“It was a dark and stormy night on the high seas. The captain and crew were desperate to save the ship from sinking as the high swells and waves caused shipping containers to tumble overboard …”
This might be a good opening for a suspense novel, but it’s the last thing you want to hear from the steamship line with your million-dollar cargo aboard. In the transportation world, risk, loss, and damage are simply facts of life. So how do you protect your company’s cargo from the risk of potential loss? You have several options.
Depending on the mode of transport—rail, truck, sea, or air—cargo insurance can provide protection against all risks of physical loss or damage from any external cause during shipping. You could also decide to forgo purchasing outside cargo insurance and “self-insure” the cargo, assuming all risk of loss. But is that a wise decision? It’s always a trade off of cost vs. risk.
As anyone who has moved freight over the years knows, it’s not all that uncommon for containers to fall overboard or to be released by the ship during a dangerous storm. Keep in mind that approximately 130 million freight containers were transported by the international shipping liner industry last year, with an estimated value of over $12 trillion according to the World Shipping Council.
Of those shipped containers, more than 10,000 containers fall into the ocean every year due to severe weather and high seas, accidents, or incorrect stowage, as ships lose containers when they begin to roll side-to-side at more than a 55-degree angle. While 10,000 containers is a small percentage of the total, it could be catastrophic if they’re your cargo containers—and that’s where cargo insurance comes in—helping to protect you against all types of risk.
Indeed, today’s supply chain executives conduct risk assessment for suppliers, contract manufacturers, logistic and warehousing partners as well as field service. This work in evaluating various types of risk, such as financial stability of a service provider, political unrest and disaster planning, can help to minimize down time and deflect the impact of major disasters.
However, evaluating the need for and currency of cargo insurance coverage is often overlooked. Unfortunately, when disaster strikes, companies can be faced with potentially devastating damages.
Planning and evaluating the costs and benefits of various types of cargo insurance, deductibles, and the possibility of self-insuring should be included with your risk assessment processes and your annual strategic planning. At a minimum, your cargo insurance, or self-insurance, should be reviewed annually.
As business conditions change and your products evolve, you need to make sure your cargo insurance coverage changes in response. In addition, insurance carriers may introduce new features and take others away. With this in mind, it’s important to be aware of these changes and how they will affect your business.
Types of cargo insurance
National and international treaty restrictions as well as the U.S. domestic Carmack Amendment limit the monetary liability of most carriers. These restrictions are intended to help the carrier stay in the business of providing transportation, and not get tied up fighting damage claims.
Shippers also need to keep in mind that transportation is considered a public utility and, as such, is protected from all kinds of liability. Always refer to a carrier’s Bill of Lading, tariff or other Terms and Conditions for specific limits of liability.
You should not depend on the legal liability of carriers for your cargo loss. Their liability is restricted to such low levels and has so many escape clauses that reimbursement for a cargo loss could be as low as $100. Here is a quick overview of some of the types of insurance you may need to consider as part of your improved strategic planning.
Land Cargo Insurance. This type of insurance provides coverage for your cargo carried by trucks and small utility vehicles such as those driven by FedEx and UPS. This level of insurance will cover you for theft, collision and related risks.
All truck carriers are also required to carry a minimum amount of insurance, known as carrier liability insurance. However, carrier liability insurance provides very little—if any—coverage should your cargo be damaged or destroyed in transit or awaiting transit. If your shipments via domestic trucks are high value, you should consider buying additional cargo insurance.
Marine Cargo Insurance (Ocean and Air). Despite its name, marine cargo insurance covers transportation by sea or air. Coverage includes damage during loading/unloading, weather, piracy and disaster.
There are three sub-types of marine cargo: Open Cover Cargo Policies that cover all cargo during a specific period of time (i.e.: 1 year); Specific Cargo Policies or Voyage Policies that cover a specific freight shipment; and Contingency Insurance Policies, or secondary insurance with typically smaller premiums in case the primary insurance doesn’t pay.
General Average Loss. Cargo insurance for ocean shipping is somewhat different from other type of insurance because the loss of a container is amortized over the entire load and all shippers with cargo aboard pay a calculated share.
In the event of an emergency and the safety of the crew is at risk, the captain may jettison some of the cargo containers to save the ship. Even if your goods remain aboard and undamaged, you will still be required to pay a percentage of the loss before your goods will be released from the port. This is known as a “general average” loss. You can, of course, purchase cargo insurance to cover general average loss.
No cargo insurance?
There is no requirement to buy cargo insurance, but that means you assume all of the risk. If you chose no cargo insurance, then your company should be prepared for potential losses and for any collateral damage that may occur.
This is a decision that should be thought through very carefully—and one to be made after the costs and benefits are carefully analyzed. For companies that may be very cost-sensitive, a combination of low-value self-insured shipments together with high-value insured shipments under a specific cargo or voyage cargo policy may be the way to go.
As with most insurance plans, it may also be possible to buy a low-cost plan with a very high deductible and then self-insure for the first $50,000 or $100,000 before cargo insurance kicks in.
Cargo insurance may not be as exciting as a suspense novel, but the ongoing threat of cargo loss may keep you up at night because overcoming a large loss could be very difficult for your company. Losing inventory could result in lost sales and damage to your customer relationships. But that’s not all.
Until the claim is paid, you should consider these additional costs to your company:
- cost of replacement of raw materials for replacement production;
- factory costs, time and scheduling to produce replacement goods;
- potential loss of business
- as you recover;
- if your is freight damaged other shipments or the environment you may have liability;
- if you must file a lawsuit to recover damages it’s going to take time and
- be expensive;
- if you have decided against cargo insurance, your cargo losses could be substantial; however, even if you did purchase cargo insurance, it will take time and effort to process the claim.
Minimizing risks, avoiding claims
To avoid insurance claims altogether, you should make every effort to minimize your global supply chain risks. This means maintaining positive control over your global supply chains with oversight, monitoring and audits. In addition, you should be planning for how your supply chain is going to respond in case of a disaster.
Here are a few key tips for minimizing risks and avoiding claims:
- Educate your supply chain staff about how to identify and avoid cargo theft and damage risks. Don’t assume that everyone will automatically know what to look for.
- Conduct frequent audits and business reviews with your supply chain partners. Stay informed about changes in their processes, leadership, and be sure to conduct on-site visits and tours of the operations, especially when they’re handling your cargo.
- Remove identifying marks from outer packaging of your goods if your items are considered high risk for theft, such as consumer electronics.
- Choose the best type of transport for your cargo. Can you minimize risk by shipping air versus ocean or truck verses rail?
- Utilize visibility and cargo tracking systems and sensors including location, temperature, humidity, high value and shock monitoring.
- Make sure that loads are secured correctly.
- Determine the concentration of risk in individual shipments and consider distributing products across several loads, carriers, or modes of transport.
- Monitor and expedite shipping times and use direct shipping routes. Use visibility software to determine where your cargo is at all times.
- Pack and stage loads at secured facilities. According to SensiGuard’s Supply Chain Intelligence Center, 75% of U.S. cargo thefts in 2017 took place within unsecured parking areas.
Is cargo insurance worth it?
With all risks considered, you will have to make a final decision regarding purchasing cargo insurance or self-insuring your shipments.
The best approach is to consider all potential costs of a loss versus the cost of insurance. But at the end of the day, cargo insurance is the best way for businesses to reduce financial exposure and mitigate supply chain risks.
There are various plans and insurance companies that can help you decide, but ultimately the decision is a cost/benefit analysis. Policies and coverage can vary, and it’s best to use the services of an insurance broker to help you decide.
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