|
|
Marine Cargo Insurance A vital element of international sales involves protecting the merchandise against loss or damage while in transit. Marine cargo, or transit insurance compensates exporters in the event that the carrier contracted to ship the goods does not cover a loss. Whether the importer (buyer) or exporter (seller) is required to purchase or pay for the insurance for the merchandise depends on the terms agreed upon between the parties. For example, if the seller is contracted to deliver merchandise to the buyer FOB (Free On Board), then the buyer is responsible for insuring the goods against risks while in transit. Carrier and shipping firms are not automatically required to provide insurance for cargo they are contracted to deliver. Obtaining transit insurance is a straightforward process that many insurance firms and freight forwarders will provide. Frequent exporters often use an open cargo policy, which can provides coverage from warehouse to warehouse, depending on the terms the shipment. This provides automatic coverage for the merchandise throughout the shipping process. These policies usually provide all risk, in addition to warehouse-to-warehouse coverage, and similar coverage for airfreight and parcel post shipments. Policies
for one-time shipments are also available. These are often used by infrequent
exporters that arrange for this coverage with their freight forwarders.
With few exceptions (bulk agricultural products & hazardous materials),
it is usually preferable for exporters to use only warehouse-to-warehouse
or door-to-door insurance policies for whatever risks are being covered.
This assures that all transit points are covered. Insurance costs vary according to the type of coverage, the dollar limitation of coverage, extent of coverage, the risks specified, the risks excluded, and any additional coverage requested by the purchaser. Typical coverage for a policy is 110% of the CIF (Carriage, Insurance, & Freight) value. This is a common level of coverage, since it is required by the provisions of letters of credit as described in the UCP 500. While specific marine insurance policies for individual shipments are available, it may be preferable to use a freight forwarder's open marine policy. For regular exporters, the principal form of transit insurance is the open cargo policy with warehouse-to-warehouse coverage contracted directly with a marine insurance broker. Terms and Conditions of Marine Cargo Policies: General
Average Loss This type of policy provides compensation in the event that the carrier declares the shipment lost under general average. For example, should a ship's captain need to dump cargo in the event of a disaster, declaring a loss under general average would spread the losses proportionally among those with cargo aboard, even if specific merchandise on board was not insured against loss. This coverage will pay for any loss over and above direct marine losses, following a determination by insurance adjusters of the proportion that is due based upon the losses of other claimants. Free of
Particular Average (FPA) FPA coverage is used by sellers to cover shipments where any loss to the cargo is considered a total loss to the insured. This policy provides protection against the total loss of cargo and the partial loss due to disaster at sea, but only under special circumstances. Determining the difference between total and particular loss required evaluating the presumed depreciation in value of the merchandise due to damage. Free with
Average (FWA) FWA similar to FPA, except that FWA is more inclusive and covers partial losses without requiring restrictions upon the nature of a disaster at sea if losses exceed three (3) percent. Additional coverage can be added to a FWA policy to provide broader protection for the merchandise in transit. Airfreight
Insurance This policy is designed to supplement the risk for shipping by airfreight. Carriers are liable for only $9 per pound of shipment in the event of an air disaster. An exporter can obtain an additional valuation charge, which increases the liability to the carrier at cost of approximately $.40 per $100 of liability. All Risk
Coverage This is a general coverage policy that is more expensive and therefore more inclusive in its coverage. However, all risk coverage does not include specific risks associated with other, extended coverage policies. For example, all risk policies do not provide coverage for loss resulting from: war, strikes, riots, civil commotion, and currency depreciation. Extended
Coverage These are
open cargo policies that frequent sellers often favor. Open cargo policies
provide coverage for a variety of modes of transport, and protect the
goods from warehouse to warehouse. Strikes,
Riots, and Civil Commotion (SR&CC) Coverage This is an additional coverage policy frequently added to other types of policies. It provides coverage against losses to the stated risks. Determining if this policy is needed should be done on a case-by-case basis depending upon the nature of the shipment, its intended destination and the stability of the places where the merchandise in question will be transshipped through as well as the destination point. This is a unique policy coverage often issued in conjunction with other transit policies. Because the rates charged for this policy can fluctuate wildly in the event of a war, this is often written as a separate policy. Many insurance companies will not issue this type of policy in the event of shipments to areas where hostilities are imminent. Currency
Exchange Risk In the event of a currency crisis, the seller can obtain this policy, which covers losses to unexpected changes in currency exchange rates. Many exporters find it simpler and safer simply to hedge against foreign exchange fluctuations through arrangements with their banks. These financial arrangements are generically called hedging against foreign exchange risk. FOB (Free
On Board) or FCA (Free Carrier) Sales Endorsement This covers transit risk from the point of origin until title transfers, when the seller relies on the buyer to insure the goods in transit. Used with Free on Board (FOB), Free Along Side (FAS), and Cost & Freight (C&F or CFR) quotes and endorsed on open marine policies. Contingency
Insurance Regardless of the shipping terms and whether title to the goods may have passed to the buyer, there are still other less assessable risks that the seller may face even with the appropriate marine insurance risks covered. These usually relate to the buyer's coverage on an FOB or similar shipment. In these cases, there is no way for the seller to know if the buyer insured the shipment. If not, the consequences to the seller could be serious in the event of damage or loss of the shipment in transit. Other issues that concern the seller include these:
These issues
can be solved by means of contingency transit insurance coverage. It costs
a fraction of regular insurance and is designed to protect a seller that
reasonably relied on the buyer to insure the merchandise, but sustained
a loss because of inadequate coverage from the buyer. Contingency insurance covers situations in which the FOB sales endorsement otherwise would have served had it been in force. Nevertheless, it may not be necessary to purchase this insurance in all situations. It depends on the seller's knowledge of the coverages and the carrier, and how critical a potential loss might be. Edited by Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore. |
|
||||||
