General Discussion of Cargo Insurance

Summary: Marine cargo insurance covers goods shipped by air or water on an international basis; for example, products made in the U.S. being shipped overseas aboard oceangoing vessels. (This is in contrast to goods being shipped throughout the United States proper, goods which can be insured against loss through the use of an inland marine policy, such as a motor truck cargo policy; for more information on this coverage, see Motor Truck Cargo). The perils facing goods transported internationally can be unique; and, international laws and maritime traditions also work to make marine cargo insurance a truly specialty lines coverage. This article presents a general overview of marine cargo insurance, with information on carriers' liability, covered perils, underwriting information, and types of policies.

Topics covered:

Introduction Who is responsible for covering the loss? Types of coverage General average and salvage Valuation Underwriting Other information

Introduction

Ocean marine insurance in general and marine cargo insurance in particular are written by many carriers. While ocean marine insurance applies to both property and liability exposures, marine cargo insurance pertains to property exposures. The cargo coverage forms for these exposures vary from company to company so there is no standard policy. However, the American Institute of Marine Underwriters acts as something akin to the Insurance Services Office (ISO) in that the institute offers basic policy language which, in turn, is enhanced and modified by individual carriers to reflect the individual carrier's marine underwriting philosophy. For information on the institute's marine policies, the address is 14 Wall Street, New York, NY, 10005; 212-233-0550; Fax: 212-227-5102; Web site: www.aimu.org.

Who Is Responsible for Covering the Loss?

Like the motor truck cargo policy, a marine cargo insurance policy serves to fill the coverage gap between the value of the cargo and the limits of the carrier's liability. However, the liability of most marine carriers for shipments entrusted to them is not nearly as extensive as that imposed on overland carriers. For example, an air carrier is liable for a limited amount based upon the weight of the shipment unless higher values are declared by the shipper. And, ocean carriers are liable only for loss due to their own lack of diligence, and even then only for a limited amount. The main financial responsibility for losses of cargo is usually on the seller of the goods being shipped. However, this responsibility (interest in the cargo) can be shared, either with the buyer of the goods or (more to the point of this article) with a marine cargo insurer.

Insurable interest in a particular shipment can be defined by the terms of sale. The most common terms of sale are free on board (FOB) or cost, insurance, and freight (CIF). FOB is an agreement whereby the seller of the goods agrees to provide insurance on the shipment up to the point at which the goods are placed on board the vessel, and the buyer then becomes responsible for insuring the shipment from that point on to the destination. CIF obligates the seller to provide insurance coverage until the shipment reaches its ultimate destination. The buyer and seller may also agree in the contract of sale on some other method of assigning responsibility for insuring a shipment. For example, the seller can accept responsibility for any loss from the time the goods leave the seller's manufacturing plant until the time the goods are placed on the dock alongside a vessel, at which time, the buyer then takes over the risk of loss.

Types of Coverage

Depending on the nature and extent of the insured's marine shipping activities, a marine cargo policy may be written in one of three ways: a particular voyage, on an annual term basis, or as an open policy. A particular voyage policy applies, as it says, to just that one particular voyage or shipment of cargo. An annual term policy covers the loss exposures involved in shipping cargo from one set inception date to the set expiration date one year later; at the expiration date, a new policy would have to be written. For insureds with regular or frequent shipments, the open policy is by far the most convenient and popular. It provides automatic coverage on all shipments described in the policy (that is, described as to types of goods ordinarily shipped, shipping routes to be used, etc., etc.), and remains in force until cancelled by one of the parties to the insurance contract. The open cargo policy does require the insured to report each shipment and premiums are calculated on shipments actually made.

And, with perils ranging from traditional ones such as fire, theft, and explosion to unique perils such as sinking, jettison, and barratry of the mariners, cargo insurance can be written on a named perils basis, a broad named perils basis, or on an all risk basis.

Named perils coverage applies to a list of basic causes of loss, such as perils of the sea, lightning, collision, sinking, capsizing, fire, jettisons (the voluntary throwing overboard of part of the cargo in order to save the ship), barratry (fraudulent, dishonest, or illegal acts of the captain or crew without the knowledge of the ship owners), explosion, hurricane, and earthquake. Policies written on a named perils basis are usually subject to a clause setting forth the extent to which partial losses—particular average, in the language of marine insurance—will be paid. The clause specifies that the policy is written either free of particular average, thus excluding coverage of partial loss; or with particular average, thus providing coverage for partial losses arising from the named perils.

Often, policies written to include a with particular average provision also include coverage for additional causes of loss and are said to be written on a broad named perils basis. Broad named perils include theft, pilferage, nondelivery, breakage, and leakage.

If the insured desires more coverage, the all risk policy can be written. Such a policy covers against all risks of fortuitous physical loss or damage; all risk coverage applies to both total and partial losses. But, even when written on an all risk basis, marine cargo policies customarily carry certain exclusions. Two such exclusions are war and strikes, riots, and civil commotion. War risks can be covered under a special war risks policy issued in conjunction with the open cargo policy previously mentioned. Coverage for strikes, riots, and civil commotions may be obtained by endorsement.

General Average and Salvage

Certain principles of maritime law expose shippers to additional risks of loss, which are customarily covered by marine cargo policies.

