Over 90% of the world’s trade is transported by ocean freight. This equates to over 10 billion metric tonnes of cargo moved each year around the globe. For the most part the container shipping industry provides a cost-effective and safe way of transporting goods. In most instances, your cargo will arrive on schedule and in the condition you expect.
Shipping, however, is not without associated risks.
Below we will discuss some of these risks, give an insight on what happens after an incident at sea, and discuss what options are available to mitigate against these risks.
What is marine insurance?
Marine insurance covers loss or damage caused to ships, terminals and any transport vessels or cargo by which goods are transferred, obtained, or held between ports of origin and final destinations. A marine insurance policy is designed to minimise the financial loss incurred by a policyholder in the event of an accident, natural hazard or other mishap. Marine insurance also includes onshore and offshore exposed property (container terminals, ports, oil platforms, pipelines), Hull, Marine Casualty, and Marine Liability.
What is marine cargo insurance?
Also known as marine transit or simply transit insurance, marine cargo insurance is the sub-branch of marine insurance and is specifically designed to cover goods in transit against loss and damage arising from external causes. A marine cargo policy can cover:
• Loss or damage during shipment due to total or partial loss or damage only to the goods being carried
• Loss or damage during shipment due to an accident with the conveying ship, plane, train or vehicle
• Loss or damage to the goods during loading or unloading
• Loss or damage to the goods in temporary storage (where such storage is a part of the overall journey)
When transporting goods via sea freight there are two types of risks you can insure against. The risks specific to your consignment and the risks for the vessel.
Risks specific to your consignment:
- Poorly designed packaging – Poorly designed or inappropriate packaging can result in product being damaged when exposed to the rigours of shipping
- Theft – Cargo can be susceptible to theft during transportation
- Improper handling – Equipment used to load and unload cargo, such as cranes and forklifts can cause damage to cargo
Risks to the vessel:
- Vessels may Run Aground and become stranded
- Fire onboard
- Stack Collapse on board a container ship
- Collision with another vessel
- Natural Disasters and Weather events can result in containers being lost in high winds and heavy seas
- Political Unrest and Piracy
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The Risks Realised
If your cargo arrives damaged, or goods have been stolen from your consignment, the shipping expense and the commercial loss can be severe. When shipping without insurance you need to consider the impact this would have on your business.
According to UK P&I Club’s statistics, cargo damage is the leading cause of cargo claims. The graph below shows the main types of insurance claims for cargoes.
In the event that things go wrong at sea, the task of successfully salvaging a container vessel and your goods is an immensely complex one. This requires engineering expertise, all the while navigating strict environmental rules.
This ultimately means substantial costs associated with any recovery undertaking and these costs are shared by the shippers and consignees.
In circumstances where the ship or cargo has undergone losses to save the voyage, the shipowner may declare a General Average.
What Is General Average?
General Average is a principle of maritime law, which acts to share financial liability across all parties involved in a voyage. In short, if a vessel is lost at sea with your container on board, not only will you lose your goods but you will be expected to pay a contribution towards the loss of the ship.
In recent times, there has been a rise in the frequency and severity of extreme weather events that have led many vessels to become grounded, causing container loss and/or vessel damage. In addition, fires on container vessels are more common now than in the past.
The Allianz 2018 Safety and Shipping Review reports that in 2017, 94 vessels of 100 gross tons or more were declared a total loss; 6 of these were caused by fires/explosions. From 2008 to 2017, fire/explosion was the third most common cause of total losses, behind foundered and wrecked/stranded vessels. Already in 2018, fires have been reported on the Maersk Honam, Maersk Kensington, and SSL Kolkata.
Types Of Cargo Insurance – A, B and C Clauses
For your cargo to be sufficiently covered by, you may need any of the three types of marine cargo insurance policies published by the Lloyd’s Market Association (LMA). They are known as Institute Cargo Clauses (A), Institute Cargo Clauses (B) and Institute Cargo Clauses (C).
C Clauses – Most Limited Coverage
1.1 loss of or damage to the subject-matter insured reasonably attributable to
1.1.1 fire or explosion
1.1.2 vessel or craft being stranded grounded sunk or capsized
1.1.3 overturning or derailment of land conveyance
1.1.4 collision or contact of vessel craft or conveyance with any external object other than water
1.1.5 discharge of cargo at a port of distress
1.2 loss of or damage to the subject-matter insured caused by
1.2.1 general average sacrifice
B Clauses – Restrictive Coverage
All the above plus:
1.2 loss of or damage to the subject-matter insured caused by
1.2.1 general average sacrifice
1.2.2 jettison or washing overboard
1.2.3 entry of sea lake or river water into vessel craft hold conveyance container or place of storage
1.3 total loss of any package lost overboard or dropped whilst loading on to, or unloading from, vessel or craft.
