The journey overseas can be a hazardous one for your cargo: Rough weather, fire, labor stoppages and insufficient packing are just a few of the risks and ones that ocean carriers are not liable for during transport by sea. When it comes to damaged cargo, international law favors the carriers, not exporters (many regulations were put into effect to promote global trade). Marine cargo insurance is one way for exporters to protect their investment from unpredictable factors that can be quite costly.
The average number of shipping containers lost at sea each year increased by 18% to 1,629 last year, according to the World Shipping Council (WSC), partially due to a large number of weather-related events during the winter of 2020-2021. Maybe you remember the One Apus, a vessel that lost nearly 2,000 containers after hitting a storm off Hawaii. The Wall Street Journal reports that insurance claims from that incident alone could reach more than $220 million. And recent high-profile groundings (in the Suez Canal and Chesapeake Bay) might have you reconsidering cargo insurance if you skipped it in the past.
Why Exporters Need Marine Cargo Insurance
There are many instances where the carrier can’t be held liable for damages. Rules outlined in the the Carriage of Goods by Seas Act (COGSA) include a number of liability exclusions for carriers, including (in addition to those mentioned above): perils of the sea, acts of God, acts of war, quarantine restrictions and insufficient packaging or marks.
General Average is another principle of maritime law that can be risky to the exporter. It requires that all cargo owners share in a loss. For example, if a ship gets stuck and cargo needs to be abandoned overboard, this law would require that you split the cost of the loss, even if your goods were not affected.
Also, because so many different people handle your goods during a shipment, it can be difficult to prove when and who caused damage.
What Is Covered
All policies will differ, but these are some of the instances exporters can typically be insured against:
- Damage caused during loading and unloading.
- Disruptions due to war, civil unrest, riots.
- Fires or explosions.
- Stranded cargo.
- Weather events.
- General Average events.
- Theft.
Incoterms: When Is Insurance Required?
Incoterms determine when responsibility for loss or damage to goods transfers from seller to buyer, so the amount of risk you’re taking on if you bypass insurance will be determined by which of the 11 terms you use. However, there are two Incoterms that do require insurance and stipulate who must pay:
Carriage and Insurance Paid To (CIP)
The seller must purchase at least 110% of the value of the goods and transportation expenses as detailed in Clause A of the Institute Cargo Clauses.
Cost, Insurance and Freight (CIF)
Seller bears the cost of freight and insurance to the named port of destination. The seller is required to purchase the minimum level of insurance under Clause C of the Institute Cargo Clauses.
What Will It Cost?
Freight forwarders can typically arrange for marine cargo insurance, and they’re a good resource, especially if you ship infrequently and don’t want to work with an international insurance carrier to arrange coverage on your own. There are a number of factors that will help determine the cost, including:
- Value of the cargo and how susceptible it is to damage.
- How risky it is to do business in the country of origin and the destination country.
- Type of packaging used (closed or open air).
- Route the vessel will take.
Understanding how liability works when your goods are at sea is the first step toward making an informed decision when it comes to marine cargo insurance. Before you decide to risk it and skip insurance, make sure you understand the potential for loss and if lost cargo is a financial hit your company can sustain.
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