Placing a Premium on Cargo Insurance
Buckle up! Cargo insurance protects your goods if they are damaged, stolen, or lost while in transit.
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As supply chains grow lengthier and encompass more players, shippers face a greater chance that their materials or components will be damaged, stolen, or lost along the way. "Shippers today are taking on a lot more risk," says Mark Bernas, assistant vice president, ocean marine, with insurer CNA.
In 2015, losses due to cargo theft hit $22.6 billion, according to BSI Group's Global Supply Chain Intelligence report. And, in November 2016 alone, the Transportation Asset Protection Association recorded 231 freight thefts in the EMEA (Europe, Middle East and Africa) region. The average loss topped 60,000 euros, or about $64,000.
Cargo insurance, which covers products in transit, can protect against these risks. Although it is sometimes referred to as "marine insurance," cargo insurance can cover shipments moving via ship, truck, rail, and/or air, depending on the policy.
"Any time you're shipping something where you have an insurable interest, you should look into protecing the goods," says Karen Griswold, senior vice president of ocean marine for insurance provider Chubb Ocean Marine, North America.
Many instances of cargo theft go unreported, as companies want to avoid the publicity. Half of cargo premium dollars go to cover theft, estimates David Lee, director, inland marine with insurer Tokio Marine America. Lee also chairs the transportation committee of the Inland Marine Underwriters Association (IMUA).
Theft, of course, is only one type of loss. About 2,700 containers were lost at sea each year between 2011 and 2013, according to the World Shipping Council. Weather, temperature changes, breakage, and other events can also damage cargo.
While the risk of cargo loss is real, the decision to purchase insurance usually rests with the shippers. They typically have no legal obligation to carry this coverage, although some financial institutions may require it before they'll lend money.
Companies with strong balance sheets may decide they can withstand a cargo loss and essentially self-insure. Businesses that take this approach need to regularly assess their exposure and loss data, and use their analyses to check the adequacy of their reserves, recommends Mark Robinson, vice president, global operations, with UPS Capital.
Ensign-Bickford Industries Inc., a global science and technology organization that operates in the aerospace and defense sectors, tailors its use of cargo insurance to the types and volumes of business it is doing, the locations it is shipping to, and shipping terms, says Rick Roberts, director, risk management and employee benefits and former president of risk management society RIMS.
For instance, when Ensign-Bickford purchases goods on FOB shipping point terms, it doesn't take ownership until the goods arrive at a domestic port. The company needs coverage only from the port to one of its plants. Moreover, these shipments typically travel by truck. Given the size of the products, it's difficult to load enough on a truck to meet the company's deductible. As a result, it often makes sense to self-insure for these trips.
In contrast, Ensign-Bickford recently started shipping to Europe, South America, and the Mideast. The volumes are larger, and some customers have requested the shipments be covered by cargo insurance. "Customers want to make sure if the ship goes down, they'll still get their important products quickly," Roberts adds.
It may seem that the company transporting a shipper's goods would have some liability if the products don't arrive as they're supposed to. But in most cases, the carriers' liability is very limited.
The industry standard can vary depending on transport mode. An ocean carrier typically is liable for $500 per customary shipping unit, such as a pallet or container. That means a company that loses a container filled with $1 million in goods may recover a scant $500. "Cargo insurance provides more protection," Robinson says.
Some questions a supply chain professional will want to address when considering cargo insurance include: Which parts of the shipping journey are most likely to present risks? Does my company ship products that are prone to theft and/or damage? At what point does my company take ownership of the goods?
"Know the risk characteristics," says Steve Connor, president of Wyvern International Insurance Brokers Inc., Barrington, Ill. That's critical to determining how best to mitigate them.
Companies also need to determine the approach they'll take. Some purchase insurance just for catastrophic events. Others companies' supply chains are prone to more frequent, but less severe events, and they may adjust their deductible to reflect this. "Deductibles can range in amount and vary according to the level of risk companies are willing to absorb themselves," Griswold adds.
The Broker's Role
Cargo insurance can be complicated. It's also less regulated than some other types of insurance. As a result, it can be a "potential minefield for unsophisticated buyers," Connor says.
