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International Freight – Do I need Shipping Insurance?

11-02-2022
Ocean freight transportation

No matter if moving goods by courier or container – it is always worth knowing the risks involved in transport. 

If your business depends on shipping cargo it is well worth it to take a moment and understand the main principles of freight insurance and how your goods are protected against any unplanned events.  

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 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. 

This article will help you to learn more about cargo insurance, and how to protect your cargo and yourself against unpleasant surprises. 

 

What is carrier’s liability? 

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 if 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 having 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: US dollar, euro, Chinese renminbi, Japanese yen and the British pound sterling. Current value of SDR on February 3rd 2022 is 1.234 euros. Learn more about Special Drawing Rights here. 

Incoterms 2020 

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 exchange of goods. Learn more about Incoterms on the webpage of 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 of any loss or damage occurring when the goods are in transit. Most common incoterms used for international trade: 

  • EXW (Ex Work) – Seller’s obligation is to make goods available on their premises. Buyer is responsible for all of the transportation, including customs clearances. 
  • FOB (Free on Board) – Seller is responsible for transport up to the point, where shipment has been to the port of departure and loaded on board. 
  • DAP (Delivered at Place) – Seller is responsible for transport up to the named place of the incoterm. Usually, the named place is the Buyers location. Seller is not responsible for customs clearance at destination country. 
  • CPT (Carriage Paid to) – Seller is responsible for transport up to the port of destination. All responsibilities for unloading, customs clearance and delivery lay on the buyer. 

More detailed information regarding incoterms can be found on here.

 

When to use Cargo Insurance? 

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. Freight insurance for your shipment should be considered when the value of the goods shipped is higher than what 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 insurance policy, you can also opt to insure potential loss of profit, which may occur due to an insurance event. 


Proper packing is essential

Insurance is only able to cover the damages if it can be proven that shipper has packed the goods sufficiently and with suitable packaging. If 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 consignee discovers any visual damage upon handover at 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 shipment was in transit. 

Cargo insurance also covers loss of cargo in transit. If 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 having occurred during transportation.  

How Cargo insurance works?

Below you can find the most common risks and measures which may affect your consignment when transporting. 

Damaged goods
If the shipper has handed the consignment over to the carrier with proper packaging and without any damage, yet damage has been discovered by the consignee while receiving the shipment, the damage is covered by freight insurance. 

Stolen goods
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 theft occurred. If theft cannot be proven, for example with CCTV recordings or otherwise, it will be treated as a loss. 

Delay in transport
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 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 a 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. 

General average
General average is used only in the maritime industry. It is a principle of collectively share of any damages to a sea-going vessels, which jeopardises the ship, its crew and 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 general average, cargo insurance usually covers this. Perhaps one of the latest case General Average declared to by the owners of Ever Given blocking the Suess canal.    

 

How to file a claim? 

It does not matter if you have freight insurance or not, you should always present a claim to the carrier of 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 insurer in turn will request the carrier or freight forwarder to pay out according to their liability regulated by applicable regulations.