Cargo Insurance: A Safety Net For Sailing

Finagle’s Law, a popular version of Murphy’s Law, which says that “Anything that can go wrong, will”, is probably the best way to explain the importance and necessity of freight and cargo insurance.

A few recent examples of accidents or incidents which resulted in huge cargo or marine claims are:

• The Tanjin Port explosion (2015) caused due to hazardous cargo could result in a loss of USD 6 billion.
  
• Bankruptcy declaration of Hanjin Shipping in September 2016 resulted in huge cargo claims.
  

Natural calamities like earthquakes, floods, and hurricanes also form a major part of marine claims.

While all transportation and allied service providers aim to provide safe transport of goods from one place to another, the possibility of damage, loss, or delay still remains. Damage or loss to cargo can be either due to natural causes or due to breakdown of or accidents on the transportation vehicle (train, truck, airplane, ship).

A good cargo insurance, to an extent, helps protect the shipper against all the things that can possibly go wrong during transportation. It helps minimise risks and losses due to accidents, natural calamities, and damages during transportation. It works as a shipper's lifeline till the goods reach the designated destination and are handed over to the specified recipient as per the Bill of Lading.

Of course, this protection comes at a cost and only if the shippers have acted in good faith and have been prudent!

However, choosing a marine insurance cover is easier said than done. There are quite a few combinations to choose from and too much fine print to read and understand. But, if a shipper keeps the following points in mind, then it becomes slightly easier to choose a good cargo insurance policy.

Sale Agreement: The sale agreement plays a major part in deciding which party to the sale is in charge of getting the cargo insured. In sale agreements where the seller is responsible only for paying for the cost and freight (C&F) or if he is responsible only for transporting the cargo till the port of loading (FOB), then the onus of getting the cargo insured lies with the importer/buyer. In cases where the sale agreement is cost, insurance, and freight (CIF), then the responsibility of getting the marine insurance cover rests with the exporter/seller.

This point is important as it determines which party to the transaction will be responsible for arranging the insurance cover and how the claim process will be handled in case of any damage or loss.

Risks Covered: The kind of risks and the extent of coverage is the one of the most important points to consider when selecting a cargo insurance policy. The shipper should gauge the kind of risks that he may have to deal with and then accordingly purchase an insurance policy that will help cover those risks.

Frequency of Trade: This is another aspect that can influence the choice of marine insurance cover selected. If it is a one-time consignment, then the shipper can consider a policy for that specific shipment only. If he has regular shipments, then he can go for an open policy or an open cover.

Arrangement with Freight Forwarder: Though shippers are always advised to take a policy for their own shipments, they can also check with their freight forwarder for insurance cover options. Here, the coverage might be lower than what they would get if they bought their own cargo insurance policy, and hence may not be sufficient to cover the losses in case a claim arises.

Multi-modal Transportation and Storage: If the transit requires multi-modal transportation, then while choosing a cargo insurance policy, the shipper must also confirm and check that the goods will be covered in all modes of transportation – rail, road, air, and sea and while in storage during the transit time period.

Assess Add-ons Required: There are certain risks that may not form a part of the insurance policy and may need to be covered separately. The party in charge of arranging for the insurance cover must assess all the possible risks involved during transit and the time in between with respect to location, transhipments, storage, and political conditions of the countries involved in the trade.

For example, if one of the countries involved in the trade is going through riots or strikes and the region falls on the route of the transportation – then it would be prudent to get a cover against this specific problem. It may increase the premium payable, but it will ensure that if the cargo suffers any damage due to an unstable environment, the losses will be covered.

Once there is clarity on the above points, and the shipper has all the required information, he can select from one of the following policies (most common types of cargo insurance available in India) to insure his cargo.

Specific Voyage Policy: This policy covers only one specific shipment. It is applicable only till the time the shipment reaches the specified destination. As mentioned earlier, it is ideal for shippers who do not export/import goods regularly.

Open Cover: Generally, a yearly cover is offered by the insurer to the shipper with an understanding that the insurer will provide marine insurance (separate policies) to both import and export shipments. Under this cover, a separate policy for each consignment is created and a premium is collected for that specific shipment.

Open Policy: This insurance policy is not applicable for international transportation. It can only be taken by shippers who are transporting goods within the country. It is generally an annual policy and covers movement of cargo declared during the policy period.

Annual Policy: This type of policy is applicable only for goods being stored or shipped from a specific place and where the title of goods belongs to the shipper (exporter/importer) who has taken the policy.

While insurance provides a safety net for the shipment, it comes with a set of rules that need to be followed. If there is any instance of negligence from the insured, then the insurance policy can be declared to be void.

Shippers need to keep the following points in mind to get maximum benefit from their insurance policies:

• Provide the correct details of the shipment with respect to weight (net and gross), number of packages, nature (perishable, hazardous or dangerous cargo).
  
• Provide the correct details of the final destination and the end recipient of the cargo.
  
• Insure that the packaging of the cargo has been done keeping trade guidelines and safety of the product in mind.
  
• Insure that all the required labels and markings have been put on the package.
  
• Insure that all additional handling instructions have been provided to the carrier and its agents.
  
• Any other information that may have an effect on the insurer’s decision to insure the cargo and give the insurer’s ability to understand the kind of and extent of risk they are undertaking by insuring the cargo.
  

It is important to note that all marine insurance claims are verified with the information provided at the time of taking the cargo insurance.