For these reasons, most cargo insurance is sold through brokers, who are fiduciaries by law. "They represent the customer, not the insurance company," Connor says. Equally important, reputable brokers are experts in pricing, coverage, and other elements of cargo policies.
Brokers also can help companies minimize potential risks in their supply chain, says Ted O'Sullivan, head of Protecht Risk Solutions with Falvey Cargo Underwriting, North Kingstown, R.I. For instance, to take advantage of lower wages, some manufacturers in China have shifted operations from the Chinese coast to central China. Rather than continue to use ocean transportation, some of the companies moved to the China-Europe Block Train, which spans 8,000-plus miles through Asia, Russia, and eastern and western Europe.
"We had to understand the risks of companies considering a shift from ocean to rail," O'Sullivan says. Train cars typically aren't heated, and travel through Siberia at times during winter. In addition, rail cars aren't always secure, so the goods could be vulnerable to theft.
While many freight forwarders offer cargo insurance, that convenience can come with its own costs. For starters, the shipper is one step removed from the actual insurer, and typically won't know the freight forwarder's loss history, both of which will influence price and coverage. "It may be a great policy, but it's hard to know," says John Miklus, president of the American Institute of Marine Underwriters.
Companies that ship infrequently may decide the convenience of working through a freight forwarder outweighs any downsides, notes Gordon Adams, vice president, risk management, Servco Pacific Inc., which operates auto dealerships across Hawaii, among other businesses.
They'll want to continually reassess their decision as the volume and/or value of their shipments increases. Frequent shippers with a decent loss history may find coverage less expensive on their own.
Shippers also need to decide whether to purchase cargo insurance on a transaction-by-transaction or on an "open cargo" basis. As the term implies, insurance purchased on a transaction-by-transaction basis covers a single transaction. An open cargo policy lasts until it's terminated, although most companies and insurers review them annually.
Companies that ship infrequently and aren't overly concerned with loss may find a transactional model adequate. "But once you start getting into high-value goods or sensitive products, you need to make sure you have adequate insurance and take a more proactive risk management approach," says Mike Falvey, president of Falvey Insurance Group.
Shippers can assess the three V's to determine when to shift to an open cargo policy: the value of their shipments, the velocity or frequency with which they ship, and the volume of each shipment. As any of these increase, the case for an open cargo policy becomes stronger, O'Sullivan says.
Warehouse to Warehouse Coverage
Most ocean cargo policies typically offer coverage from "warehouse to warehouse," says Ralph Santoro, regional manager, ocean marine with Tokio Marine America. If a shipment travels from a U.S. warehouse via truck to a port, and then on a ship to Europe, where it docks and again moves via truck to a French warehouse, many policies will cover the entire journey. "If a loss occurs, we know what policy it's under," Santoro says.
Similarly, many bills of lading are titled multimodal, or contain terms and conditions that mention multiple modes of transportation, in case the carrier needs to substitute one form of transportation for another. This might be needed if, for instance, shipments that were scheduled for air transport wind up moving by rail because bad weather grounded the planes.
Correspondingly, shippers' cargo policies "should be robust enough to handle all modes of transportation," notes David Pasco, senior account manager with Roanoke Trade, a subsidiary of insurer Munich Re.
An "unnamed location" provision covers a shipment if there's a break in the voyage and the goods are temporarily stored. "It's a catch-all if something happens you can't control," Adams explains.
Some cargo policies include provisions specific to the mode of transport or items being covered. For example, an insurer may require a company shipping high-value freight via truck to keep at least two drivers in the truck cab at all times, and to never leave the cab unsecured, Santoro says. Similarly, the insurer may require the shipper to keep the packages free of content descriptions, which could tempt would-be thieves, Santoro says.
Stock-throughput policies, or STPs, are growing in popularity, Falvey says. These provide coverage for materials as they change from stock to raw materials to work-in-process to finished goods, and whether they're in storage, a processing location, or on their way to a final delivery.
Adams provides an example: A company delivers vessels of raw tuna to a cannery, where they're cooked, cleaned, and canned before traveling to a warehouse and then on to their final destination.
"People assume that cargo insurance covers goods to the site, through the value-add processes and the continuation of the voyage, but that's not always the case," Adams says. For instance, cargo insurance typically wouldn't cover spoilage that occurred if the power went down while the fish were in processing. A stock throughput policy—essentially, an enhanced cargo policy—likely would cover the cargo as it's being processed. "It's a broader policy and covers more of the risks you face in this scenario," he says.
