The ABCs of cargo insurance
Tuesday, May 19, 2020
As COVID-19 swept through Wuhan, China, earlier this year, the country fought to contain the spread of the virus by locking down the city and closing the port of Fuzhou from vessels from several foreign countries, including the United States. Subsequently, exports to the United States fell sharply.
In fact, an Institute for Supply Management (ISM) survey in March found that nearly 75% of companies polled reported having their supply chains disrupted due to transportation restrictions caused by the COVID-19 pandemic. Moreover, a white paper published by the Zurich Insurance Group reported that freight held up at ports or stored for longer periods pending transit could sustain damage if improperly packed, resulting in cargo losses or damage.
But even before the COVID-19 pandemic, shipping freight has always been a venture full of risk. The potential disasters and mishaps include theft, hurricanes, train derailments, truck collisions and containers jettisoned or lost at sea as well as corruption and political unrest in foreign nations. Such losses can cost shippers thousands and even millions in revenue.
Because of the risks associated with shipping, many of them purchase cargo insurance. While shippers aren’t required to have cargo insurance, it can help them manage the risks associated with damaged or stolen merchandise during shipping.
What is Cargo Insurance?
Shippers with cargo insurance policies can file a claim for goods that are lost, damaged or stolen. The size of the insurance premiums, however, usually depends on the goods shipped and the route the carrier takes to the destination.
While, by law, carriers must offer carrier liability, carrier liability tends to provide only minimal coverage due to exclusions like international treaties. Consequently, carrier liability often doesn’t adequately cover the value of the goods shipped. So, rather than relying on a carrier’s liability coverage, a shipper might want to have their own cargo insurance policy.
Policies for various modes of shipping exist. For instance, land cargo insurance covers goods transported via truck or train and offers protection against freight losses due to collisions, theft or train derailments.
Marine cargo insurance can protect cargo shipped by land or air internationally or domestically. This insurance covers incidents like piracy, inclement weather or mishaps that occur during loading and unloading.
In the United States, the Carmack Amendment of 1935 puts limits on carriers’ liabilities for freight losses or damages. Before passage of the law, carriers were liable for freight that sustained damage during transport.
But under Carmack, a carrier can be liable for damages without proof of negligence unless the carrier can show that it wasn’t negligent and/or prove that an exception to the law applies. Such exemptions include natural disasters, the act or default of the shipper, or cases where the cargo is inherently at risk of deterioration.
Shippers who file freight loss claims must prove that the cargo was in good condition when transferred to the carrier, that damage to the freight occurred during transport and that the freight arrived at its destination damaged or didn’t arrive at all. They also must quantify the damage to or loss of the cargo.
What’s in a Cargo Insurance Policy?
Cargo insurance policies offer varying kinds of protection. But the truth is, no standard cargo insurance policy provides full protection against every possible loss.
An all-risk policy covers inventory against all risks not subject to exclusions or other terms and conditions.
A named peril policy specifically lists what’s covered and what’s not such as a truck collision, a train derailment, storms or a sunken cargo ship. On the other hand, an international cargo insurance policy covers events like piracy and high jacking.
To prevent heavy losses, companies should always document the value of the cargo due for shipment, calculate the risk or potential losses, and know what their cargo insurance policy will and won’t cover.
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