When the freight or cargo is in transit, it is susceptible to damage due to unpredictable events on road or sea. In case of an explosion due to road accidents or the sinking of container ships, the carrier liability will not be enough to compensate for the loss of cargo owners. Cargo or freight insurance safeguards these owners from bearing heavy loss and indemnifies the claimant to the extent insured.

What is Cargo Insurance?

Cargo insurance is an exemplary risk management tool that protects against financial losses due to lost or damaged cargo. The cargo insurance coverage includes events mentioned in the policy like vehicle accidents, cargo renunciation, damage due to natural calamities, acts of war, piracy, etc. It covers up to the limit of an amount insured and is different from carrier liability.

Why is it Important to Have Cargo Insurance?

Opting for preventive measures before the r cargo is damaged is a prerequisite for businesses that ship frequently. Cargo or freight insurance offers advantageous solutions to decrease the financial liability when there is any damage to a shipment.

Shipments in possession of a shipping line or airline are exposed to various types of risks. The uncontrollable external factors can bring great loss to a business. Moreover, in most cases, the carrier's liability is less than the total value of the goods, which makes cargo insurance quintessential.

Also Read: Export Credit Insurance | ECGC's Insurance System in India

What are the Types of Cargo Insurance?

Generally, cargo insurance is of two types – marine and land cargo insurance.

Land Cargo Insurance

As the name suggests, land cargo insurance is for the cargo which uses the road as its mode of transportation and is usually shipped in trucks and other utility vehicles. This insurance offers coverage in incidence related to collision damages, theft, and other risks in freight shipping. This type of insurance is for the shipment of goods within the country's geographical boundaries.

Marine Cargo Insurance

Marine cargo insurance is used for international shipment through sea routes and covers the air portion when it is the part of that same journey. This type of insurance offers coverage on any damages due to bad weather conditions, loading and unloading of goods, piracies, and other possible losses involved while the cargo is in possession of the Airline and Shipping line.

In addition, this freight insurance has several kinds of policies which are mentioned below in brief:

1. Single Coverage

Single coverage policies are also known as specific coverage policies and offer coverage on single shipment basis. Generally, small business owners who have started getting sales or businesses who send shipments infrequently use single coverage policy.

2. Contingency Policies

Contingency policies are the ones where a consumer has liability to bear the cargo insurance cost. A lot of times, customers avoid liability for the damage and refrain from accepting the goods. However, this involves getting assistance from legal bodies who will pass an order for a consumer to pay on being proven responsible. Hence, for these reasons, contingent policy includes additional charges and requires time.

3. Open Coverage

This kind of policy is suitable for companies that send shipments through airlines and shipping lines frequently. Open coverage is opted for covering more than one shipment for a year or specific period. This effective instrument used for risk management has two types:

  • Permanent The permanent policy is imposed for a certain period, like one year and offers coverage to an unlimited number of shipments within this timeframe.

  • Renewable This kind of policy can be renewable in between the delivery of cargo which makes it ideal for businesses to transport single shipments.

4. Free from Particular Average

Also known as named peril policy, this kind of ocean cargo insurance covers the major damages which all-risk coverage policy does not cover. This includes Force Majeure or unpredictable events, rough weather conditions, theft or piracy, collision, damage due to sinking, non-delivery of the cargo, etc.

5. All-Risk Coverage Policy

The all-risk coverage covers a wide array of damages that are caused due to uncontrollable external factors. This insurance policy covers primarily new products and is not easily vulnerable to any damage, leakage, or spoilage. Some of the damages that this policy does not cover are:

  • Customs rejection
  • Force Majeure events like a volcanic eruption or natural calamities
  • Damage or loss due to war, riots or any civil unrest as mentioned in WSRCC
  • In cases of unpaid goods
  • Occurrence of damage due to negligence on exporter or importer’s behalf
  • Cargo abandonment

This policy offers industry's best coverage rates and has easy accessibility under any circumstances.

6. General Average

General average is quintessential for marine freight as the principle of this concept helps businesses to a great extent. As per this policy, even if the cargo of a specific owner does not go through any damage or loss due to any turbulence during transit via sea, they will be liable to pay for damages of other cargo. In other words, owners of surviving merchandise on board a same ship must share the cost of loss or damage if some of the goods belonging to other owners are in bad condition or lost completely.

The policyholder must separately include a general average in a policy as it will not be present by default. Statistically, though this type of claim happens every 8-9 years, it puts an owner of a damaged cargo in an advantageous position.

How does Cargo Insurance Work?

Cargo insurance coverage is based on the clauses outlined in the policy. The primary objective of the policy is to cover the damages caused due to the incidences specified in the clauses. Upon payment of the premium upfront, a policyholder can claim for damage or loss that occurred during transit.

The claim, once submitted, is reviewed to check the viability of that incident by a claim adjuster. If the damage is covered under the clauses of the policy, the claimant will receive a settlement check to the limit insured. While making a claim, a business must be sure of certain information like:

  • Description of items – details like dimensions, weight, implants, visual indicators, etc.
  • Inventory number
  • Proper description of the severity of damage
  • Age of item and date of procurement or purchase of that specific goods
  • Location of the packaging of goods
  • Provide accurate original cost and price of similar items to determine their replacement cost
  • Claim amount – Specify the cost of repairing goods in case of damage. On the other hand, specify the actual cost of a product in case of a complete loss.

