Introduction

Whether you are buying or selling goods from or to the international market, there is always a risk that they may be delayed, damaged or lost in transit.

Most people in the supply chain who facilitate the movement of goods operate under conditions limiting their liability in cases of loss, damage or delay. Traders should therefore insure their goods against loss, damage or delay in transit.

The importance of insuring

If you’re moving goods to or from the, insurance cover safeguards against the risk that goods may be delayed, damaged or lost. In some cases, you can claim compensation if there’s any resulting financial loss to your business.

Cargo insurance

A typical cargo insurance policy covers goods in transit via road, rail, sea or air. In its simplest form it provides cover against accidental damage and other risks. The other extreme is a comprehensive all-risk policy, covering a range of specified accidents - including damage during loading, theft and negligence.

The cost of your insurance and in which circumstances you’ll receive compensation will depend on:

- The value of the goods in transit
- Whether the journey is domestic or international

Insurance terms and duties

If you use an insurance underwriter or broker, it’s important to keep in mind some of the basic insurance principles.

Contract of indemnity

This is the amount of compensation agreed by you and your insurer in case your goods are lost or damaged.

Duty of utmost good faith

This means you must supply all relevant information about your cargo and its journey at the outset. The underwriter needs this information to calculate an appropriate premium - ie the price of your policy.

Duty to act as though uninsured

Arranging insurance for your cargo doesn’t mean you can neglect your normal duty of care regarding its transportation. You should act to minimise the chance of a payout by:

- Ensuring goods are packed safely and securely - you’ll only be insured against risk, not certain disaster, which poor packaging makes more likely
- Maintaining the upkeep of vehicles used for transportation
- Having a robust selection policy for drivers of these vehicles and for contractors involved in loading and storage
- Making sure the buyer of the goods provides information on any loss or damage to goods within a short period of time

Insurable interest

You must be able to demonstrate an insurable interest in your goods in order to trigger any policy you take out on them. This means you’ll either benefit financially from their safe arrival or you’ll lose out in the event of loss, delay or damage. The point at which the insurable interest passes from supplier to buyer is determined by the sale of contract used.

Managing the risk

The terms of sale agreed in a commercial transaction outline who is responsible for the cost of goods being transported. In other words, they clarify to what extent the buyer or seller pays for:

- The procurement of documents
- Licences and permits
- The use of a freight forwarder

The terms also cover how the risk of loss or damage to the goods will be managed. They specify cargo delivery points and at what point the risk is transferred from one party to another.
The most commonly used terms for delivery in an international sales contract are those found in Incoterms. For detailed information, see our guide to International Commercial Contracts - Incoterms.
There are two Incoterms that require the seller to take out insurance for the benefit of the buyer:
- Cost, Insurance and Freight (CIF) - under these terms the seller takes out insurance on an ‘open cover’ basis. They pay for the cost of the goods, cargo insurance and all transportation charges up to a named sea port (destination). Unless otherwise agreed, they also provide war risk insurance, passing on the cost to the buyer.
- Carriage and Insurance Paid To (CIP) - as above except this applies to all forms of transportation to a named inland destination (CIF terms apply to vessel shipments only).

Both the above terms will continue to apply under Incoterms 2010, which applies as of 1 January 2011.

According to Institute Marine Cargo Clauses (ICC) ‘A’ and ‘B’, under these Incotermsthe seller must take out insurance for 110% of the value of the consignment. Read about ICC ‘A’ on the Lex Mercatoria website.

Other Incoterms place no obligation on either buyer or seller to provide insurance only guarantee minimum cargo coverage if the seller is required to arrange for insurance coverage under ICC clause ‘C’. However, depending upon the actual term used for each shipment, the seller or buyer bears responsibility for loss or damage to the goods at some point during transit. You are therefore strongly advised to insure against this exposure to financial loss.

Risk coverage options

You can cover the risk of loss or damage to your goods with marine insurance. This can cover the whole journey - over land as well as sea. The most common form of marine policy in the UK is that used by Lloyd’s of London. In addition to a basic contract form, various clauses can be added to provide coverage that best suits your business needs and trading patterns.

