Cargo insurance is a sub-category of marine insurance which itself is a complex area. The world’s oceans are full of ships and other sailing vessels moving a wide variety of cargos to and from different countries. Any responsible ship-owner will want to ensure that their vessel is properly insured. Usually, cover is taken out on the hull plus any machinery and personnel and whilst marine insurance can, in some circumstances, cover loss or damage to cargo, that seldon, alone provides sufficient assurance. This is because the cargo doesn’t actually belong to the ship-owner but to the exporter for whom the cargo is being transported. It may in fact even belong to the importer who has already paid the exporter for the goods or ownership might pass from exporter to importer during the voyage. If this all sounds complicated, then it is.
What is Cargo Insurance?
I think it is helpful when trying to understand the different types of marine insurance to make an analogy with domestic insurance. People insure their houses with two different types of insurance policy. They take out two types of cover; buildings, covering the structure of the house, the brick work, roof, subsidence, fire etc. and contents, the things in the house; their clothes, furniture, white goods, antiques, jewellery etc. General marine insurance is like the buildings cover whilst a contents insurance policy is like cargo insurance, with the exception that it is taken out by one or more third parties with an “interest” in the cargo, e.g. buyers, sellers, shipping or forwarding agents and other bailees.
For instance, a manufacturer selling his goods is still interested in them when they are in transit up to the point at which he receives payment for them
after which point the buyer should have them insured. Those declaring an interest and taking out cargo insurance must show that they will benefit financially from the safe arrival or that they will lose out in the event of loss. If the cargo is lost or damaged in transit then it is necessary to consider which party had the insurable interest at the time of loss and transfer; this is called assignment.
Cargo Insurance, a potted history.
General marine insurance has been around since ancient Greek and Roman times. Cargo insurance isn’t quite so ancient, although an early maritime cargo policy prescribed by a Florentine Ordinance of 1523, insured good on a named ship against sinking, fire, jettison and other perils, which interestingly is close to what is set out in the Marine Insurance Act of 1906. Policies in England are recorded as early as 1555,
although they were less developed than their Italian equivalents. London became a centre for marine insurance from the late 16th century, coinciding with the growth in markets and trade during the Elizabethan age. In 1689 Edward Lloyd formed Lloyd’s of London although that did not coalesce into an organisation of underwriters, insuring in syndicates, until almost a century later. In parallel with Lloyd’s other marine insurers were developing across the world. It was in Canton in 1835 that traders engaged in exporting cargo from China formed a mutual association to pool the hazards of marine cargo adventures; others soon followed. This was in direct response to the fact that whilst marine insurance covered the ship-owners' losses, damage of cargo from the standpoint of the seller or buyer was seldom sufficiently mitigated. The Institute of London Underwriters issued the first Institute Cargo Clauses in 1912 covering named perils. These have been revised regularly since. In 1942 the Joint Cargo Committee was established consisting of leading underwriters representing both Lloyds and the Institute of London Underwriters. In 2005 they proposed a major revision of clauses to take into account the risks from international terrorism and the developments in market conditions. The results were published in 2008.
Types of Policy
Open cover is a flexible policy with insurance based around a given number of shipments within a specific period of time or for an open period until either party cancels the agreement. It can also cover shipments up to an agreed value and usually contains a valuation clause or formula for working out the amount of insurance, taking into account variations in the value of any commodity, subject to price fluctuation. The premium is based largely on the value of goods being transported. A deposit is paid initially with a final adjustment according to actual turnover value of the goods
that are carried. The policy should contain a description of each shipment, the departure point and the destination, the maximum value payable in
the event of a claim and how the goods will be valued.
A voyage policy is specific to a particular consignment and some customers prefer this because the overall cost of a particular shipment can be easily identified.
Terms of sale set out the responsibilities of the buyer and seller in terms of the goods being moved, clarifying who pays for the procurement of documents, any licences or permits and how any risk or loss will be handled. Specific cargo delivery points are set out, including the point at which the risk transfers from buyer to seller. All these considerations are contained in the Incoterms, a set of rules which define the responsibilities of sellers and buyers for the delivery of goods under sales contracts. The terms set out are used by organisations such as The American Institute of Marine Underwriters and The Institute of London Underwriters and are, in fact, adhered to internationally. The Insurance Certificate should provide the name and address of the insurance agent in the country of destination and will be signed by the policy holder assigning the certificate to the benefit of the buyer, meaning they can receive settlement for loss or damage of goods in transit as if they were the assured. There are several different insurance provisions for cargo, the most common of which are detailed below:
• Cost and Freight Insurance (CIF). This applies to shipments only. The seller takes out cover, insuring the goods, up to 110% of their value, to the point of destination, plus all transportation. War risk insurance might also be included, the cost of which is usually passed on to the buyer;
• Carriage and Insurance Paid (CIP). The seller has to obtain insurance for the goods while in transit, usually up to 110% of their value. Unlike CIF, it applies to all types of transportation (road, rail, air) when cargo has to be transported prior to or
after the sea voyage; and
• Free on Board. This type of cover is restricted to goods transported by sea or inland waterway. It should be used where the seller of the goods being transported has direct access to the vessel for loading. The seller delivers the goods to the port and loads them on board to the timescales agreed in the Contract of Sale. Once loaded, the risk transfers to the buyer, who bears all costs thereafter.
What risks are covered: Perils of the Sea
The UK, Maritime Insurance Act of 1906 refers to “Perils of the Sea”, including sinking, stranding, collision, fire, war perils, pirates, thieves, capture, jettison and washing overboard. Individual policies may include other “perils” and risks appropriate to other means of transportation like crashes, derailment,
or overturning. Total loss of cargo as a consequence of any of these events
would be covered. Partial loss can also be covered under the provisions of
Particular Average where the damages or expenses incurred by the shipper are
borne by that shipper only, independent of the insurance bought for the
cargo and stemming from the contract between the ship-owner and the cargo
owner, now replaced by the relevant Institute Cargo Clause of which there
are 5, vis:
1) Free of Particular Average America Conditions – this limits recovery on partial losses to cargo unless caused by stranding , sinking or collision.
2) Free of Particular English Conditions – which restricts coverage for partial loss to cargo unless, even indirectly, the loss was attributable to stranding, collision, fire,
3) With average amounts to 3%. The percentage is referred to as a franchise and is the minimum amount that can be claimed.
4) Average irrespective of percentage, covers all partial losses due to perils of the sea.
5) All risk conditions provides cover against all physical loss or danger for any external source.
What is not covered
Loss of market is not covered under cargo policies or deterioration as a result of delay, for example, because of civil unrest, strikes, or acts of war (these can usually be covered elsewhere in any case). Nevertheless, cargo policies can be flexible and can be adapted to include explosions or contain an Inchmaree Clause relating to losses as a consequence of burst boilers or the breakages of shafts, hull or machinery. Losses where damage occurs due to fumigation of a vessel can also be covered.
In the event of loss.
In the event of loss the insured party should contact the nearest agent to arrange a survey. The agent will inspect the damaged goods to establish the cause of loss or damage, the value of the cargo and extent of the damage. Their report, together with any insurance certificate, invoice or Bill of Lading will be sent to the underwriters.