Does Your Business Need Ocean Cargo (Shipping) Insurance?

If your business buys or sells goods outside the United States you may need ocean cargo insurance. This coverage protects your company from loss or damage to property that's in the course of transit to or from the U.S. and a foreign country. Ocean cargo insurance is purchased by manufacturers, importers, exporters, and freight forwarders.

Ocean cargo coverage was originally designed to cover goods transported by sea. The shipping industry has changed dramatically since the advent of cargo containers in the 1950s. Nowadays, a cargo container (and its contents) may travel via ship, air, rail, and truck as it moves from its point of origin to its destination. Consequently, many ocean cargo policies provide "warehouse to warehouse" coverage. This means they cover goods from the time they leave the warehouse at the point of shipment until they arrive at the warehouse at their destination.

Shipping Terminology

If you plan to ship goods outside the U.S., you should understand some terminology that is unique to the shipping industry. The word 'shipper' means the party who initiates the shipment of goods. The shipper is usually (but not always) the seller. The 'consignee' is the recipient of the goods. The consignee is generally (but not necessarily) the buyer.

The transporter of the goods is called the carrier. The carrier may be a shipowner, a railroad, a trucking company, or an airline. A 'bill of lading' is a contract between the shipper and the carrier. It serves as a receipt of the goods by the carrier. The bill of lading describes the items to be shipped and provides evidence of title (ownership of the goods).

Terms of Sale

If you buy or sell goods that must be shipped to or from a foreign country, the sales contract should specify whether you or the other party is responsible for insuring the goods while they're in transit. It should also specify the point at which ownership will transfer from the buyer to the seller.

Whether you are the buyer or seller, there are advantages to obtaining your own cargo insurance. One is the freedom to choose the type of cargo insurance that suits your needs and your pocketbook. If you buy your own cargo coverage, you won't have to rely on (or pay for) insurance selected by someone else. Another advantage is that you can file claims with your own insurer. If a loss occurs, you won't have to deal with an insurer you don't know and that is located in another country.

Types of Cargo Policies

There are two basic types of cargo policies. A voyage policy is designed for businesses that ship goods infrequently. It covers goods shipped on a single voyage. An open policy covers all goods shipped on all voyages occurring during the policy term. You should buy an open policy if you plan to ship goods multiple times a year.

Key Provisions

Cargo policies can be confusing as they contain terms that are unfamiliar to many small business owners. Here are some provisions you are likely to find in a policy.

• Goods Insured. Describes covered property. Typically covers "lawful goods and/or merchandise of every description but consisting principally of" (followed by an explanation). The description should be broad enough to cover any goods you may ship.
• Assured Parties. These are the parties covered by the policy. Your business should be listed as the "assured."
• Covered Conveyances. These are the covered methods of transport. Examples are ships, barges, trucks, trailers, and rail cars.
• Covered Perils. All-risk policies cover losses caused by any perils that aren't specifically excluded. Named perils policies cover losses caused by the perils listed. Covered named perils typically include fire, assailing thieves, jettisons, barratry, and "perils of the sea." Barratry means criminal acts committed by the ship's captain or crew that injure the shipowner. Perils of the sea are events that commonly occur on the water such as storms, winds, waves, sinking, capsizing, and collision with other objects.
• Exclusions. All-risk and named perils policies normally exclude losses caused by war, improper packing, abandonment of the cargo, rejection by customs, delay, and inherent vice (a hidden defect that causes property to destroy itself). This is not a complete list.
• Sum Insured. This is the amount of insurance purchased on the property. It typically consists of the property's invoice price, freight charges, and a percentage (often 10 to 20 percent) for profit.
• Geographical Limits. Describes the places where coverage applies (the coverage territory). A worldwide territory affords the broadest level of coverage.
• Warranties. These are exclusions. For instance, a Strikes, Riots, and Civil Commotion warranty excludes damage to cargo by any of these perils.

What 'Average' Means

In cargo policies, the term 'average' means partial losses. The phrase 'free of particular average' means that partial losses are excluded unless they result from one of a handful of named perils (such as fire or sinking of the vessel).

'General average' is a loss-sharing concept that has existed for thousands of years and is still relevant to cargo policies. It applies when the vessel, crew, and cargo have faced a common danger (like a fire or collision), and the crew has jettisoned some cargo to save the ship. If the shipowner declares general average, then all cargo owners share proportionately in the loss. This includes owners of property that weren't jettisoned. Your cargo policy should cover your general average losses if the event that precipitated the jettison is an insured peril.

Buying Ocean Cargo Coverage

Ocean cargo insurance is widely available. Sources include large insurers like Travelers and Chubb, specialty carriers like STARR and XL Catlin, and Lloyds' of London. The premium you pay depends on the nature of the goods shipped, their value, the route used, and the scope of coverage provided. The premium is calculated by dividing the sum insured by 100 and multiplying the result by the rate.