Patrick Murphy, global marine practice leader at Integro Insurance Brokers in New York, acknowledges that it is appropriate for smaller firms shipping small and infrequent quantities to buy their insurance from freight forwarders, steamship lines and similar firms. "But when you get to a certain size and volume of regular shipments, that doesn't make sense," Murphy says.

That was reinforced by Allan Ilias, national cargo practice leader for Catlin US, who works with Berrian, Murphy and other brokers across the country. "There's nothing wrong, in and of itself, with a company obtaining cargo insurance from a freight forwarder," Ilias explains, noting that Catlin provides cargo insurance to freight forwarders, logistics firms and other shippers.

"Insurance through a freight forwarder makes sense for one-off shipments," Ilias says. Freight forwarders buy their insurance from insurers such as Catlin, and then mark up the cost when charging customers to insure the freight. Freight forwarders limit their cargo insurance exposure by charging by the weight of the shipment.

"If a business is shipping a lot of volume under that arrangement, it can eventually start losing money," Ilias explains. "At a certain point they can save substantially by arranging for their own cargo insurance."

The proper valuation

One advantage offered to clients by marine cargo insurance Ilias says, is in the valuation of shipments. Rather than being limited by concepts such as "replacement cost," as with commercial property insurance, marine cargo insurance offers more flexibility in determining what is needed to make a firm "whole" in the event of a cargo loss.

Ilias offers this example: Consider a U.S. firm that manufactures a product at a cost of $500,000. The company intends to ship the product to another country, where it is to be sold for a total value of $1 million. "If the insured has a standard valuation of cost, insurance and freight, plus 10 percent, in the event of a total loss he would only get the original investment back," he explains. "But with a selling price valuation on the policy, the insured would get the full $1 million."

The insured would need to provide proof of the impending sale to document the sales price. "To set the correct valuation the underwriter needs to understand the actual values shipped and the related selling price valuation," Ilias states.

"From a marine perspective, we're looking to make our insureds whole in the event of a loss," he adds. "Since we are dealing with world trade, we try to be attuned to our customers' needs, which can sometimes be complicated when it comes to valuation issues."

Those issues have arisen from increased global trade and expansion of the global supply chain, which today includes not only multinational firms, but small and mid-sized firms as well. "When you think of world trade, think of logistics," says Ilias. "We can have an insured whose product travels to several different countries at each stage of its manufacturing, thus adding value along the way. Without having a bespoke valuation clause, the insured could have a claim somewhere in the middle of the process, but be paid at the original raw material price of the goods."

Stock throughput

There are different levels of cargo insurance, including policies that cover only the ocean-going part of a shipment, or policies that add coverage for inland transit. The most flexible, open, "all risk" marine cargo insurance coverage is provided through what is known as a "stock throughput" policy.

Stock throughput policies combine ocean cargo, inland transit and property/storage coverages to insure a company's inventory and flow of goods from the source of production to the final destination. Policies can be used to cover raw materials, works in progress or finished goods. The destination may be a warehouse or other storage facility, or a "retail stock throughput" can be written to include coverage for goods all the way to the retail floor.

"This product is very flexible," says Berrian. "We in the United States don't typically think about marine insurance capacity because the property market has vast capability. But the marine market has underwriting guidelines and reinsurance agreements that are entirely separate from the non-marine side, making it an attractive alternative.

"A stock throughput policy can be adapted to things I once never thought possible," he adds. "For example, we can design the stock throughput policy to provide excess limits for ammonia contamination above the sub-limits provided by an equipment breakdown insurer. We even use the policy to insure live cattle flown from the United States to Asia."

Because of the marine market's separation from the non-marine side, stock throughput policies can access the marine market's catastrophe aggregate capacity. In the current soft marine insurance market conditions, this can provide a strong advantage for firms with large quantities of products or materials in storage.

"A customer came to us with more than $9 billion in stock stored at various locations around the world," Berrian says. "The Federal Emergency Management Agency (FEMA) is remapping flood zones." Because the remapping placed some of the customer's warehouses in flood zones with a higher-risk designation, the customer's property insurer was required to buy facultative reinsurance for those locations.

"That would have been a huge expense," says Berrian. "We got involved and tailored a stock throughput policy for materials in storage at flood zone 'A' locations. Integrating the capabilities of the property and marine insurers saved the insured hundreds of thousands of dollars of premium.

"We often find opportunities to improve an insured's program where stock has been included within a property policy," he continued. "This is true for those insureds with locations exposed to hurricanes, earthquakes or floods, because we replace high, variable deductibles with low fixed-dollar deductibles, and we bring fresh aggregate limit capacity to the insured at competitive prices.

"Stock throughput policies are also useful to insureds who are not exposed to catastrophe perils, as they can take control of how their stock is insured worldwide and how it is valued in the event of a loss."

The flexibility of manuscript policies

Murphy shared other examples of coverage innovations possible under marine cargo policies, including another approach to product valuation.

"We had a retail client who was required to remove from their shelves pharmaceuticals that were past their expiration dates," he says. "The retailer would return that product to the wholesaler in return for a refund equal to a percentage of the market value.

"In one case, the truck carrying the expired pharmaceuticals overturned, damaging the product. Fortunately, the 'refund value' was stipulated in the marine cargo policy."

In another example, a policyholder was covered when damage to electronic equipment wasn't clearly evident, but the product was still disposed of out of an abundance of caution.

"A shipping container with 200 video recorders leaked, and half of them were wet," Murphy explains. "The other 100, though not obviously wet, had been sitting in the same wet container, and the manufacturer didn't want to run the risk of selling product that may have had water damage."

How was insurance determined for the recorders that weren't wet on first examination? Murphy explained that marine cargo contracts had traditionally read, "In case of physical loss or damage, the insured will be the sole judge" of the damages. In the case of the water-damaged recorders, the clause "….or if the insured reasonably suspects damage," had been inserted into the wording in order to extend coverage for those items which were not visibly damaged. The approach, Murphy says, originated with the pharmaceutical industry.

He describes another innovation which didn't involve physical loss or damage to cargo, but the unexpected diversion of cargo that delayed the shipment.

"If, for example, there's a longshoreman's strike in Long Beach, and the cargo is sitting offshore, that could mean a loss in revenue for the owner of the cargo," Murphy says. "We developed and included a clause that covered the additional cost of diverting the ship to Mexico, offloading the cargo there and shipping it by truck to its U.S. destinations. This covered an unexpected disruption in the supply chain."

Murphy encourages clients to be willing to provide as much detail as possible to their broker and insurer on exposures, loss experience and other factors in order to design the most appropriate cargo insurance program.

When considering a marine cargo insurer, Berrian recommends clients consider:

• License and authorization for the insurer to work in all countries where the insured may have an exposure,

• The availability of loss control and claims-handling services in those countries, and

• Flexible underwriting and broad coverages, "so you can get manuscript coverages as needed."

The global economy has changed the scale on which companies do business and expanded their areas of risk considerably. This provides new opportunities for insurers who understand the complexities of these risks and have the tools to manage them.

Patrick Hirigoyen is an industry consultant with more than 20 years of experience in insurance and reinsurance.