Does Your Business Need Cargo Insurance? Cargo insurance can be confusing, but it pays to know these basics to avoid devastating losses.
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If you're wondering why you should care about cargo insurance, it's simple: Your business could lose a bundle. How much? How about paying millions to replace a sunken cargo ship. . . even if you shipped only a few thousand dollars in goods.
Steve Klinger has seen it happen. The longtime operations director at third-party logistics company Cargo Services in Indianapolis, Klinger says one Cargo customer while in Lebanon on business saw a ship in Beirut's harbor get hit by rebel shelling in the 1980s -- the ship that carried his Libya-bound merchandise. A few weeks later, the small exporter received an invoice for his business's allotted portion of the multimillion-dollar ship's replacement cost.
"That's quite a shock, if you're not covered," Klinger says.
Welcome to the confusing world of cargo insurance, which is based on ancient maritime law. Forget to check a box on a coverage form -- or assume incorrectly that your manufacturer insured your shipment -- and your business could see a costly loss, says George Butler, a vice president for marine-shipping business at Travelers Insurance in Hartford, Conn. And problems are on the rise: A 2012 study by theft-prevention group CargoNet showed cargo theft of U.S. shipments up 28 percent compared with 2011.
In the case of the Libyan cargo shipment, Klinger's exporter customer ran into the "general average" rule. Under this clause, if a vessel transporting your goods is damaged at sea or goods must be jettisoned to save the ship, all the ship's customers share in covering the losses. This rule is still used today. Just a year ago, the cargo ship Hanjin Osaka billed its import/export customers for general average losses after an engine-room explosion.
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It can be vital to know who is responsible for getting cargo insurance and what your policy covers. Here are some fundamentals:
Who: In some cases, the manufacturer or exporter insures goods until they reach the buyer. If you're importing, you might seek out this arrangement to avoid the insurance responsibility. But beware, foreign manufacturers frequently use insurers in their own countries, which can create headaches if you ever have to file a claim, according to Butler.
"If you insure through a U.S. company," he says, "you have an agent advocating for you, and U.S. and state insurance laws on your side."
If you're a small U.S. exporter, you can require customers to insure from the moment goods leave your warehouse or factory, says Butler, an arrangement known as "ex-works." Your terms of sale should clarify which party has insurance responsibility.
What: It's important to carefully document each shipment's value in case there is any dispute, loss or damage later.
Where and when: While some policies cover all modes of transit, others only cover ocean vessels, or exclude warehouse storage. If it's your own warehouse and it has separate insurance, that might be fine, but if not, this could open up a dangerous loophole for uncovered losses.
Coverage: Anything can happen in transit, natural disasters, theft, damage, train derailment, accidents, fire, containers falling overboard, collision or other problem. Some policies exclude such modern woes as war and piracy. Read carefully to know what's covered. Or take out an "all risk" policy for peace of mind.
Cost: Cargo insurance is lightly regulated, says Butler, so prices vary. Shop around to get the best deal. If what you're shipping is unusual or complex, consider using a specialized cargo-insurance firm.
Insurer or a Freight Forwarder?
If a small business is responsible for insurance, it's usually purchased either directly from an insurance company or from the business's shipper. There are advantages and disadvantages to each approach.
For a small company that's new to import/export, with infrequent shipments or particularly fragile goods, it can be difficult to get affordable private coverage. Your lack of a shipping track record may spook insurance companies, Klinger says.
One option could be insuring through your freight forwarder or third-party shipper, an intermediary service that oversees shipping between businesses and vendors or customers. Your shipper would then help train you on how to pack goods to avoid breakage. But note that logistics firms insure each shipment separately. If you forget to request coverage for a shipment, Klinger warns, it is not insured.
Despite this, Klinger says, 85 percent of its small-business customers use the shipper's policy, which covers all types of cargo shipped to every spot on the globe. Most of its clients do too little volume to insure privately, he says.
As the frequency and value of your shipments increase, renegotiate for better rates, advises Klinger. Using your existing broad-lines business insurer may save you a little and help prevent coverage gaps.
To get the best rate from an insurance company, provide your broker with detailed information about your shipments -- the value of goods, manufacturers' names, precise destinations, and your company's shipping history. Insurers are worried by vague information, Klinger says, and will tend to charge higher rates.
"An insurer with little information is always a pessimist," Klinger says.