A number of terms and documents are important in cargo insurance policies. The information presented in the bill of lading (BOL), such as the cost and weight of the goods and their starting and ending points, typically is used to determine the value of the goods being insured, Lee says. (The term "contract of affreightment" is used at times. This refers to the agreement under which a ship owner agrees to carry a shipment via water.)
For goods traveling via ship, a copy of the BOL is given to the ship captains, Adams says. If they have to jettison cargo, this is noted on the bill of lading. If a shipment is damaged, the type and extent of the damage also is noted. "These determine the extent to which you can claim cargo loss," he notes.
Another key piece of information is the point at which ownership transfers from seller to buyer. This typically follows the terms of sale, which are usually stated in the invoice or sales contract. Shippers "have to demonstrate title to goods at time of loss," Connor says. In contrast to most insurance transactions, shippers may not even own the goods when they purchase a cargo policy. However, to file a claim for a loss, they typically will need to show they had title to the goods when the loss occurred.
One concept unique to ocean insurance policies is that of "general average." This comes into play if a ship's captain determines that to save the vessel, the crew needs to jettison some of the cargo. "It's called a 'deliberate sacrifice' for the greater good," Griswold says. This can occur because of bad weather, engine trouble, or a fire, among other events.
The idea behind "general average" is that all parties—the shippers and the carriers—benefit when some cargo is tossed overboard. So, rather than place the loss entirely with the company whose products were sacrificed, everyone takes a financial hit.
While the calculations can become complicated, each shipper's portion generally is based on the percentage value of its goods relative to the combined value of all the goods on the vessel, and the ship itself, says Pasco.
After a general average has been declared and the vessel arrives at port, no cargo typically is released until the shipper has posted a general average bond or guaranty. "If you have insurance, it will provide the guaranty," Bernas says. Companies that don't have insurance need to come up with a guaranty or some instrument that shows they can pay.
If a vessel completely sinks and there's no recovery, the general average concept doesn't come into play. "There's nothing to be saved from the venture," Griswold says.
The coverage provided can differ from one cargo policy to the next. "Open cargo insurance" is designed to cover frequent shippers, Robinson says. It typically covers most risks, including damage, theft, piracy, general average, and shipwreck. Losses resulting from cyber attacks, illicit trade, civil and military unrest, and the delayed delivery of time-sensitive or perishable goods tend to be excluded, he says.
Some other specific losses may be excluded as well. Griswold provides an example: a policy for a company that's shipping intricate machinery might exclude mechanical derangement, or damage to the electrical or mechanical components or workings of the machine.
Many cargo insurance policies are written for what's known as "CIF plus 10." This refers to the cost of the goods, plus insurance and freight costs, with 10 percent for profit. If a company presents a claim, it generally will recover CIF plus 10.
Some insurance companies don't require documentation on the value of the shipment(s) in order to obtain cargo insurance. However, if a shipper files a claim, the insurer may require an invoice or other information in order to validate the value of the goods on the claim.
At What Cost?
The price of a cargo insurance policy depends on numerous factors. These include the items being shipped, their origin and destination points, and the carrier's loss history. Items at greater risk of theft are, not surprisingly, more expensive to insure.
The way in which the goods are packed also can impact price, Bernas says. Goods that can be shipped within crates or containers tend to be priced more favorably than goods that can't be packed, or are simply shrink-wrapped, where they're more vulnerable to both damage and theft.
The mode of transportation can come into play, Bernas says. Shipments via barge tend to be more expensive than vessel shipments, because barges are more open, smaller, and likelier to capsize in heavy weather. Ocean shipments tend to be more expensive than air, because the goods are exposed to various risks for a longer time.
Shippers will want to work with their brokers and insurers to confirm they're complying with any regulations that come into play when their shipments cross national boundaries. For instance, certain countries require shippers whose goods travel on their roads or rail systems to obtain a local transit policy, Griswold says.
"A cargo policy is a living, breathing thing," Pasco says. Shippers need to regularly review their coverage to make sure it continues to adequately protect against the risks to which their shipments are exposed.