Cargo insurance: What is it and why you need it?

If you ship goods by sea, it’s likely the value of your goods isn’t something you would want to put at risk. And, while most shipments by sea reach their final destination unscathed, mother nature is unpredictable, and this means problems can occur which can potentially cause damage to your goods. Unfortunately, some shippers only realise they are not covered when it’s too late, so we thought we’d give you a quick round-up of what cargo insurance is and why it’s a worthwhile investment.

What is cargo insurance?

Cargo insurance gives you protection against all risks of physical loss or damage to freight from any external cause during shipping, whether by land, sea or air.

While carriers have liability insurance, it does have limitations; for example, it won’t usually cover ‘Acts of Gods’ and it will typically be capped to a max amount per KG of cargo dependent on the mode of transport, known as SDR’s (Special Drawing Rights). Details as below under BIFA terms.

By sea – Hague Visby rules: £2.12 per kg (SDR 2.00 per kg) £706.16 per package (SDR 666.67 per package)

By road – CMR: £8.82 per kg (SDR 8.33 per kg)

By air – Montreal Convention: £20.13 per kg (SDR 19.00 per kg)

By air – Warsaw Convention: £18.01 per kg (SDR 17.00 per kg)

BIFA STC: £2.12 per kg (SDR 2.00 per kg)

Obviously for high value cargo these limits can fall well short of the full cargo value and are of course on the basis of liability being proven which can also be difficult & time consuming.

The purpose of cargo insurance is to give you peace of mind that whatever happens to your shipment, your goods and your investment will be protected. You’ll find most marine cargo insurance policies protect you from carrier exclusions such as Acts of God, terrorism, strikes, riots and civil commotion risk.

The other critical event cargo insurance will protect you from is ‘General Average’. And if you’re not familiar with this term, read on to find out how you could be affected if a carrier transporting your goods declares it.

What is General Average?

General Average is an old law of maritime insurance. It is a process whereby those whose interests have been sacrificed or have incurred an extra expense, are then compensated by those whose interests have been saved.

For example:

A container ship has 100 containers on board

One container catches fire, and it spreads to nine other containers

All ten fire damaged containers are thrown overboard to save the other 90 containers.

By throwing those ten containers overboard, the crew and the remaining cargo are saved. Therefore, the burden of the loss will be shared among everyone, not just those who had their containers thrown overboard.

So if this scenario was to happen on a container ship carrying your goods and you don’t have insurance cover for General Average, your goods won’t be released to you until you’ve paid your share of General Average. If your cargo is insured, you should receive a General Average Guarantee from your insurers however if not, a cash deposit is required before any cargo is released.

Recent events – a stark reminder

Recent months have given the ocean freight industry a stark reminder of the importance of cargo insurance, having seen three major incidents including a container ship collision in Karachi Port and two fires on separate Maersk vessels. This included a fire on board the Maersk Honan container ship which saw Maersk declare General Average due to the extraordinary costs caused by the damage, berthing and discharging of the ship.

These costs have been set by vessel salvor Richard Hogg Lindley (RHL) at 42.5% of the cargo value, and a further 11.5% as a general average deposit. This means a shipper with goods worth $100,000 in a container faces a combined general average and salvage security bond bill of $54,000 to have the cargo released. (Source: The Loadstar)

Shipping by sea is still a cost-effective and reliable method of shipping, however, as the figures show, an incident at sea can have significant financial implications, which is why cargo insurance is such a sensible investment.

For more information about cargo insurance or if you have questions about general average, contact our friendly and experienced team of freight forwarders.

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