Cargo insurance: Why we need it

by Christian Sivière

Thanks to globalization, most companies today are part of a global supply chain. We no longer ship goods just across the province or the country, but often across the globe—importing, exporting or both. Risks are greater, managing them is crucial and cargo insurance is a very effective, affordable tool that helps manage those risks.

We want cargo insurance in order to be compensated in the event of loss or damage to our goods in transit from our suppliers or to our customers. But an essential consideration is that carriers have limits of liability and we will look at the maximum liability of carriers by mode, how cargo insurance works and how to get adequate coverage.

Some shippers mistakenly believe that if something happens to their goods, it will be the carrier’s problem and they will compensate the shipper for full value. But this only happens if the shipper declares the value of the goods on the bill of lading and pays valuation charges. These valuation charges cost around two percent of the value, which is five or six times the cost of cargo insurance, for a lesser coverage. Most shippers do not show a declared value for carriage on the bill of lading, only a value for Customs and opt instead for cargo insurance.

Limits of liability
What are the carriers’ limits of liability, the maximum they will reimburse us in the event of damage or loss? For road transport in Canada, the maximum liability is uniform across the country, fixed at $2/lb (or $4.41/kilo). In the US, a law called the Carmack amendment, makes truckers liable for the full cargo value, except when they use the “released value”, which can considerably reduce their exposure as low as $0.50/lb.

When comparing the prices of a US trucker versus a Canadian trucker, a prudent Canadian trader should look at their respective limits of liability. A US trucker could be cheaper, but if his liability is substantially lower than the Canadian trucker, it may not be such a good deal. On the other hand, Canadian truckers may sometimes want to avoid the full liability of the Carmack amendment when they deal with US customers.

For rail, there is no uniform rule and the carrier’s limits of liability are established in the individual customer contract.

For air, the liability of airlines is defined by international convention. It should be easy to manage, as the Warsaw Convention from 1929 was replaced by the Montréal Convention in 2003. Alas, only 110 countries signed the Montréal Convention while 152 countries had signed the Warsaw Convention, so 40 countries still apply the latter.

This is why most air waybills refer to both Conventions in their fine print. Which one will apply depends on the airline’s nationality and the country where the loss occurs. So the airlines limits of liability are: 17 SDRs (around $30/kilo) under the Warsaw Convention and 19 SDR’s ($34/kilo) under the Montréal Convention. SDR stands for Special Drawing Rights, an currency created by the Inter-national Monetary Fund for international agreements, based on the US$, Euro, Renminbi, Yen and Pound Sterling. It follows the fluctuations of these currencies.

Ocean freight is more complex, as five conventions can apply, depending on the nationality of the shipping line and the country involved. They are: the Hague Rules, the Hague-Visby Rules, the Hamburg Rules and the Rotterdam Rules, governing outbound ocean freight. The US has a rule called the Carriage of Goods by Sea Act (COGSA), inspired by the Hague-Visby Rules. COGSA’s uniqueness is that it applies to both outbound and inbound freight. The Hague-Visby rules are applicable in Canada.

What does it all mean? In the event of a claim and depending on the applicable convention, the ocean carriers will reimburse a maximum of 100 GBP, US$500 or SDR667 (around CA$1,200) per “customary shipping unit” and when we ship FCLs (Full Container Loads), a “customary shipping unit” is a container. So if you ship 200 boxes of electronics in a container and it falls overboard during the voyage, the ocean carrier may compensate you on the following formula: 1 x US$500 and not 200 (boxes) x US$500.

Integrators and courier companies like DHL, Fedex or UPS also have limits of liability. They can be pretty low—nowhere near the value of your goods—but are not uniform and vary from one company to another. So when comparing prices between several integrators, it is wise to also compare their respective limits of liability.

Who’s buying?
Now we see that contracting cargo insurance is essential to compensate for the shortfall from carriers, so let’s look at who, between the shipper and the consignee, should take insurance. Firstly, the insured party must have an insurable interest in the cargo, i.e., someone who will suffer a loss if it is damaged or destroyed or who will benefit from the safe arrival of the cargo.

For example, a Canadian shipper selling under the ExWorks Incoterm makes the merchandise available at his loading dock and has no responsibility beyond. He therefore cannot contract cargo insurance, only the buyer can.

This leads us to address the relationship between Incoterms and cargo insurance. The seller is responsible for cargo insurance under the CIF and CIP Incoterms (but the insurance must be in the buyer’s name, as the goods travel at his risk). So in these two instances, the seller pays both freight and insurance premium. With the other Incoterms (EXW, FCA, FAS, FOB, CFR, CPT, DAT, DAP and DDP) insurance is left open and neither the seller, nor the buyer, has insurance obligations. A prudent trader should take insurance based on when the risks are on his shoulders, according to the Incoterm.

Another consideration is terms of payment: if a seller gets paid in advance, he may not worry about cargo loss but he may worry if he gets paid after delivery, even if goods travel at the buyer’s risk. These decisions require careful analysis, based on commodity, transport mode and country of destination. From the buyer’s point of view, the same factors come into play, in reverse.

Types of insurance
So cargo insurance covers the seller/ or the buyer in the event of loss or damage to their goods during the voyage. We will look at the types of cargo insurance available and their main features. Until 2009, the standard clause choices were “All Risks”, “With Average” and “Free of Particular Average”—together called the “American Cargo Clauses”.

They have since been replaced by the “Institute Cargo Clauses” (ICC) A, B and C, drafted in London. ICC A is the most comprehensive, most expensive coverage, B provides less coverage while C, covering against total loss only, is the cheapest. Whether you use ICC A, B or C, the coverage is warehouse to warehouse, except for some cargoes and some destinations, where the insurance underwriter may limit the coverage up to the port or the airport.

This depends on the nature of the cargo and the local conditions at destination but some countries also have restrictive laws, making it compulsory for importers to contract insurance locally. Algeria and Iran have such restrictions and there are a few dozen countries with similar restrictions, mainly in the developing world.

Aside from these country limitations, cargo insurance generally provides coverage from commencement of transit at the point of origin until it is delivered to the warehouse or “door” at destination. Some additional risks we want covered and not part of the ICC A, B or C are customarily added by endorsement: War Risks and Strikes, Riots and Civil Commotion clauses.

Some of the factors that influence pricing are the customer’s prior claim experience, the nature of the cargo and packaging, values, modes of transport and origins/destinations. Having an open cargo insurance policy is a good way to enjoy favourable rates and the peace of mind of continuous coverage, as the inadvertent failure to report a shipment does not usually void coverage, such shipments being held covered, subject to the policy conditions.

Like auto or home insurance, cargo insurance works with deductibles: the higher the deductible, the lower the rate. Limits apply as well on the maximum insurable value per conveyance.

What cannot be covered with cargo insurance is consequential damages, loss of profit caused by shipment delays, inherent vice or improper packaging.
Insured value is determined by adding the costs of packaging, freight and the insurance premium to the transactional value of the goods, then add 10 percent to cover administrative costs. This is expressed as 110 percent of the CIF/CIP value. We can insure more than 110 percent with the consent of underwriter.