Institute ‘A’ clauses

These provide the most coverage to traders at the highest premium (price). They cover practically all risks - except, for example, wars and strikes. These can, however, be reinstated by including appropriate clauses.
Similar clauses are used for movement of goods by air.

Institute ‘B’ and ‘C’ clauses

These provide coverage for a number of risks on a ‘reasonably attributable’ basis - meaning responsibility for damage or loss can be reasonably attributed to a particular party. Less coverage is provided under the ‘C’ clauses, but the price is lower.
General average

A standard marine insurance policy covers claims under general average. This applies when some cargo is lost or damaged through efforts to salvage a ship in distress. It provides for all cargo owners to collectively compensate whoever of them loses out in such circumstances.

Acts of God and acts of war

Under international law, transport carriers aren’t liable for acts of God, ie unforeseen acts of nature such as lightning - or acts of war or civil unrest. Piracy, which is very common in some waters, is also considered an act of war. If you send goods to a region where piracy is common (eg some of the waters off Indonesia and the Republic of the Philippines), it would be prudent to consider additional coverage. If you want cover for acts of God or for acts of war, make sure you inform your broker.

Terrorism

Acts of terrorism are usually excluded - cover has to be bought for an additional premium.

Excess and franchise

Some policies include either an excess or franchise clause. Excess represents a predetermined amount that is deducted from a claim and is used to discourage irresponsible, malicious and small claims. Franchise means a percentage of the value of a loss, below which no payment is made but above which total compensation is paid.

Open cover

This is the most common form of policy. It provides great flexibility - coverage can apply to either an unlimited number of shipments within an agreed timeframe or for an indefinite period until either party cancels the agreement. Alternatively, it can cover shipments up to an agreed value. You pay an annual premium based on an initial deposit and make a final adjustment according to the actual turnover value of goods you export.

An open policy should contain:
- A description of each shipment and the departure and destination points, often completed in retrospect as part of a regular (usually monthly) reconciliation
- The maximum value payable in the event of a claim
- Information on the method of valuing the goods
- Terms and conditions

Voyage policy

If you don’t export often, you may prefer to buy an insurance policy for a particular consignment. A voyage policy literally refers to the specific shipment for which cover is sought.

How to claim on your policy

Under Incoterms or other terms of sale, the seller takes out insurance for the benefit of the buyer. For other insurance claims (excluding the seller making a claim for the buyer), you should follow the guidelines below.
In the event of damage or loss to goods in transit, the consignee (or buyer) should follow these guidelines:

- carry out a thorough inspection of all the goods and note damaged or missing items
- take any steps necessary to minimise or prevent further damage
- make a note of any expenses incurred in carrying out the above for the insurer to reimburse
- keep as evidence the shipping container, packing materials, damaged merchandise and shipping documents
- contact the insurer (or broker if appropriate) so that a survey of damage can be arranged
The consignee should then file a letter of claim against the freight forwarder or carrier - this should include:
- its company name and (if applicable) voyage or flight number
- sea waybill or bill of lading or air waybill number (if applicable)
- date of arrival at destination
- description of cargo
- container numbers
- the amount being claimed

At the same time, the consignee should send full details of the claim to the insurer (through the seller, if you’re using the Incoterms - CIF or CIP - this should include:
- a commercial invoice
- insurance policy details and certificate number
- bill of lading or air waybill number (as applicable)
- standard terms and conditions of the carrier/forwarder
- any correspondence with the carrier/forwarder concerning loss or damage
- survey report

A similar procedure should be followed by the seller if, under the terms of sale, they carried the risk at the time of loss or damage.

Pursuing litigation

If your insurers refuse to pay a claim when a covered cargo loss occurs, you can pursue claims against both them and/or the carrier/forwarder. If you pursue litigation on two fronts, costs incurred in the action against the carrier/forwarder are recoverable if the other action is successful. This is because the costs are seen as a direct result of the insurance company’s breach of contract.