Introduction to the term Cargo Insurance herein after expressed as Marine Cargo Insurance
Cargo insurance is perhaps the oldest form of insurance with the first policies being issued more than 400 years ago from Lloyds Coffee House in London; now known as the most famous of all insurance companies Lloyds of London.
As the first policies were issued on marine cargo risks, the laws which affect transit between territories, jurisdictions and over the seas were based on marine terms. Even though cargo is now shipped around the world by a variety of methods including by Air, Sea, Road and Rail the term Marine Cargo is still the main term used in cargo insurance wordings thus, most of the following information will be cast in the term Marine Cargo Insurance.
Cargo insurance (also called marine cargo insurance) covers physical damage to, or loss of, your goods whilst in transit by most recognised methods of transit such as by Sea, Air or Land ie; road and rail, and combinations of any.There are Two (2) main types of Cargo insurance available:-
Single Cargo Shipments – (for One-Off Shipments often referred as ‘Voyage Specific’) - This is the next most common form of cargo insurance, mainly taken out by individuals and small businesses for One-Off Shipments of cargo & freight. This is where the cargo as one-off shipment is priced and covered as one shipment from a particular destination to another – the cover usually commences at the point of departure and ceases upon arrival at the cargo’s destination which could be a port or the customer’s premises often referred to as ‘Warehouse to Warehouse’. This type of cover is also sometimes referred to as a ‘Voyage Policy’ as the insurance covers only that specific shipment/voyage.
Open or Annual Cover – (mainly for regular shippers such as Importers/Exporters) - This is the most common form of cargo insurance, most often used by regular shippers of goods such as importers and exporters including freight forwarding agents, where a policy is issued to cover a number of consignments being shipped to and from various ports and destinations throughout the year. The policy can be either for a specific value that requires renewal once the insured amount is exhausted, or an open policy that will be issued for an agreed period, allowing any number of shipments during that time. This type of cover is sometimes referred to as an ‘Open or Annual Policy’ as the insurance cover remains in-force for a stated period of time, usually a 12 month period.
How does a Marine Cargo open policy work
A marine cargo open policy is the agreement between a merchant and the insurance company to insure all goods in transit falling within that agreement for an indefinite period, until the agreement is cancelled by either party. The policy specifies:
- the general description of the goods
- the countries or places to or from which the goods will be insured
- the maximum value payable under the policy
- how the goods will be valued
- the conditions of insurance.
Terms of sale: important definitions
- EXW (Ex Works) The buyer is responsible for all costs and risks from the time the goods leave the seller’s warehouse until they arrive at their final destination.
- FAS (Free Alongside Ship) The seller is responsible for all charges until the goods are alongside the ship. (The definition of “alongside ship” varies from port to port. It may mean customs warehouse, ship’s storage shed and so on.) The buyer is responsible for all costs and risks from that point until the goods arrive at their final destination.
- FOB (Free On Board) The seller is responsible for all costs and risks until the goods are on board the vessel. The buyer is responsible from then on. The merchant agrees to declare details of all shipments falling within the scope of the policy, and the insurance company agrees to insure such shipments, according to the terms and conditions of the policy.
- CFR (Cost and Freight) The seller is responsible for all charges incurred to the place of discharge, except for loss or damage after they have been delivered unto the custody of the ship owner at the place of ship mentor point of FOB. It is the buyer’s responsibility to insure the goods once they are delivered to the place of shipment or FOB until they reach their final destination.
- CIF (Cost, Insurance, Freight) The seller’s responsibilities are the same as for CFR sales, except that the seller arranges insurance to the final destination of the goods, providing cover in terms that are usual to the trade. The buyer pays for and takes title to the policy when the goods are paid for.
- FIS (Free Into Store) The seller is responsible for all costs and risks until the goods are delivered to the buyer’s warehouse. The buyer does not need to arrange insurance at all.
