Cargo Marine Insurance 101: Protect Yourself!

Businesses make money by selling products. Every time a company decides to import or export products, they make an investment expecting a profitable return. The process of shipping goods, however, is not without risk. Sadly, some businesses do not protect their investment by purchasing insurance, which in the end, could cost them much more than anticipated.

Whether importing or exporting, using air freight or ocean freight for your international shipping, marine cargo insurance covers loss and/or damage of cargo while it is in transit between the points of origin and final destination. Although it might seem that a person is saving money without taking out marine insurance, the factors influencing cargo in transit are too unpredictable. In addition, sea freight users are contractually liable to cover the costs of any damage to the ship should they occur. Luckily, however, due to internationally low claims rate on standard cargo, marine insurance rates are usually very reasonable for the amount of cover given. For these reasons, it isn’t wise to import or export goods without marine cargo insurance. Refer to our incoterms guide to determine which party, the buyer or the seller, is liable to take the risk and responsible to pay for the insurance.

Cargo policies come in two forms, namely, open policy, which covers a number of consignments over a period of time. This is calculated on the total consignments that will be done within one year. This policy provides cover for all the consignments conducted by the business and is payable on a monthly basis. Secondly, you get a specific policy, which covers one specific consignment and is payable once-off. There is also an option to increase the cover to an all-risk or total loss cargo policy, which provides cover against all fortuitous losses.

Here are some pitfalls to avoid when choosing marine cargo insurance:

  • Limited cover:  Inexperienced exporters and importers often view insurance as a grudge purchase and risk not having adequate cover in place. This exposes their businesses to financial – and liability risks in the event of an accident.
  • Choosing Cover on Price: Importers and exporters are sometimes overwhelmed by the capital intensiveness of trade, and look for ways to cut costs.  They shop around for cargo insurance, choosing the best priced option. This is a big mistake. Businesses should rather focus on what the policy covers, instead of basing their decision solely on price. Rushing to sign a contract without fully understanding the terms and conditions of the policy can get them into trouble.
  • Reducing liability: Getting the right amount of cover is vitally important when applying for cargo insurance. Lowering monthly premium costs may initially seem like a good idea, especially because a person is saving money. But it is not advisable. Seek help from brokers and insurers to arrange the right amount of cover for a business, as well as to protect personal assets.
  • Unaffordable deductibles: Choose deductibles that you can afford. A deductible is commonly known as an excess. This is the amount that a business will have to pay upfront before an insurer can settle a claim. While choosing a higher deductible may help to reduce monthly premium costs, it is best to choose a deductible that will be affordable in the event of a claim.
  • Be aware if you are using an incoterm which allows the other party to choose the insurance cover.

When the other party decides on the insurance, such as when using the CIP incoterm, often the cheapest insurance is used that may not provide the protection that you desire. If the decision about the insurance is in the hands of another party, ensure that your commercial agreement with them stipulates the quality of cover to be provided. In the end, it’s better to be safe than sorry. You don’t want to put yourself under unnecessary financial pressure.

More information on marine insurance is available in our cargo insurance manual.

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