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What is Cargo Insurance: Benefits, Types, & Coverage

When your freight is in transit, it is prone to risk that can damage or cause the loss of your shipment. If a shipment was lost at sea because the container ship sank, the carrier liability is usually not enough to cover the value of the freight. If your truck was involved in an accident, you just lost two assets — your truck and your goods.

That’s why it’s important to consider cargo insurance for your freight. It allows you to save time and money if your cargo is lost or damaged.

And through this article, you’ll learn more about cargo insurance and its benefits, types, and coverage.

What is Cargo Insurance?

Cargo insurance protects you from financial loss due to damaged or lost cargo. It pays you the amount you’re insured for if a covered event happens to your freight. And these covered events are usually natural disasters, vehicle accidents, cargo abandonment, customs rejection, acts of war, and piracy.

It is also different from the carrier liability and insurance policies that are usually available from dedicated cargo insurance companies, freight forwarders, agents, and large brokers.

What are the benefits of Cargo Insurance?

The primary benefit of cargo insurance is that you minimize your financial loss even if your shipment is damaged or lost. The small investment (a.k.a. the premium) you pay provides peace of mind as your goods leave your warehouse.

It also includes these advantages for your business:

  • Your cash flow is protected from unforeseen stoppages
  • Profits are still generated if coverage includes it
  • Efficient procedure of claims because of professional service
  • Simplified reporting of losses

When do you need cargo insurance?

Generally, it’s always advisable to get cargo insurance for your shipment even if it’s not required by law.

Your freight is exposed to a lot of risk as it moves through different hands, different trucks, and different ports. There are also external factors such as weather and traffic conditions. So the longer it is exposed to risk, the more likely it is to be lost, stolen, or damaged.

Also keep in mind that even if the carrier is legally liable, their limit is usually less than the value of goods that are commonly shipped. Ocean freight carriers are liable for only up to US$500 per package/shipping unit or the actual value of the goods, whichever is less. Air freight carriers, meanwhile, are only liable for 19 SDR (~US$24) per kilogram. Based on these numbers, you could still lose a significant amount of money without any cargo insurance.

However, there are situations where it may be unnecessary. It’s important to look at the incoterms of your contract because certain ones remove the burden from you at certain points in the shipping process. Determining the full scope of the contract allows you to save money because you only pay for insurance when it’s needed.

Types of Cargo Insurance

Cargo insurance is mainly categorized into land and marine cargo insurance (which also covers air cargo).

Land cargo insurance

This type insures cargo that is moved by land transportation, which includes trucks and small utility vehicles. It covers theft, collusion damages, and other risks involved in land freight shipping. It is also typically used for domestic cargo since its scope is only within a country’s boundaries.

Marine cargo insurance

This type insures ocean and air freight and it’s mainly used for international shipping. It covers damage due to loading/unloading, weather conditions, piracies and other risks faced by ships and aeroplanes.

There are also several kinds of marine cargo insurance policies, which we’ll discuss down below.

Open coverage

This covers freight for a specific period (usually for a year) and multiple shipments can be included under one policy. This is an efficient tool to manage risk if you ship frequently. It also has two kinds:

  • Renewable. The policy can be renewed after a shipment is delivered, making it more suited for single trips and voyages.
  • Permanent. The policy can be enforced for a certain period and allows unlimited shipments within that time frame.

Single coverage

Also known as a specific coverage policy, this covers freight on a per shipment basis and is ideal for businesses who ship infrequently. 

Contingency

There are some instances where the customer is responsible for the insurance instead of the seller. And if the customer receives damaged goods, they tend to avoid the liability by refusing to accept them. The seller can ask for help from the legal system but it is a costly procedure and he can also lose the case.

To avoid further losses, this is the type of policy that a seller uses even if the customer failed to insure the shipment. It is also cheaper for the seller, who doesn’t have to inform their customer about its application.

All Risk

This type covers most causes of damaged or lost shipments, provided that the goods are new and not inherently prone to spoiling, damage, or loss.

However, it doesn’t include the following causes:

  • Damage or loss due to acts of God (i.e. natural disasters)
  • Loss or damage due to war, strikes, riots, or civil unrest (WSRCC)
  • Negligence of the importer/exporter
  • Customs delays and rejections
  • Unpaid goods, whether the customer fails to pay or the seller fails to collect payment

Free from particular average

This type only covers major damage or loss to the cargo unless partial loss or damage is due to stranding, sinking, burning, or collision. The shipper is only liable for a significant portion of his shipment in case of its damage or loss.

It also covers risks not included in an all-risk coverage policy, like:

  • Acts of God
  • Collision
  • Bad weather conditions
  • Sinking
  • Derailment
  • Theft
  • Non-delivery of cargo

General average

This type is a basic requirement for marine freight and only covers partial losses of your shipment. It is based on the principle where owners of all cargo onboard a ship must contribute to all the losses if some cargo is lost, jettisoned, or destroyed due to a problem at sea. You also pay for the coverage of others even if your shipment survives the incident.

Warehouse to warehouse

This type covers the freight once it is unloaded from the ship and is on its way to the customer’s warehouse. It only applies to your cargo even if it is transported with other freight in the truck.

What does cargo insurance not cover?

Cargo insurance doesn’t cover risks and problems that the shipper has a lot of control. It is important to keep this in mind so you lessen the chances of your freight being damaged or lost.

And generally, policies exclude:

  • Damage due to inadequate packaging. If any damage to your goods is traced back to improper packaging of your freight, the policy won’t cover you.
  • Damage due to flawed products. If the carrier can show you that the damage was because of faulty items inside your cargo, the policy won’t pay you back.
  • Specific kinds of freight. Some insurance providers don’t insure hazardous materials, certain electronic products, and other highly-valuable or fragile products.
  • Some modes of transportation. Some policies may only cover your freight when it is onboard a ship, a plane, or a truck.

How to make a claim

Carriers are assumed to be not liable for the damage or loss until proven otherwise. They also would do everything to reduce their responsibility or avoid it beforehand and you can see their limitations in the fine print of the Bill of Lading.

Thus, it is up to you to prove that the damage or loss happened under their custody or they were careless in handling your shipment. And when you successfully do so, your claim is justified and the insurance company pays you.

There are also details about your shipment that you need to retrieve when you make a claim, which are:

  • Inventory number. The number as stated in the inventory list given by your insurance provider. You can request for the inventory list if they don’t give you one.
  • Item’s room. This refers to the location of your item before it was packed.
  • Item description. Indicate all the details you can remember about the item, like its dimensions, weight, visual indicators, accessories included, etc.
  • Damage. Describe what and where the damage occurred in your shipment.
  • Item age & date of purchase. If you don’t have any production records, estimate how old the item is inside and the date you bought it. Keep in mind that pre-owned items would have a different age and date of purchase.
  • Original and replacement cost. Write the original cost as accurately as possible and find out about the price of an item very similar to yours to determine the replacement cost.
  • Claim amount. If your claim is for damage, only indicate the cost of repair for your item. If your claim is for loss, indicate the cost of your item or the amount stated in the inventory. You may also be required to provide a proof of ownership or value by the underwriter of your policy.

If you have more questions about third party cargo insurance, feel free to call us at 888-297-6968.

Chris Clever

Chris is the president and founder of FreightPros. Chris has been involved in the transportation industry for over ten years and focuses on strategy and new business initiatives to help drive FreightPros to become the most progressive freight broker in the industry.

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