In commerce, sales are made under internationally recognised terms of sale. These have been defined in detail by the International Chamber of Commerce in their booklet No. 460. This sets out the rights and responsibilities Terms Risk transfers of the exporter and importer. Risk responsibility for goods passes at different stages of transit, according to the terms of sale. This is a general terms. Insurance covered by
| Ex Works (EXW) Free Carrier (FCA) | When goods have been placed at the disposal of the buyer When goods have been delivered into the custody of the carrier | Buyer from seller’s warehouse Buyer (Seller up to the carrier) |
|---|---|---|
| Free Alongside Ship (FAS) Free On Board (FOB) Cost and Freight (CFR) Cost, Insurance, Freight (CIF) Delivered at Frontier (DAF) | When goods have been effectively delivered alongside the ship at the named port of shipment When goods pass the ship’rail at port of shipment As for FOB, but the seller prepays freight to destination When goods cross ship’s rail at port of shipment When goods put at disposal of buyer at named place at frontier | Buyer (Seller up to the ship) Buyer (Seller up to the ship) Buyer (seller up to the ship) Seller (Insurance policy sold to buyer with cost of goods) Seller (To frontier) Buyer (From frontier) |
| Carriage Paid to... (named point of destination) (CP) Delivered Duty Paid (DDP) | When goods delivered into custody by first carrier who undertakes carriage from place of departure When goods put at disposal of buyer at named place of destination | Buyer (Seller until delivered into custody by first carrier) Seller |
| Free Into Store (FIS) | When goods accepted duty paid at the buyer’s warehouse (not an internationally recognised term of sale) | Seller |
Advantages of a marine cargo open policy
- It provides guaranteed cover at prearranged rates arid conditions
- Flexible policies are tailored to suit the customer’s individual needs
- Insurance protection starts from the moment goods are at the risk of the merchant
- Losses are covered even if they occur before details of the shipments have been given to the insurer
- The policy remains in force indefinitely until cancelled, usually by either party giving thirty days notice of cancellation (insurers reserve the right to withdraw war risks cover following seven days notice)
- The cost of insurance is usually lower than if separate policies are arranged
- It avoids the need to arrange separate policies for each shipment
- Exporters are able to offer insurance in the cost of goods when negotiating sales
- The method of premium payment can be tailored to the customer’s needs: annual adjustable; quarterly;or monthly declaration.
Important marine cargo open policy terms
- Maximum Sum Insured The policy shows a figure which is the insurer’s maximum liability for a claim in any one conveyance. The customer should make sure that the value shown is enough to cover the value of the largest shipment and double this figure to cover the possibility of two shipments being sent in the same conveyance.
- Location Clause This clause limits the maximum amount payable from one accident or series of accidents occurring in one location; for example, before shipment. It is usually but not always the same amount as the bottom limit.
- Classification Clause The type or age of a ship is important when fixing the rate of premium. However the names of ships carrying goods are not usually known when fixing premium rates for a marine cargo open policy. This clause provides that the pre-agreed premium rate for the marine open policy refers to goods in transit in ships under a certain age and up to a certain Standard/Class. An additional premium may be payable for transits on other ships.
- Basis of Valuation Commercial shipments are normally insured on the basis of the invoice value plus all transit and other known costs, plus a percentage to cover hidden costs and a proportion of the buyer’s expected profit. This value could be shown as CIF plus 10%. The agreed basis is noted on the policy so that if a declaration is accidentally overlooked, a loss will remain automatically covered for the value agreed. This valuation is also used by the merchant when declaring details of shipments to the insurer. When insuring imports, often two valuations are often noted on the policy. One applies to FOB orders (for instance, FOB plus 30%) and the other to C & F orders (for instance, C & F plus 10%). The percentage added should be enough to cover freight as well as other costs for FOB orders. Having two valuations makes it easy for the merchant to decide which value is declared to the insurer.
The Transit Clause, part of the Institute Cargo Clauses, is explained here: Duration This insurance attaches from time the goods leave the warehouse or place of storage at the place named for the commencement of the transit, continues during the ordinary course of transit and terminates at either:
- delivery to the Consignees’ or other final warehouse or place of storage at the named destination,
- delivery to any other warehouse or place of storage, whether prior to or at the destination named, which the insured decides to use either:
- for storage other than in the ordinary course of transit or,
- for allocation or distribution • on the expiry of 60 days after completion of discharge over side of the goods insured from the overseas vessel at the final port of discharge, whichever occurs first.
In the case of specific Institute Cargo and Commodity Clauses (for example Frozen Food Clauses and Meat Clauses), attachment and expiry dates may differ. It is important that attachment and expiry dates are assumed only after consulting the relevant Institute and Commodity Clause.
- To recover a policy under a marine cargo policy, a person must have insurable interest at the time of loss, though the interest may not have existed when the insurance was arranged.
- From Section 3, you will see that risk responsibility for goods can change at various points during shipment, according to the terms of sale. Although the duration clause shows cover as being warehouse to warehouse, an importer only has this cover if it is purchased on EXW terms. Similarly, an exporter has insurance cover from warehouse to warehouse if the goods are sold on a FIS or CIF basis.
- If an order is supplied on FOB terms, the policy cover for an importer starts from the time that risk responsibility passes to the importer (in this case, when the goods cross the ship’s rail).