A Clauses – Full Coverage
If the goods are damaged in transit and it could not be proven that the carrier caused the damage, the shipper would not be able to recover the loss. “All Risks” insurance provides protection without having to prove carrier liability.
All the clauses cover general average plus Both to Blame collisions, which is where containers are lost at sea due to collision of two ships.
Be aware of exclusions which are clearly stated in clauses 4, 5, 6 and 7.
How Is Marine Cargo Insurance Charged?
The cost of insurance is usually a rate applied to the amount you wish to insure. The common practice when calculating the amount to insure for marine cargo insurance is as follows:
Amount to insure = invoice cost + freight cost + extra costs
The extra costs are usually 10% – 20% of the invoice and freight cost to allow for:
- Landing charges
- Bank charges
- Road transport
- Customs broker fees
- Currency conversion
- Handling and payment
Note that this does not include the cost of insurance. You can contact us on 1300 227 461 to get a free quotation.
How Is The Premium Calculated?
Policies can be arranged to cover a single transit or a series of transits. Where a single transit cover is arranged, the premium is based of the nature of the goods, the method in which they are packed, the start and destination of the journey, the mode of transport and the total value of the goods being shipped.
Where a policy is arranged to cover a series of transits (generally as an annual policy), the above factors are used to calculate the premium, but additionally, the insurer requires an estimation at the beginning of the policy, of the total number of transits that will occur during the year and the total value of all goods that will be shipped during the year. At the end of the policy year, the insurer requires a declaration which is compared to the estimation at the beginning – where the declaration exceeds the estimation; an adjustment premium is then payable before renewing the policy for a further year.
When Is Marine Insurance Mandatory?
There are some instances where the provision of insurance is mandatory in accordance with the chosen contract of sale options, that is the choice of Incoterms. In summary, International Commercial Terms (Incoterms®) are a set of pre-defined commercial terms designed to communicate thetasks, costs and risks associated with the global transportation of goods, and provide rules and guidance to importers, exporters, insurers, and just about everyone involved in trade.
There are only two terms that require the seller to formally provide to the buyer evidence of insurance for the consignment in the form of an insurance policy or certificate, and these are CIF (Cost, Insurance and Freight) and CIP (Carriage & Insurance Paid To).
For the other 9 Incoterms, evidence of cargo insurance cover is not required. This does not mean, though, that a trader will not wish to make arrangements for cargo insurance, regardless of the contractual obligations.
How Do I Select An Ocean Cargo Insurer?
Letting your freight forwarder arrange your ocean cargo insurance may in fact be to your best advantage. This is especially true when you have infrequent shipments and want to avoid minimum premiums usually required by insurance companies for issuing open policies, or when providing insurance on individual shipments as they occur.
Important considerations in selecting an insurer are:
- The company’s financial health and claims-paying ability. Firms such as A.M. Best and Standard & Poor’s provide ratings of insurance companies;
- The company’s reputation for fair and prompt settlement of claims and their aggressive pursuit of subrogation;
- A full range of loss control and risk management capabilities;
- The adequacy of coverage to fit your specific needs on a cost that is based upon your cargo’s exposure to loss and not the loss experience of all shippers insured by the insurer.
Is Marine Insurance Really Worth It?
When goods are insured during transport, whether it be by land, air or sea; it means that if the cargo is damaged or lost during transit it will be refunded or replaced to whichever party held the “technical” ownership.
For instance, the receiver of the shipment may not claim it on their inventory until it is actually received in which case the shipper still holds ownership. Should the insured cargo be damaged, the shipper will receive the benefits of the insurance for their goods and the purchaser will be issued a refund. Having the cargo insured is a win-win for both parties. The right policy can also cover you against General Average costs.
When organising your shipment, ask your forwarder for a marine insurance quote and weigh up the costs vs the potential risks to make the right decision for your business.
Many forwarders, including ICE, offer marine insurance and should be promptly alerted if your stock arrives damaged or stolen.
Please contact your ICE team member to get a marine insurance quote today.