When you’re trying to find ways to increase the profit margin on your imports, you may find yourself asking whether or not cargo insurance is worth it.
While self-insuring might save you money in the short-term, what happens if you lose an entire shipment at sea, swept away by a rogue wave? This can happen, but your cargo is more likely to be damaged than lost.
Containers can be compromised in many ways. Water damage, usually due to a bad container seal or leaky ULD, is a common reason for insurance claims. Other reasons include contamination, damage due to a collision or fall, improper ventilation, and even sun exposure.
Navigating insurance can be daunting, especially if you’re dealing with international suppliers and carriers.
Start by doing some research.
Improvements in shipping technology have led to an overall decline in lost or misplaced cargo. The World Shipping Council found that from 2014-2016 the average number of containers lost at sea was 612 per year.
When factoring in lost containers due to the weather, that statistic spikes to 1,390 containers lost every year. However, these findings still reveal a 16% and 56% decrease from the years 2011 to 2013, respectively. While carriers and shippers both aim for zero container losses, we aren’t there yet. And there’s still the risk of damage, either from water or an improperly packed container. Knowing all this, we’ve got some key questions before you decide to opt for cargo insurance.
Where Is the Insurance Company Located?
Cargo insurance is ultimately a contract that allows you to exchange a premium to protect yourself against loss or damage.
As with any contract, you should review the terms closely and with the help of legal counsel. Most ocean/air carriers are not domestic, so the liability insurance they provide is likely underwritten by a company operating out of the same country as your carrier.
What Is the Insured Value?
The next question is about the scope of your coverage.
There are different ways to design an insurance package for cargo, and some terms can be less than favorable to the shippers. For example, some insurance plans might base their coverage on the value you paid for your cargo, whereas you might expect it to cover the value you planned on selling it for.
The former is obviously going to be a lower figure, so factoring in what you stand to make from your product is an important part of evaluating an insurance offer.
Is the premium you pay to insure your cargo at the value you paid for it ultimately a wash when you factor in the profits from the containers that arrive undamaged?
When you’re deciding on insurance, look out for contingencies. For example, a policy might say the first thousand dollars of damaged products isn’t covered. A single container with your cargo inside might take on some water damage, but the cost ends up not meeting that threshold. You’re still out money on both the product and the premium.
Another thing to watch for is a coverage cap. The insurer might only agree to cover a maximum of $20,000, but the total value of your shipment is $50,000. Is it likely that you’ll lose your entire shipment? No. But it’s also not impossible.
How Will You Be Compensated For Your Loss?
This question is mainly for shippers working with suppliers and carriers based in Asia or developing nations.
In European countries, how you’re paid is important, but there are familiar currency standards in play. However, a Chinese insurer might stipulate that any claim will be paid out in Renminbi yuan, the official currency of China. It can be difficult to get RMB out of China. Receiving pay in RMB won’t be a total loss for the shipper, but it can lead to unnecessary headaches. Asking for an English translation of any foreign insurance policy can help you avoid surprises.
Cargo Insurance Coverage in Your Policy
Most importers we work with aren’t paying on a delivery basis.
Usually, they’ll have paid for their shipment with a letter of credit or similar means for advanced payment. This means you’ve already paid your suppliers, they’ve got the money, and in most cases that would indicate it’s their responsibility to get you the product. Unfortunately, it’s not that simple when it comes to insurance claims.
Depending on which market you’re operating in, who is actually responsible for your shipment at any point in the supply chain is not always clear. This grey area is where a lot of importers get into trouble. They make assumptions based on familiar ways of doing business without looking at the fine print of an international insurer.
Limitations of Liability
If your product is an export or an import of the United States, then you are operating under a limited liability cap per container. The U.S. says that a carrier can only be held liable for $500 per “package,” which has since been expanded to include box containers.
We’re the outlier from an international perspective, where most countries operate under a set of standards called the Hague-Visby rules. You can find more information about the $500 limitation in the Carriage of Goods by Sea Act (COGSA).
If you happen to be shipping a product without insurance where the value of a single container is $10,000, you can only hold the carrier liable for $500. This is why it’s so important to think through investing in cargo insurance.
Another scenario to consider is “catastrophic loss,” which is when a ship is forced to voluntarily sacrifice parts of the ship or cargo. When this happens, liability is determined by a maritime law called “General Average.” This law states that “all parties in a ‘sea venture’ proportionally share any losses resulting from a voluntary sacrifice of part of the ship or cargo when it’s necessary to safeguard the ship and/or remaining cargo.” This can mean that you are responsible a protion of the overall loss, even if you have insurance. Coverage for General Average Loss is available.
Insurance premiums are paid per shipment. The math is straightforward. Compare the total insurance premium against the containers you’re shipping, the value of each container, the likelihood of a container to be lost, and whether the loss of multiple containers (or even a single one) is less than the cost of insuring the entire shipment.
When it comes to cargo insurance, you should know you’re playing the odds, even in a best-case scenario. Cataclysmic events due to weather are not uncommon. Even if the chances of loss are slim, be sure you ask yourself what happens to your company’s bottom line if you lose an entire shipment without insurance. That will lead you to the right decision.