premium.

The cargo insurance

As with any commercial transactions, there are risks associated with trading internationally. Whether you are buying or selling goods from or to the international market, the risk of loss, damage, or delay of goods in transit (including detention at customs), is relatively high. Although there is no law to make insurance of property in transit compulsory; with goods generally having to be transported over long distances and being subject to a variety of hazards en route it's important to minimize the impact of such incidents on your business by by being properly insured.

Exporters and trading companies, who do not provide a 'package' which includes insurance, can lose business to competitors who do. Indeed,

without insurance cover the business of trade would be seriously restricted. Raising finance without insurance would be difficult. Many foreign buyers see this as essential service provided by the exporter, given that cargo insurance rates are often cheaper than those available to the overseas customer in his local market. Major exporters and traders sell on Cost Insurance and Freight (CIF) or similar terms, which allows them to arrange marine cargo insurance usually on an 'open cover' basis. Because this insurance cost is legitimately passed on to the customer, who also gets the benefit of the insurance, this virtually amounts to free insurance which the exporter controls. To learn more on major types of cover available, click on quick link "The Cargo Insurance Policy" Unfortunately, many traders do not want to become involved in arranging this type of insurance because they feel they do not have sufficient knowledge, whilst some others see it as an unnecessary expense involving extra administration, and both make the mistake of allowing suppliers or customers to control this vital area of business. This loss of control not only increases the difficulties of implementing an effective trade risk management strategy, but can also have far reaching effects on profitability. For more information with regards to the formation of the Policy, the major types of cover available, insurance premiums, the assignment of insurance policy etc., see "The Cargo Insurance Policy"
The Insurance Policy
The basic instrument in marine insurance is the policy which constitutes the evidence of a contract of indemnity between the assured and the insurer; whereby the insurer undertakes to indemnify the assured in manner and to the extent agreed (Marine Insurance Act 1906 Section 1). A corollary of the principle of indemnity is that of subrogation. Learn More - The Right of Subrogation The policy is based upon uberias fides (the utmost good faith) and if it were not observed by either party the contract may be voided (Marine Insurance Act Section 17). The standard policy document represents only the skeleton of a marine insurance contract and its principal purpose is to define the terms of the agreement between the assured and the insurance company. Learn More - The Contents of a Standard Cargo Insurance Policy To make the policy apply to a particular type of risk and to meet constantly changing requirements of modern commerce, the insurer will incorporate special clauses or sets of clauses into the insurance policy, depending in his assessment of the risk and the extent of the cover most appropriate to the circumstances. It is the clauses, which the insurer incorporates by attachment to the insurance policy, that are the essence of the contract, and may contain, by agreement, specific wordings which extend or restrict the basic cover by imposing, for instance, warranties, special conditions or an excess.

Within the legal parameters laid down in the Marine Insurance Act 1906, the Institute of London Underwriters have approved numerous 'clauses' defining the risks covered, circumstances excluded, etc., to be incorporated into insurance policies. Today, the insurance cover offered by the main marine insurance markets is very similar; many markets have tended to adopt either the London market Institute Cargo Clauses or those of the American Institute of Marine Underwriters.

The Institute Cargo Clauses

Within the legal parameters laid down in the (UK) Marine Insurance Act of 1908, the Institute of London Underwriters have approved a group of clauses The Institute Cargo Clauses defining the risks covered, circumstances excluded, etc. to be incorporated into insurance policies. The clauses are divided into sub-clauses which are arranged in a logical sequence. Each set of clauses is selfcontained and designed to stand on its own. The alternative types of cover available are the following:

Institute Cargo Clauses (C) - "Minimum cover" Learn More Institute Cargo Clauses (B) - "Intermediate cover" Learn More Institute Cargo Clauses (A) - "All Risks" Learn More Institute Cargo Clauses (Air) - These are similar in scope to the Institute Cargo Clauses (A) except they are used specifically for airfreight.

The Institute Cargo Clauses are not used for all types of cargo.

Where there is a special "trade risk" i.e. related to the specific nature of a product, specialised clauses have been formulated in conjuction with the trade body concerned and are based on the Cargo Clauses, e.g. 'The institute Frozen Food Clause" or "The Timber trade Federation Clause". Examples of trade clauses are those relating to the following commodities: oil, coal, corn, raw sugar, flour, frozen meat and produce, timber and rubber.

Institute Cargo Clauses are not providing cover for export credit insurance. Traders wishing to implement a more effective trade risk management strategy should inform their broker and arrange for additional insurance, covering incidents of contingencies and other various commercial and non commercial risks.