If your business depends on shipping cargo, it is reasonable to take a moment and understand the main principles of cargo insurance and how your goods are protected against any unplanned events.
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Anyone ordering transport for their goods is intending to get their cargo moved from shipper to consignee, without any delays, damage to the goods etc. In real life, it doesn’t matter whether your ship is by air freight, ocean containers or transport via rail, things sometimes happen even to the very best transport specialists. Anyone with experience in logistics can tell you that unforeseen events can turn your logistics upside down in a second. Unforeseen events can be transport delays caused by technical issues, weather or force majeure, but also related to mishandling, which may result in lost or damaged goods.
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This article will help you to learn more about cargo insurance, and how to protect your cargo and yourself against unpleasant surprises.
Every shipment which has been handed over to a freight forwarder is protected to some level by freight forwarders’ or carrier’s liability. It is important to keep in mind, that your freight forwarder or carrier can be held liable only in case the loss or damage occurs as a result of a mistake or negligence of a freight forwarder during transport.
In case any damage or loss has occurred in transit as a result of a mistake or negligence by your carrier of freight forwarder, your carrier is liable for the loss. Bear in mind there are limitations to the extent of liability, which deviates according to the transport mode used.
|Transport mode||Extent of liability||Standard conditions|
|Air freight||SDR 22.00 per kg||The Montreal Convention|
|Ocean freight||SDR 2.00 per kg||Hague–Visby Rules|
|Road freight||SDR 8.33 per kg||CMR Convention|
Table 1. Carrier’s maximum liability on different freight modes.
SDR or Special Drawing Rights was created as an international reserve asset by IMF. The value is linked to five currencies: the US dollar, euro, Chinese renminbi, Japanese yen and the British pound sterling. The current value of SDR on February 3rd 2022 is 1.234 euros. Learn more about Special Drawing Rights here.
The International Chamber of Commerce (ICC) has introduced Incoterms to help standardize and simplify any international trade interactions involving in trade of goods. Today Incoterms 2020 is a set of standard terms used widely in international trade and the exchange of goods. Learn more about Incoterms on the webpage of the International Chamber of Commerce.
When shipping cargo Incoterms rules are there to help and define the rights and responsibilities of the buyer and the seller. These rules also help to define who is liable for any loss or damage occurring when the goods are in transit. Most common incoterms used for international trade:
Cargo Insurance is there to protect the owner of the goods from financial loss, which may occur due to damaged goods or loss of cargo. Cargo insurance for your shipment should be considered when the value of the goods shipped is higher than what the carrier’s liability would cover.
Cargo insurance is there to cover any damages to the shipments. This is intended to cover for example any scratched or dented items but also water damage.
When negotiating an insurance policy, you can also opt to insure potential loss of profit, which may occur due to an insurance event.
Insurance is only able to cover the damages if it can be proven that the shipper has packed the goods sufficiently and with suitable packaging. If the shipper hands the shipment over to the carrier without sufficient and secure packaging or with visible damage, it will be recorded by the carrier. However, if the consignee discovers any visual damage upon handover at the delivery place, the consignee will have to mark that down on the delivery receipt, as this will serve as evidence that the damage occurred while the shipment was in transit.
Cargo insurance also covers the loss of cargo in transit. If the consignee discovers during the handover of the shipment that some of the goods are missing, this needs to be noted on the transport document upon receipt, as this serves as evidence of the loss or theft has occurred during transportation.
Below you can find the most common risks and measures which may affect your consignment when transporting.
If the shipper has handed the consignment over to the carrier with proper packaging and without any damage, yet the damage has been discovered by the consignee while receiving the shipment, the damage is covered by freight insurance.
In order to declare lost goods stolen, the theft must be demonstrable. In a case when upon receipt of goods it is discovered that some or all goods are missing, it needs to be noted on the transport documentation to prove that goods were lost while in the possession of the carrier. The burden of proving a theft lies on the party which was in possession of the shipment when the theft occurred. If theft cannot be proven, for example with CCTV recordings or otherwise, it will be treated as a loss.
Although your goods can be delivered without any loss or damage, it can be the case where a delayed delivery leads to consequential damage or financial loss. Usually, transit time is guaranteed only when using a premium service with a dedicated and guaranteed schedule. This means that in most cases transit time is not guaranteed, which results in carriers or forwarders not accepting any liability in case of damage created by a delay. However, in some cases, it is possible to insure yourself against potential consequential damage or special damage, to protect your finances and potential loss of profit.
The general average is used only in the maritime industry. It is a principle of collective share of any damages to a sea-going vessel, which jeopardises the ship, its crew and its cargo. The general average covers damages both to the ship and its cargo, but also any actions to protect the ship in danger or all costs of a salvage operation including the value of all goods that may have been sacrificed in the process. The general average is proportionally shared with the ship owners and cargo owners.
Although it is a rare event when a consignor sea freight needs to bear a part of the general average, cargo insurance usually covers this. Perhaps one of the latest cases General Average declared to by the owners of Ever Given blocking the Suess canal.
It does not matter if you have freight insurance or not, you should always present a claim to the carrier or freight forwarder first to hold them liable.
If your shipment has cargo insurance, you would file a claim with your insurer after you have held your carrier of freight forwarder liable. If the claim has been approved, your insurer will reimburse you according to the insurance policy and the insurer in turn will request the carrier or freight forwarder to pay out according to their liability regulated by applicable regulations.
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