Why Do I Need Cargo Insurance?
Why do I need cargo insurance?
I've heard this question asked. The short answer is:
"Because you're a shipper."
If that isn't enough for you, keep reading.
Cargo insuranse reduces shippers' exposure to financial loss. Yet, so many shippers choose to risk importing and exporting goods without getting cargo insurance. Unfortunately, many shippers have suffered great loss for taking this risk.
Below are eight reasons shippers should get cargo insurance. Some of the reasons are dangers that can cause loss or damage to cargo, but the list actually goes well beyond that. In truth, there are even more reasons to get cargo insurance than what we've listed below, but this is a blog, not a book.
#1 - Cargo Theft Rising
Cargo theft, especially through identity theft and fictitious pickups, is on the rise.
We're not even counting piracy, which is a major risk of cargo theft and loss in modern international shipping.
We won't spend too much time on this topic as three of our last four blogs had to do with cargo theft. You can read them by clicking the below links:
Being in the middle of the peak season for cargo theft and seeing a plethora of stories on cargo being stolen lately are big factors why we are posting this blog about getting cargo insurance. That made us start the list with cargo theft; however, it is only one of many reasons to get cargo insurance.
#2 - More Containers Lost at Sea Every Year
Every year, containers are lost to sea. With the trend to mega ships, carrying huge stacks of shipping containers across the oceans, cargo containers overboard have actually increased.
The World Shipping Council conducts surveys to find out approximately how many shipping containers are lost to sea in a year. Their 2014 update reveals a very significant rise in cargo containers lost to sea from their 2011 survey.
The survey of the years 2011, 2012 and 2013 estimates that there were approximately 733 containers lost at sea on average for each of these three years, not counting catastrophic events.
That number of approximately 733 shipping containers lost at sea during the 2011-2013 period is more than double the number of containers lost at sea for the previous period of 2008-2010.
2011 survey results, the World Shipping Council estimated that on average there were approximately 350 containers lost at sea each year during the 2008-2010 time frame, not counting catastrophic events.
Considering the dramatic rise in shipping containers lost at sea is one more reason shippers should get cargo insurance.
#3 - Catastrophic Events Happen
Storms, shipwrecks, explosions, pirate attacks... we've had past blogs on all of these events, which have caused the loss of many, many shipping containers. In one event, an entire shipload or more of cargo containers can be lost.
The World Shipping Council defines a catastrophic loss "as a loss overboard of 50 or more containers in a single incident."
When one includes catastrophic losses (as defined above) during these years, the average annual loss for [the years 2011, 2012 and 2013] was approximately 2,683 containers.
Catastrophic events like the Tianjin explosions in China's port city last month or container ships taken by pirates wouldn't even likely be included in the totals above because, while very large numbers of shipping containers of goods are lost, the cargo containers are not necessarily lost overboard to sea.
Every year, catastrophic losses happen that affect many, many shippers. Those affected without cargo insurance, deeply regret their decision not to get insured.
#4 - Cargo Damage a Common Occurrence
As common as cargo theft or loss has become, even more common is cargo damage.
UK P&I Club is a mutual marine protection and indemnity organization that actually represents shipowners rather than shippers hiring their goods to be imported and exported. However, UK Club has shared that they spend a considerable proportion of their time handling container cargo claims.
In a PDF about cargo damage, UK Club share the percentages of the cargo claims they handle, with physically damage cargo by far being the top claim:
"... 25% of the damage is physical, 14% temperature related, 11% containers lost overboard, 9% theft and 8% shortage."
Other claim areas are sinking, contamination, and infestation. All of these claim types account for smaller percentages than 8%.
Damage to cargo happens all too often, probably because there are so many different opportunities for damage to occur.
Bad stowage and shore error are the largest contributors to damaged cargo according to UK Club, but they list many, many other reasons for damage:
Lack of export packaging.
Increased use of weak retail packaging.
Wrong choice of container.
Poor condition of container.
Lack of effective container interchange inspection.
Ineffective sealing arrangements.
Lack of clear carriage instructions.
Ineffective internal cleaning.
Contaminated floors (taint).
Wrong temperature settings.
Poor distribution of cargo weight.
Wrong air flow settings.
Wrongly declared cargo.
B/L temperature notations misleading/unachievable.
Lack of reefer points
Heavy containers stowed on light.
Stack weights exceeded.
Heat sensitive cargoes stowed on/adjacent to heated bunker tanks or in direct sunlight.
Fragile cargoes stowed in areas of high motion.
Damaged, worn, mixed securing equipment.
Poor monitoring of temperatures.
Wrong use of temperature controls.
That's a long list of things that could go wrong and damage a shippers' goods. It's almost like 27 reasons to get cargo insurance within our 8 reasons for shippers to get cargo insurance.
#5 - General Average - Expedite Cargo Release
You may be required to post a bond and/or cash deposit in order to obtain release of your cargo following a general average – even though there was no loss or damage to your goods.
By purchasing insurance, your insurance company assumes the responsibility and expedites the release of your cargo in these instances.
General Average is an internationally accepted principle where if certain types of accidents occur to the vessel, all parties share in the loss equally. You definitely do not want to find yourself in a General Average situation without insurance.
#6 - Contractual Requirement
Shippers' sales contracts may obligate them to provide ocean cargo insurance to protect a buyer’s interest or their bank’s interest. This is especially true when selling goods CIP or CIF.
Shippers should always pay attention to the small details of their contracts. Unfortunately, insurance sometimes gets overlooked and the shipper can be held responsible.
Failure to get cargo insurance when a shipper is contractually obligated to do so can not only subject the shipper to financial loss if there is loss or damage to the goods, but non-compliance with the terms of the contract with the buyer can lead to loss of sales and legal problems.
Litigation can quickly surpass the financial repercussions of uninsured cargo that is damaged or lost.
#7 - Coverage for Limited Carrier Liability
Carriers, by law, are not responsible for many common causes of loss that occur in transit (for example, acts of God, General Average, etc.).
Even when carriers are liable, carriers’ liability in the event of a loss is limited – either by contract in the bill of lading or by law.
In most cases, shippers will only recover cents on the dollar from the carrier. Shippers should never count on the carrier that is shipping their goods to cover losses or damage that may occur over the course of a container ship voyage.
#8 - More Control Over Insuring Terms
Relying on the buyer’s or seller’s insurance may be a viable option, but shippers must be satisfied that the insurance has in fact been purchased and that the insuring terms, valuation, and limits provided by each insurer on each shipment are adequate to meet their needs.
If shippers leave the insurance up to the other party or other parties when importing and exporting, they run the risk of not being properly protected.
On top of that, if there is a claim dealing with a foreign insurance company, perhaps in a different language, it can be time consuming and frustrating. If there’s a claims issue, international shippers are often dealing with courts in a foreign country.
Shippers who purchase cargo insurance themselves are usually much better protected than shippers who allow other parties in their importing or exporting transactions to handle the cargo insurance.