- If a Australia exporter sells goods on CIF terms, the cover is warehouse to warehouse. However, if the exporter sells the goods on CFR terms, the risk responsibility is only held until they cross the ship’s rail and, if the exporter has insured the period of transit from warehouse to ship’s rail, the cover ceases then. (Section 7 explains how this can be extended). Marine Cargo Open Policy cover can provide wide protection for a Australia importer or exporter. Certificates of insurance issued from the master open policy are sub-sets of this cover which comply with the required insurance terms of a specific commercial sales contract. This shows just how flexible a marine cargo open policy can be. Cover automatically starts when it is needed and protects a merchant for as long as is necessary.
A variety of risks can be covered but the most common and widest are the Institute Cargo Clauses (A) (formerly known as the All Risks) which cover loss or damage to goods. In addition, War Risks (while on board a seagoing vessel or an aircraft) and physical risks of loss or damage as a result of Strikes, Riots and Civil Commotions may be insured. The War and Strikes risks are rated from an agreed scale to which all insurers are bound. The risks insured are defined in sets of conditions called the Institute Clauses. These are issued by the Institute of London Underwriters. They are understood globally and are used widely.
Some types of loss are not insured. The main exclusions are loss or damage caused by:
- willful misconduct of the insured (the merchant)
- ordinary leakage, loss in weight,
- wear and tear of goods
Cargo Categories - Cargo is usually classified into several different categories and sub-variants, each carrying an individual premium risk rating depending on the degree of fragility of the goods being shipped, ie; for obvious reasons perishable food will attract a higher premium then that of containerised and packed timber.
When a customer requests cargo insurance they will usually be asked to categories the goods to be shipped from the following primary categories (if a suitable category doesn’t present itself, the broker will assist the customer to broker the risk to the underwriter as a specialist freight order).
Household Goods and Personal Effects Are defined as anything in a household/residential move such as furniture and any other household item (appliances, electronics, art work, china etc’) as well as Personal Effects. All residential moves are considered household goods by most Cargo & Transit insurance companies. General Merchandise/General Cargo NEW or refurbished goods that are not specifically subject to breakage such as, Glass & Fragile Goods Fine Arts Heavy Machinery (Mobile & Static) Cranes & Earthmoving Equipment Machinery (Not Prone to Breakage) of any type from Lawnmowers to Heavy Material Machinery, Building Site Vehicles, Generators, Road Works Equipment, Drilling Equipment, Wheelchairs, Spare Parts and Accessories, Excavators, Bulldozers through to Mobile Cranes and Coal Re claimers including Farm Machinery and other similar Machinery which is towed by other Machinery. Note: Machinery with an Engine & Hydraulics will have to be “dry” (without oils and fuels) for shipping. Precision Instruments & Fragile Machinery Computers & Software Electronics Cell Phones and PDA's (iphone, treo, blackberry, blackjack etc.) handheld digital computers (palm pilots etc). Branded Goods Bottled Products for Human Consumption Bottled Beverages containing Liquors Any type of bottled beverage containing Liquors. Non-Perishable Food Frozen Foods Frozen Meat Chemicals & Hazardous Materials Steel Sheets, Coils, Bars, Billets and the Like Automobiles & Motorbikes Yachts and Boats Aircraft |
Types of Cargo Insurance Cover Generally Available
Cargo insurance is a pretty standard sort of cover, originally created by Lloyds of London almost 4 centuries ago.While Lloyds is now one of many Cargo specialist insurers worldwide, the industry still adopts Lloyds lead in terms of policy coverage which usually includes additional but, standard clauses known as the ‘Institute Cargo Clauses – A, B or C, plus War Clauses and Strikes Clauses.
Simply put, Cargo Clauses A provides the most cover with B and C giving less coverage which is reflected in reduced premiums for the lower cover (somewhat similar to car insurance cover with comprehensive, third party, fire and theft, and third party policies).
Also there are Institute Cargo Clauses (Air) for movement by air, which is equivalent to the A clauses. Cargo Safe will be able to give details of exactly what cover is given by each clause so you can choose the most appropriate for your business needs and trading patterns.
Most customers requirements are common thus, Cargo Safe has developed a summarised cover in a more simplistic form as follows;
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Where additional clauses are desired, Cargo Safe will arrange with a suitable cargo specialist insurer to include those additional or varied the clauses within the cover, sometimes however, this may lead to an increase in costs.
