Management SITPRO

International Trade Guides

Cargo Insurance
 Cargo Insurance
This guide provides general information about cargo insurance and why you need it.

You should read it if you are involved in trading your goods worldwide. If you are an exporter you
should pass this information onto your sales and marketing team and the department responsible
for arranging the shipment of export consignments.

If you are an importer you should ensure your buying department as well as the team handling
the supply and import process are aware of the information in this Briefing.
What is cargo insurance?
Cargo insurance (also called marine cargo insurance) covers physical damage to, or loss of your
goods whilst in transit by land, sea and air and offers considerable opportunities and cost
advantages if managed correctly.

Unfortunately, many UK traders do not want to become involved in arranging this type of
insurance because they feel they do not have sufficient knowledge. They see it as an
unnecessary expense involving extra administration, and 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.

Fortunately, this attitude is changing, with more and more companies following the lead of many
of the 'blue-chip' manufacturing and trading giants of the UK economy who tend to take full
control of this type of insurance.

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.

Cargo insurance is usually provided by the means of one of three Institute Cargo Clauses - A, B
or C, plus War Clauses and Strikes Clauses. Simply put Cargo Clauses A provide 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

2 SITPRO Management Guide: Cargo Insurance

party policies). Also there is an Institute Cargo Clauses (Air) for movement by air, which is
equivalent to the A clauses. Your insurance company or broker 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.
Why do traders need cargo insurance?
Exports
Many major UK exporters and trading companies sell on Cost Insurance and Freight (CIF) or
similar terms, which allows them to arrange marine cargo insurance in the UK - 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.

Many foreign buyers see this as essential service provided by the exporter, given that cargo
insurance rates in UK are often cheaper than those available to the overseas customer in his
local market. Indeed, exporters who do not provide a 'package' which includes insurance, can
lose business to competitors who do.

The other side of the coin is where UK exporters allow their customers to arrange the insurance.
This can range from selling on Ex Works terms to exporting on Free on Board (FOB) or Cost and
Freight (CFR) terms. An Ex Works sale represents the minimum obligation for the seller, who has
merely to make the goods available at his premises for collection by the buyer's designated
carriers.

However, what tends to be overlooked is that the exporter is totally reliant on the buyer arranging
adequate insurance on goods which have probably not been paid for. If the goods arrive
damaged or if the buyer's insurance does not cover the loss, the exporter may not receive
payment. Additionally if the goods or shipping documents are rejected on arrival at destination,
the insurance risk can often revert to the exporter who may not have taken out any insurance.

Imports
Many importers assume that the suppliers are including the marine cargo insurance for free
when, in fact, the cost is included in the purchase price. In addition, obtaining information from
suppliers about these costs and whether they are being loaded can prove difficult.

Another important issue is the type of cover being provided - is it comprehensive 'all risks' or just
'total loss' only? Is it on a warehouse to warehouse basis or just warehouse to UK port? Without
this information, importers may not realise they are paying too much for insurance which does
not meet their needs, and may leave them with uninsured exposure.
SITPRO Management Guide: Cargo Insurance
A further issue is who is actually insuring the goods? The security of some overseas insurers
may not compare favourably with the security of insurers in the highly regulated UK market. In
the event of goods arriving damaged in the UK, the importer will probably deal with the UK agent
of the overseas insurance company - an agent who will be working for the insurer, not the
importer. This can lead to delays in processing and settling claims.

If the importer takes control of cargo insurance they can arrange the necessary cover in the UK
market, which is often more comprehensive and price competitive than in overseas markets.
What types of cargo insurance are available?
Open Cover
This is the most usual type of cargo insurance, where a policy is drawn up to cover a number of
consignments. The policy can be either for a specific value that requires renewal once the
insured amount is exhausted or an permanently open policy that will be drawn up for an agreed
period, allowing any number of shipments during this time.

Specific (Voyage) Policy

Although not the norm for cargo insurance, you may from time to time need to approach an
insurance company (or broker, or other intermediary) to request an insurance policy for a
particular consignment. This is usually referred to as Voyage Policy as the insurance covers only
that specific shipment.

Contingency (seller's interest) insurance

As an exporter you may often sell goods on terms where your customer (as the importer) is
responsible for insuring (or at least bearing the risk of damage of or loss to) the goods, for
example under FOB and CFR Incoterms 2000. In these cases you are exposed to the risk of
damage to the goods while in transit and your customer refusing to accept them. In the worse
case your customer may not have insured the goods.

If this happens and your customer attempts to avoid liability, you could seek redress through the
legal system. However, this can prove very expensive, and may often be pointless. Seller's
interest insurance, usually for a small premium, will cover you for this contingency. For valid
commercial reasons you may not wish your customer to know you have taken out such a policy.
Where can I get cargo insurance?
You can obtain cargo insurance direct from an insurance company, or some freight forwarders
and other trade service intermediaries. Also you may find that your bank will offer cargo
insurance as part of a trade finance package. However, best practice adopted by many
companies has shown that using a specialist (marine) cargo insurance broker provides value-
SITPRO Management Guide: Cargo Insurance 4
added services when arranging cover and gives additional benefits when dealing with any claims
and settlement procedures. The British Insurance Brokers’ Association (BIBA) has a search tool
to help you to identify insurance brokers at http://www.biba.org.uk/consumer/findbroker.asp.
SITPRO does not sell cargo insurrance or recommend insurers.
What other options are open to me?
There are several other ways to approach the risk involved in the physical movement of the
goods you trade across international borders:
• do nothing and carry the risk yourself. If an incident occurs resulting in damage or loss to the
goods you could take action against the carrier. But you should remember that carrier liability
is strictly limited by internationally agreed conventions. Also you will need the expertise and
perseverance to sustain a successful claim. This could have an impact on your business;
• as an exporter you can let your customer insure the goods;
• as an importer you can let your supplier insure the goods.

The factors you must consider for either of the final two options have been described earlier in
this Briefing;
How much will it cost me?
Like all insurance cover (premises, employer's liability, credit) 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. As with
all insurance cover, you should spend time researching the market and getting quotes from a
range of cargo insurance providers.
Conclusion
More and more companies recognise the long term advantage of buying cargo insurance in the
UK and using the services of specialist cargo insurance brokers. If you are a small or medium
sized trader you need to look more closely at this area of your international trading operations.
You could reap benefits for your business through enhanced protection of your interests,
improved international trade administration, better trading relationships and increased
competitiveness, resulting in greater profitability.

5 SITPRO Management Guide: Cargo Insurance

 SITPRO Guides
Management
Cargo Insurance

Acknowledgement
SITPRO wishes to acknowledge the
valuable assistance of Willis Limited
(insurance brokers) in the preparation
of this guide.

SITPRO
Simplifying International Trade

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