General average is a charge assessed against shippers whose cargo is saved intact by the partial or complete sacrifice of others' cargo. Charges thus collected are used to reimburse the owners of the sacrificed cargo. The most common situations out of which general average charges might arise are a jettison of and water damage to cargo which results from putting out a fire aboard ship. When general average charges are assessed. each shipper not involved in the loss contributes an amount in the same proportion to the value of his shipment that the value of the sacrificed cargo bears to the total cargo. Marine cargo policies customarily cover general average charges for which a policyholder may become liable.

Shippers may also be subject to salvage charges. According to maritime law, a person who saves the property of another from a maritime peril is entitled to a reward. If, for example, a ship's engines are damaged and the assistance of another ship is necessary in getting safely to port, the shippers of cargo aboard the disabled ship would be liable for salvage charges payable to the operators of the rescuing ship. Salvage charges are levied in proportion to the value of the shipper's cargo as a percentage of the total cargo saved, and are covered by most marine cargo policies.

Valuation

Valuation is an important point for the insured shipper to consider in obtaining marine cargo coverage. Because such potential losses as general average and salvage charges are determined on the basis of the market value of delivered goods, replacement cost to the shipper is usually not a valid index for computing the amount of insurance needed. The shipper who obtains insurance protection that is centered only on his own financial interest in the cargo may find himself seriously underinsured should general average charges be declared at the end of the voyage. So, the insured and the insurer should agree in advance of the shipment on the value of the cargo.

In the case of an open policy, the value of each shipment covered cannot be known in advance. For this reason, a formula for determining the insured value of any given shipment is included in the typical cargo policy. The formula calls for an insured value equal to the invoice amount plus freight costs plus an additional percentage—usually 10 percent or higher—the latter to cover such additional costs as inland transportation charges at the shipment's destination and, to some degree, the expected mark-up on the goods once they are delivered.

The insured should also be aware that, since the cargo is traveling overseas, international currencies can come into play. The insured and the insurer should agree in advance on the formula for the rate of exchange so that the foreign currencies can be converted into U.S. currency.

Underwriting

Because of the international nature of the business it serves, marine cargo insurance is not written subject to forms, rules, or rates filed with a regulating authority. Policy provisions are negotiated and tailored to meet the needs of individual insureds, and rates are determined by underwriters based upon their assessment of the risks involved.

Producers are expected to be thorough in supplying information pertinent to the evaluation of a risk. Underwriters typically require such information as the exact nature of the goods to be shipped; the method of packaging; locations to or from which the policyholder ships, and trade routes taken to get to these locations; the condition of the vessels carrying the cargo; the method of valuation to be used; limits of insurance applicable to each method of conveyance used in the shipping of the goods (ship, truck, plane, etc. ); terms of average (all risks, or named perils, particular average provisions, exclusions, deductibles, or franchises); the insured's premium and loss record; and any special conditions the insured wishes to be included in the coverage (war risk coverage, strike coverage, riot coverage, etc.).

The market for marine cargo insurance includes all manufacturers who ship their goods by air or water (including oceans, rivers, lakes). Other prospects are importers, freight forwarders, shipping and air cargo concerns, customs agents, and brokers. Prospects in the marine cargo insurance market are often very receptive to the opportunity of arranging their own cargo coverage. This means that the prospects need underwriters and producers who can meet specialized, individual coverage needs.

And, it is important for insurers to make sure that insureds know that international business more than likely requires dealing with foreign insurers and foreign courts if trouble develops in connection with an overseas sale.

Other Information

Chubb Insurance published an ocean cargo claims handbook several years ago that listed six steps that an insured could take to make an effective ocean cargo claim. These steps include thorough documentation, prompt notification of the loss, description of the damage, and a written notice of claim to all transporters of the cargo and to all insurers involved.

Several terms associated with ocean marine and cargo insurance are worth discussing.

One of these is the Inchmaree clause. This clause is a provision in a marine cargo policy that protects an insured from loss resulting from the negligent navigation or management of the vessel, from any latent defect in the machinery or hull, or from boilers bursting. This clause was created in response to a claim for damage due to a machinery loss on board the ship Inchmaree that was held to be not covered under the language of the standard perils of the sea clause.

Sue and labor charges have long been associated with marine insurance. The prime purpose of the clause is to have the insured safeguard a damaged vessel and prevent further loss to covered property for which the underwriter would be liable. The insured would, in turn, be reimbursed for its expenses in mitigating the damages. Sue and labor expenses will be paid, but only to preserve property (such as, cargo) that is covered under the insurance policy from further damage. The payment to the insured is in addition to the policy limits.

A bill of lading is a document showing receipt of goods for shipment issued by the person or organization engaged in the business of transporting or forwarding goods. The bill also serves as a contract that sets out the duties, and hence, the liabilities of the shipper and the carrier.

This article has dealt with international shipments of goods so it is proper to note that oceangoing vessels are said to need blue water insurance. This is is opposition to brown water insurance that deals with vessels that use coastal and inland waterways.

The term warehouse to warehouse is used when the insurance that the shipper has on the goods begins when the goods leave the shipper's warehouse and ends only when the goods reach their final destination. In other words, the shipper has the items insured against loss not only on the high seas, but also when the goods are being transported overland from warehouse to port and port to warehouse—the entire course of transit.

Finally, cargo shipped overseas can obviously be damaged by contact with water. Besides the salt water and rainwater perils, the cargo could also suffer damage through cargo sweat. This term is used to describe the condensation that forms on the cargo when the cargo is cold and is placed in a warm area, or vice versa. Either way, the cargo can be damaged and the insured needs the proper coverage for protection against that damage.