INTRODUCTION

In this article, we will try to ACTUALLY weight the importance of marine cargo insurance objectively and hopefully give a clear perspective of its benefits to importers, exporters, and third party service providers on the application of Marine Cargo Insurance.

The World Shipping Council (WSC) estimates that in 2017 on average, 568 containers are lost each year. When attributing to catastrophic events such as fires, earthquakes, and tsunamis, the average total loss of containers is 1582.

This could be seen as a signal of improving efficiency and accountability of the ocean freight industry, seeing that there are approximately 130 million containers transported worldwide in 2016.

Which means, that the likelihood of your cargo is loss during ocean transit is about 0.0012%. You are more likely to be drafted by the NBA (0.03%) than to have your cargo lost at sea.

So why do people advocate to purchase marine cargo insurance? Is it the advent of fear-mongering by giant corporate insurance underwriters? Or is it the fact that insurance is as old as capitalism and we have grown accustomed to the “sense of relief” for any related insurance at all?

MARINE CARGO INSURANCE EXPLAINED

The first ever marine insurance is drafted in the 1680s in a coffee shop in Tower Street, London, it is a special coffee shop were sailors, shipowners and merchant congregates.

Ever since, the dealings that occurred in Lloyd’s Coffee House has formed the fundamentals of marine insurance, where its core principals are still in practice today.

To date, Lloyd’s Insurance Company covers over 200+ countries worldwide and the majority of the marine insurance is underwritten by Lloyd’s Insurance Company.

To look specifically into marine cargo insurance, it is a protection against losses and damages of cargo while in transit as a result of various risks at high seas.

By no means that the insurance purchaser is to profit from disasters, only to cover for the inherent monetary loss from cargos lost or damaged.

As the risk is transferred to the underwriter, insurance underwriters charge a “premium” for its services as compensation. There are many factors that determine the insurance premium and we will discuss it further in this article.

THE BASIC PRINCIPALS THAT GOVERNS THE MARINE INSURANCE

For an insurance agreement to work, the contract has to have these principles:-

Utmost Good Faith

As we mentioned, insurance is not a way to profit from disaster, but to indemnify or recover losses from those disasters. The buyer has to disclose, to the best of their ability, the most accurate material facts about the insured interest.

Examples of material facts of the cargo insurance are such as the cargo description, cargo amount, cargo value, cargo packaging, or any other related matters pertaining to the cargo shipment.

Realistically, if the insurance proposer does not operate in the utmost good faith, the whole marine insurance industry will not be functioning.

As insurance purchasers will arbitrarily overvalue cargo or even stoke disasters in anticipation of the monetary compensation from the insurance underwriter.

This is why a breach of the duty of utmost good faith, in a form listed below, has serious consequences.

  • Non disclosure:- not conveying important facts of the cargo
  • Concealment:- deliberately not informing insurance underwriter of cargo information
  • Innocent misrepresentation:- making a false statement that the proposer perceives to be true at that time
  • fraudulent misrepresentation:- actively making a false statement of facts of cargo

Insurable interest

You can’t insure cargo that does not belong to you, because you do not have any vested interest in the cargo’s condition.

Indemnity

In practice, cargo insurance will cover or indemnify the fair market value of the goods damaged or lost. No more, no less. This is in line with the repetitive yet important fact that insurance is not used to earn a profit.

Subrogation

Subrogation is like playing a game tag, where a child (or adult, we don’t judge) tag a playmate and he or she becomes “it” and subsequently chases another person to tag “it’s” responsibility away.

OK, this may be a crude example, but marine cargo insurance underwriters generally do a form of tag game.

Once the insurer has compensated fairly the insuree, the insurer proceeds to find the third party involved in the movement of cargo, it can be the transport operator, forwarding agent, freight forwarder, etc. If the insurer deems a third party liable for the cargo damage or loss, they will file a claim against the third party provider for compensation in kind.