What does Freight & Cargo Insurance Covers?

Different types of unforeseen incidents can occur during transit via road, sea or airline. To safeguard a business from bearing heavy physical losses due to loss or damage of shipments, here are the primary coverages that cargo insurance companies provide:

  1. Cargo insurance companies mostly provide coverages in damage caused due to explosion or fire, stranding or sinking, etc.
  2. Covers additional expenses raised due to overturning, collision, or other road inconveniences
  3. Insurance covers damages due to earthquakes, floods, tsunamis, or volcanic eruptions.
  4. Package lost while loading or unloading and handling
  5. Any damage caused due to the entry of seawater into ships and vessels.

Besides the scenarios mentioned above, cargo insurance companies offer lucrative security to shipments in other cases that may vary across insurers.

Also Read: Bill of Lading (BL) - Meaning, Types & Purpose In Shipping

What does Freight & Cargo Insurance Not Cover?

Cargo and freight insurance firms do not cover the loss of shipments that shippers could have control of. The restrictions specified by the insurer in the policy prevent any fraudulent claim. Most of the policies exclude certain scenarios, like:

  • Damage of shipment due to inappropriate packaging

The policy does not cover any losses if it is found that packaging of goods was not proper. For this reason, many shipping companies mention packaging guidelines for fragile or certain types of goods based on their weight and volume.

  • Restrictions on the mode of transportation

Some policies only cover shipments via ship, large utility vehicles, or airplane. The policy may not include some specific mode of transportation for shipments. Hence, businesses need to go through every clause of the policy beforehand to know which modes of transportation the policy covers.

  • Damage due to shipment of faulty product

If established by an insurer that the goods sent contain faulty or broken parts, the policy will not cover any such damages.

  • Does not cover specific shipments

There are insurance companies that do not cover fragile or hazardous goods. Certain types of electronics products, metal items and highly-valuable goods might not be covered under the policy as well.

Air and marine cargo insurance coverage are based on the clauses specified by the Institute of Cargo Clauses. The specifications under this governing body only bear the damage due to constructive total and actual total loss, general average, liability due to collision, partial loss, etc.

How much does Cargo Insurance Cost?

Generally, the cost of cargo container insurance is approximately 0.15% of the total value of goods. This is as per the commercial invoice . However, this cost may vary across insurance companies and their offerings.

How is Cargo Insurance Calculated?

The process of calculating cargo insurance policies involves conventional CIF+10% formula. This is a standardized calculation technique where;

C = Invoice value (consider selling cost if the client is a seller or purchase cost if he is a buyer)

I = Insurance premium.

F= Freight and associated charges, which mostly include custom clearance charges

Adding 10% of the additional cost is due to inflation in the freight cost.

Hence, the CIF value of a shipment consists of three different values – Commercial Invoice Value, insurance costs, and freight charges. For example, if the Commercial Invoice Value is USD 60,000, the Insurance is USD 300, and the shipping charge is USD 1,000, then CIF is USD 61,300.

In the final step, based on the percentage granted by an insurance company, identify the rate to complete the calculation of the total insurance payable.

What are the Benefits of Cargo Insurance?

Fundamentally, the benefit of cargo insurance covers the business's liability when it encounters any unforeseen events. To safeguard shipments, this insurance offers a certain amount of the cargo's value as claim money and protects the carrier to the extent possible.

Overall, freight insurance provides the following other benefits to the businesses:

  • Offers protection to the cash flow of a business from unfavorable obstruction of shipment
  • Freight insurance coverages help secure a profit even after a loss of cargo.
  • A small investment in cargo insurance saves from forfeiture of greater investment related to the overall business.
  • Opting for cargo insurance is necessary for businesses dealing with fragile goods.

What is the Difference Between Cargo and Freight Insurance?

Usage of these two terms, freight and cargo, refers to goods transported for commercial purposes by a business. Though the perception is that these two terms can be interchangeably used; both hold significant differences:

  • Freight is usually for transportation of goods via truck, small utility vehicles, and trains. On the other hand, the term cargo is generally used for transporting goods via ships and airplanes.
  • Freight charges are fees or expenses the carrier charges. In contrast, the word cargo is to define goods and not any charges.
  • Cargo specifies goods shipped to larger vehicles like ships or vessels, whereas freight refers to packages that can be transported in small or medium-sized utility vehicles.

In the insurance sector, freight and cargo are separate terms, and coverages are available accordingly. Hence, businesses must avail of the appropriate policy based on the maximum usage of a particular transportation mode.

When Do You Need Cargo Insurance?

Businesses that ship frequently and deal in cross-border trades mostly, must get cargo insurance e from the initiation of operation. Even after opting for a plethora of safety measures in packaging and shipping; accidents, calamities, and even custom rejections can bring in great loss.

Moreover, freight insurance ensures that a business's profit generation is nearly constant, even after damage or loss of shipments. Based on a business's nature and products the business deals with, owners must choose the insurance policy mindfully. Cargo insurance is an astounding tool for managing liabilities as it involves high-reward coverage to share financial liabilities of unanticipated damages.