When you are looking at the types of cargo insurance available, you may come across the term ‘General Average’. This is one of the oldest principles of cargo insurance and relates only to ocean and sea voyages but, is still relevant in today’s trading environment.
General Average covers the situation where damage or loss of certain goods occurs so that the remaining cargo and the means of transport are saved. For example goods may sustain water damage during fire fighting. In this situation, if General Average is declared, all the parties involved must contribute to covering the loss.
The following additional covers can be considered:
- Advance loss of profits (machinery transit)
- Strikes diversion
- Sellers interest (FOB exporter)
- Difference in clauses (CIF importer)
- insufficient packing, inadequate storage in a container, inherent vice, or goods deterioration caused by delay
- insolvency or financial default of the owners, managers and so on, of the vessel.
Deck cargo, other than goods in containers on container ships, is covered against certain named risks as opposed to the wider conditions of the Institute Cargo Clauses (A) As many types of Institute Clauses are available, so a marine cargo open policy can be tailored to suit your needs.
- Returned goods
- Rejection/expenses
- Charter liability Duty
This is not a complete list. Your insurance advisor can provide you with more information.
Methods of declaring shipments to the insurer
Imports The most popular method is for the importer to note brief details of shipments on a form supplied by the insurer. The entry is usually made when documents are received from the bank. By using this method the importer knows that details have been declared. Sometimes it is arranged for the supplier to declare shipments direct to the insurer. However, there is a chance that the supplier may forget or perhaps declare the wrong value. It is the NZ merchant’s responsibility to ensure that every shipment has been declared. In other cases it may be possible for the insurer to use the merchant’s office system documents as declarations.
How much will Cargo Insurance cost me
Like all insurance cover (premises, employer’s liability, credit etc’) you will have to pay for your cargo insurance services. Premium is usually calculated according to the value of the consignment (plus a percentage mark up for profit margin), the type of goods (danger or hazard) and other specific risks (mode of transport, route, destination, etc.) from the insurer’s perspective.
When transiting goods inside Australia, it is common for carriers to be liable up to $1,500 per unit of goods (Carriers’ Liability Act 1979). If a merchant sends packages valued at more than $1,500, it is possible to make substantial premium savings if the open policy covering the sending has
- Exports The exporter usually produces a Certificate of Insurance at the same time other export documents are generated. This negotiable document gives brief details of the shipment, the conditions of insurance and the value insured. It also provides evidence of insurance for banks.
- New Zealand Transits (sales/ sending's) An open policy can be tailored to cover all or just some of a merchant’s sales or sending's. This is why there are many different methods of declaring the details of goods in transit. an excess equal to the carrier’s liability. Savings can also be made on imports premiums if a merchant agrees to a small excess on the policy, so that minor losses are not claimed against the open policy.
Charging premiums under marine open policies
When details of shipments are being declared to the insurer on a regular basis, the insurer usually charges premiums monthly, based on the received declarations. In some cases the premiums may be charged annually. This method usually applies to the insurance of goods in transit within Australia, where the merchant estimates the value to be insured for a twelve month period. A deposit premium is charged, calculated on this estimate and an additional/return of premium adjustment made at the end of twelve months, calculated on the declaration of the actual value of transits made by the merchant’s accountant.
Advantages of insuring in Australia
- Reduced currency risk Australia importers do not have to pay additional overseas funds if they insure the goods. However, if goods are insured by the seller, this increases any exchange rate risks.
- Efficient Claims Service Insurance companies usually have branches throughout Australia as well as a network of branches and agents around the world. No matter where a claim occurs, your insurer (or insurance agent) is there to assist and settle claims swiftly. If you ever have to make a claim, you deal with your insurer, not the agent of an overseas insurer. Some overseas insurers do not have agents in Australia and you must apply directly to the overseas insurer for settlement.
- Tailored Policies Your insurance policy can be tailored to suit your individual needs. The conditions of insurance policies arranged overseas may not fully cover your needs, leaving a shortfall in protection.
- Competitive Rates If arranged off-shore, insurance rates may contain additional hidden costs loaded by the seller. Your insurer will be pleased to provide you with a competitive quotation for a marine cargo open policy.
Types of Cargo insurance
What is a marine cargo open policy?
Terms of Sale: important definitions
Terms of sale: how they work
Advantages of a marine cargo open policy
Important marine cargo open policy terms
Period of insurance
What risks can be covered?
Types of Cargo Insurance Cover Generally Available
Policy extensions
Methods of declaring shipments to the insurer
How much will Cargo Insurance cost me
Lower premiums through excess
Charging premiums under marine open policies
Advantages of insuring in Australia
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