Proximate Cause

the events leading to damages and losses of cargo may not be straight forward. The domino effect leading to the actual damage or loss of cargo can sometimes blur the line among whoever or whatever is responsible for the damage or loss.

If the insurance underwriter cannot determine who or what is responsible, they cannot compensate with just an estimation of what really causes the damage or loss.

Proximate Cause is where insurance underwriters find the events that are substantially the root cause of the damage or losses.

There are several methods insurance surveyors determine the proximate cause. Either with the “But-For Method” or with the other factors such as “Forsee-ability”, “Direct Causation” and “Harm within the risk”.

Contribution

Recall that we mentioned that insurance is not for profit?

The principle of contribution dictates that bailee does not file a claim against 2 or more insurance policies. More often this occurs when the insurance proposer purchases two policies to cover the same cargo.

The underlying concept is that the total amount of compensation, whether claimed from one or multiple policies, cannot be more than the fair market value of cargo loss or damage.

Contribution by insurance policy can either be by limit or by equal share. As detailed here

WHAT ARE THE RECENT CASES OF CARGO DISASTERS

Hyundai Fortune-Gulf of Aden 2006

Shipwreck caused by fire and subsequently a secondary explosion from containers containing fireworks

Hyundai Fortune Gulf of Aden 2006

MSC Napoli-English Channel 2007

Ran aground to the beach at Lyme Bay due to strong wind conditions, the ship’s seaworthiness came to question

MSC Napoli English Channel 2007
Source: https://safety4sea.com/ten-years-passed-since-msc-napoli-disaster/

Rena Monrovia-New Zealand 2011

Ran aground due to navigation error while sailing from Napier to Tauranga. 77% of the cargo was recovered.

Rena Monrovia New Zealand 2011
Source: https://commons.wikimedia.org/wiki/File:NZ_Defence_Force_assistance_to_OP_Rena_-_Flickr_-_NZ_Defence_Force_(19).jpg

OTHER CAUSES OF CONTAINER CLAIMS

Those cases we listed above are due to negligence and disasters at sea. However, a majority of the cargo claims are from the potential causes listed below:-

  • Undeclared Dangerous Goods Cargo
  • Container Stow Collapse
  • Container Dents from Stow and Delivery
  • Road Accident
  • Unseaworthy Container
  • Cargo Delay
  • Improper Cargo Loading

Some interesting fact listed in Port Techonlogy also sheds some light on some of the breakdowns of cargo claims.

  • Dangerous Goods make up around 10% of all containerized shipment worldwide
  • Poor and incorrect packing of transport unit cause 65% of cargo damage claims
  • Dangerous Goods have caused 30% of shipping incidents

DETERMINANTS OF MARINE CARGO INSURANCE COST

Claim History

Are you claiming more than usual? You will have a higher risk factor if you trigger your marine cargo insurance frequently in the past. This risk factor is reflected in a higher insurance premium.

Vessel Seaworthiness

If you were to look at Insurance as a measure of risk, vessel seaworthiness is an important factor the underwriters take into consideration before setting an insurance premium.

Ordinarily, most containerized type vessel is regularly serviced and seaworthy. The more pertinent types of vessels where it’s seaworthiness may be questionable are conventional vessels and barges.

Of course, there are more factors that attribute to vessel seaworthiness apart from the vessel itself. Factors such as insufficient crews and inadequate safety equipment.

Scope of Coverage

The more risk you try to mitigate the risk undertaker, the more costly the insurance premium is. There are many types of marine cargo insurance and may coverage types.

You can also basically negotiate with the insurance provider and engineer a personalize an insurance coverage to fit your risk appetite. Depending on the nature of your cargo.

Your INCOTERM also dictates your scope of coverage, if your cargo is a DAP shipment (Delivery At Place), you are at liberty to prepare cargo insurance “warehouse to warehouse”

Voyage

16.1 Billion USD of insurance premium is recorded by the International Union of Marine Insurance

Marine Cargo Insurance top risk accumulation in ports
Source: International Union of Marine Insurance

Referring back to the statistics provided by the International Union Of Marine Insurance, Port of Nagoya, Port of Guangzhou has the largest claims accumulated.

