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Cargo Insurance: Protecting Against Losses When You Ship Internationally

By Bill Camarda

When you ship internationally, plenty has to go right for your goods to arrive at their destination intact. Cargo insurance can help when it doesn’t.

One reason cargo insurance can be important is carriers are usually subject to limited liability when a shipper’s goods are damaged, destroyed, or lost en route, based on a complex series of domestic laws, regulations, and international treaties. For example, goods shipped to or from U.S. seaports are subject to the Carriage of Goods by Sea Act, which limits the carrier’s liability to $500 per package—and a “package” has occasionally been interpreted as including everything stuffed into a pallet or even a standard shipping container, not just what’s in your package.1

 

For goods that travel between non-U.S. ports, a marine carrier may be subject to per-kilogram limitations, which may still be far lower than the value of the goods. Losses viewed as beyond the carrier’s control—such as those caused by “Acts of God”—may escape liability altogether.2

 

As for international air shipments, the standard carrier liability limit is currently 19 Special Drawing Rights (SDRs) per kilogram, which translates to approximately $12 per pound.3 By one estimate, that leaves more than half of air cargo shipments underinsured.4

 

Global Shipping: A Complex Industry with Complex Rules

 

Ninety percent of world trade is carried by some 60,000 merchant ships registered in over 150 countries. In 2019, the number of shipping vessels that sank or otherwise became total losses dropped to 46, less than one-fourth of the 2000 number.5 But that’s still nearly one a week. What if your goods were aboard? In 2017, the most recent year for which numbers are available, 1,582 shipping containers were lost.6 But any year could become an outlier: more than 4,000 containers went down when the MOL Comfort sank in the Indian Ocean in 2013.7

 

Once your ship arrives safely at port, goods must be transferred to rail, truck, or other modes of delivery. Fires, accidents, and theft occur; trucks crash; goods get damaged in handling, or they’re simply lost… bad things happen.

 

Using Cargo Insurance to Reduce Your Risk

 

For some shipments, you may be willing to self-insure—take your own chances. For higher-value shipments, though, cargo insurance is worth consideration. It’s sometimes possible to mix both strategies, for example, by taking a low-cost cargo insurance policy with a high deductible, thus self-insuring part of the shipment yourself.8 In other cases, you won’t have a choice because a buyer or a bank may require you to carry cargo insurance to protect them.9

 

If you only occasionally ship overseas, the most cost-effective approach may be to purchase cargo insurance through your freight forwarder; this can help you avoid high minimum premiums. If you ship more often, you may find it more cost-effective to explore alternatives from insurance brokers or carriers that specialize in cargo insurance and might cover many or all of your shipments through a single policy.

 

As you shop for cargo insurance, you may need to know some specialized terminology:

 

  • All Risk policies cover an extremely wide range of physical losses or damage from external causes—though not quite “all.”10 For example, if you don’t pack your goods adequately, your damage claim might be denied. So, too, if you ship something that can’t survive the conditions you’re exposing it to, such as shipping something on an ocean vessel that will rust as soon as it’s exposed to humidity.11
  • Named Peril policies tell you exactly what they cover, like a vessel burning, sinking, stranding, or colliding, and don’t cover anything else.12
  • Warehouse to Warehouse coverage means that you’re covered not just when your merchandise is afloat, but from when it leaves the shipping warehouse until it arrives at the destination warehouse. In an era where merchandise often stays in the same container on boats, rail, and trucks, this can make sense.13
  • General Average insurance addresses a long-accepted rule of global ocean shipping: if part of a vessel’s cargo is damaged or destroyed to avoid catastrophe, each shipper shares equally in the loss, and must guarantee its share of the payment before its surviving goods are released.14

Beyond these terms, it’s worthwhile to carefully review the coverage you’re getting, to make sure it’s what you need. Policies can vary in exclusions, deductibles, claims handling, and other features.15 As you’d expect from the preceding discussion, costs can vary widely. What you’re shipping and where you’re shipping it may significantly affect insurance cost. So can your own track record for shipping undamaged goods—another reason careful packing is worth the effort.16

The
Takeaway:

While the global shipping system has become far more reliable than it once was, goods still get destroyed, damaged, lost, or stolen. If you can’t afford that, cargo insurance can help you manage the risk.

Bill Camarda - The Author

The Author

Bill Camarda

Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.

Sources

1. “Unwrapping the COGSA Package Limitation: A Survey of How It is Interpreted and Applied by U.S. Courts,” Gard; http://www.gard.no/web/updates/content/20740637/unwrapping-the-cogsa-package-limitation-a-survey-of-how-it-is-interpreted-and-applied-by-us-courts-
2. “Why Do I Need Cargo Insurance?” Flexport; https://www.flexport.com/help/41-cargo-insurance-guide
3. “Understanding Liability, Insurance, and Claims,” DSV; http://www.us.dsv.com/~/media/US/Files/pdf/airfreight/Understanding-Liability.pdf
4. “Cargo Insurance: Keep from Freight Falling,” Shapiro; https://www.shapiro.com/services/insurance/
5. “Safety and Shipping Review 2019,” Allianz; https://www.agcs.allianz.com/news-and-insights/reports/shipping-safety.html
6. “Containers Lost at Sea – 2017 Update,” World Shipping Council; http://www.worldshipping.org/pressroom/news-archive
7. “How Many Shipping Containers Are Really Lost At Sea?,” GCaptain; https://gcaptain.com/how-many-shipping-containers-lost-at-sea/
8. “Cargo Insurance: Protecting against risk,” Supply Chain Management Review; https://www.scmr.com/article/cargo_insurance_protecting_against_risk
9. “5 Reasons You Need Cargo Insurance for Your Import or Export Goods,” Universal Cargo; https://www.universalcargo.com/5-reasons-you-need-cargo-insurance-for-your-import-or-export-goods/
10. “Cargo Insurance Guide,” Global Shipping Services; https://www.glship.com/resources/cargo-insurance-guide/
11. “What is Inherent Vice?” Flexport; https://www.flexport.com/glossary/inherent-vice
12. “The Two Main Types of Marine Cargo Insurance,” TRG; https://traderiskguaranty.com/trgpeak/two-main-types-of-cargo-insurance/
13. “Does Your Business Need Ocean Cargo (Shipping) Insurance?” The Balance; https://www.thebalancesmb.com/does-your-business-need-cargo-shipping-insurance-4173371
14. “What is General Average?” Flexport; https://www.flexport.com/glossary/general-average
15. “Understanding cargo insurance,” FreightWaves; https://www.freightwaves.com/news/2017/10/26/understanding-cargo-insurance
16. “Freight & Cargo Insurance: Cost, Coverage, & Providers,” FitSmallBusiness; https://fitsmallbusiness.com/cargo-insurance/

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