The seeds of today’s ocean cargo insurance were sown centuries ago on a Chinese river, where boat traders shifted cargoes one to the other to spread the risk of loss. That way, if a boat was lost, the merchants would not suffer a total loss of cargo.
Today, although the terms of insurance have become more complex, the same basic principles hold true, says Jay Frank, a vice president at ECBM Insurance Brokers and Consultants.
“Buyers of insurance need to know that each cargo shipment really is a joint venture on the part of the ship owners or operators and cargo owners,” says Frank.
If there is damage to the ship or cargo, all of the cargo owners participate under a “general average adjustment” that is covered under the cargo policy.
Smart Business learned more from Frank about how to minimize your risk when transporting cargo internationally and what to look for when selecting a broker.
What do business owners need to know about insuring product for international transit?
If you are in the position of frequently shipping — either importing or exporting — it’s a good idea to have a broker who does that kind of business. It’s also important to use an insurance company that is a major underwriter of cargo insurance and that can be a source of information and service.
There are other insurance companies that do not underwrite cargo insurance in any great volume. Therefore, their support would be a lot weaker than that of an insurance carrier that has experienced underwriters, adjusters and claims correspondents in many lands.
What should a business owner look for in a broker?
You want to have at least a medium- to regional-sized broker who has experience with ocean cargo coverage so the broker can offer advice when needed and will know which insurance carrier is most receptive to your product and the ports you ship to and from.
It’s wise to interview two or three brokers to find one whom you feel has the knowledge and insurance company contacts you require.
What are some common mistakes insureds make when transporting products internationally?
In order to collect an ocean cargo claim, you have to be able to prove insurable interest. Shipping documents, which include invoices, insurance certificates, purchase orders or contracts, delivery receipts with exceptions, survey reports, carriers written confirmation of nondelivery and a summation of the claim are required.
The documents will indicate the INCO TERMS — standard terms used in international contracts, such as free on board delivered or point of purchase — so that title would transfer at the buyer’s warehouse or at the shipping point. If the documents are not properly aligned and the insuring party has no insurable interest, it’s likely you will not collect your loss. Also, it’s best to make sure the insurance coverage is placed in the U.S. insurance market.
The terms of the American cargo policies can be quite comprehensive. Insurance policies from other countries can be very deficient. You want to be paid in American dollars, and you want any disputes to be settled in American courts. To allow a foreign placement of coverage puts you at a disadvantage.
What should business owners look for when purchasing ocean cargo insurance?
Look carefully at the insuring terms and conditions. There are a variety of insuring terms available under a cargo policy, such as Perils of the Sea, which is well defined in the history of ocean cargo underwriting, because it dates back 350 years to Lloyd’s of London. Perils of the Sea can be enhanced to include specific optional perils, such as theft and contamination. Or you can go to an All Risk policy that puts you in a much better position because you don’t have to cherry-pick a specific peril and risk an uninsured loss.
If it is All Risk, it would include all perils except those that are specifically excluded. A few that could be excluded, depending on the product, could be breakage, rust or contamination. If those are important to your insurance coverage, you have to be sure your policy includes those perils — which are very often excluded by underwriters who are looking to collect your premium but avoid the most likely loss.
Rust is a good example of that, when shipping metals. If they are exposed to either freshwater or seawater, they can sustain a great deal of damage. If your cargo is being shipped in a vessel that has a problem with leakage or sweating, having a policy that includes rust coverage would be very important.
What other factors can affect your policy?
The previous loss experience of the insured is going to sway the underwriting opinion of the insurance carrier. For instance, a client who imports steel from a foreign company may have a five-year history of water damage or rust claims that the underwriter will very likely not want to insure because that importer is doing something wrong, whether it is picking the wrong ships or not properly protecting the product while it’s under way.
Independent survey companies will examine your product and the ship at loading and comment on the condition of both. Then a surveyor at the offload port can do the same to identify if damage occurred in transit. Proof of claims could depend on the surveyor’s reports. If so, how did it occur? Did it occur on the ship, or did it occur prior to being loaded?
Jay Frank is a vice president with ECBM. Reach him at (610) 668-7100 x1302 or [email protected].