Marine Insurance providers will surely increase insurance premiums for cargo voyages that transit via Port of Nagoya or Port of Guangzhou.

Type of Cargo

We know for a fact that 30% of cargo claims are from Dangerous Goods. So if your cargo is classified as a dangerous good, everything tends to get more expensive. From the ocean freight rate, road transportation rate and, intuitively, marine cargo insurance premium

HOW DO I CALCULATE MARINE CARGO INSURANCE PREMIUM

There are many forms of marine cargo insurance premium calculation. The gist of the calculation is that it is a percentage of the declared cargo value.

Cargo Value :- USD 100,000
Insurance Premium:- 0.3% of 110% of Cargo Invoice Value
Calculation = USD 100,000 X 110% X 0.3%
Port to Port Insurance Premium = USD 330 per shipment

DIFFERENCES BETWEEN MARINE CARGO INSURANCES

Ordinary Marine Cargo Insurance are categorized into three groups:-

  1. Institute Cargo Clause A
  2. Institute Cargo Clause B
  3. Institute Cargo Clause C

The table below provides a good perspective in terms of the scope of coverage of these 3 separate cargo clauses

Difference between Marine Cargo Insurance Institute Cargo A, B and CCoverage

GENERAL AVERAGE EXPLAINED

General average is a unique clause that is only applicable to cargo in-transit via sea. It codifies that all parties involved in the cargo’s voyage share responsibility to the damages and losses from voluntary sacrifices of a part of a ship to save the whole on a pro rata basis.

When you enter into a contract of affreightment with a Carrier Operator, the bill of lading specifically claims the right of possession or lien of your cargo in an event that general average is triggered. You can read more about the terms and conditions of the bill of lading here

Of course, a general average cannot be triggered nonchalantly, there has to be an extraordinary event that is beyond the shipowner’s control, and sacrifices have to be made whether by jettisoning cargo or even by grounding vessels in order to save something much more valuable.

Some examples of instances where carriers instigate general average, these extraordinary events are covered by marine cargo insurance across institute cargo clause A, B, and C

  1. Cargo Jettisons
  2. Fire and Explosions
  3. Vessel Grounding or stranding
  4. Vessel Capsizing

BENEFITS OF MARINE CARGO INSURANCE

It should be obvious by now, that there is nothing to gain from not purchasing cargo insurance. Yet many cargoes are not fully covered.

We do not have to methodically list down the benefits of purchasing marine cargo insurance, those have been extensively covered by just knowing what extraordinary events are covered by marine cargo insurance. The importance of marine cargo insurance can be ascribed in two major factors

1. Bill of Lading limited liabilities

The clause of the bill of lading limits the liability of the carrier operator to a comical level. It limits the carrier’s monetary responsibility to a minute amount only. Detailed here.

You will never get close to recovering the cost of the damages from even the negligence of carrier operators. Whereas marine cargo insurance covers the full fair market value of your cargo declared.

2. Beware of General Average

The reason why we underlined a section to explain the law of general average is that even though your cargo is intact, not damaged and recoverable.

The carrier operators holding lien to your cargo should these unfortunate event happens will request damage claims recovery from all party involved. So you either pay the pro rated damage amount or sacrifice your cargo.

To further add on, carrier and liners generally request for monetary deposits once general average is triggered.

CONCLUSION

You can generally gauge the impact of not having marine cargo insurance. We hope that this article is a convincing reminder that we can always limit these risks that may potentially be a very costly lesson.

RESOURCES

https://en.wikipedia.org/wiki/Proximate_cause
https://www.justia.com/injury/negligence-theory/actual-and-proximate-cause/
https://www.irmi.com/term/insurance-definitions/contribution
https://www.porttechnology.org/news/top_four_dangerous_shipping_statistics
http://www.phoenixrisksvcs.com/library/a-guide-to-general-average-salvage/

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