What international traders need to know about marine insurance.
Although the pretence of a profitable business is simple – buy low, sell high - when it comes to moving goods internationally the math gets tricky.
Besides the cost of inventory, international traders must ensure their profit margin covers permits, transport and duties whilst remaining competitively priced. All these costs quickly diminish profits, which means importers and exporters often need to cut costs wherever possible. There are means of minimising expenses in international trade. Comprehensive marine insurance should, however, never be one of them.
What is marine insurance?
Historically international freight happened by ship only. International transport of goods automatically therefore functions under the Marine Insurance Act. As modern transport methods also include road, rial and air freight, a more correct term would be cargo insurance.
The Marine Insurance Act, first written in 1906, is periodically revised to accommodate modernisation of trade and governed by seven basic principles:
1. Utmost good faith
In any contract of marine insurance, both the insurer and the assured must disclose all material facts regarding the goods and their transport requirements to the other party. This includes any information likely to influence the judgment of the other party. E.g. the shipments level of flammability, volatility or perishability. Withholding of material facts is fraud and enables the disadvantaged party to declare the contract null and void.
2. Insurable interest
A person or entity has an insurable interest in a shipment only if the complete or partial loss or damage thereof would cause a financial loss or other hardship.
3. Indemnity
The assured party may not collect more than its own financial interest in property that is damaged or destroyed. This is determined by the declared value at the time of taking up the insurance policy. Depending on the conditions of the policy, an added margin may be factored into the declared value of the goods based on the assumption that a profit would have been earned pending safe arrival of the shipment.
4. Subrogation
In the event of a loss, the insurer claims losses against a third party who is proven to be at fault for the loss or damage, or their insurer. This happens after the assured has been paid out for damages as a means for the insurer to recover loss.
5. Proximate cause
In determining responsibility for loss or damage of goods, a court of law would not stop at the direct cause, but also consider determining factors that led up to an event or cause of loss.
6. Contribution
In a claim where a shipment is partially insured by more than one insurer, the insurer who pays out for loss or damages may lay claim of funds from the other insurer(s) proportionate to the value of the policies.
7. Abandonment
By signing a formal notice of abandonment an assured party unconditionally surrenders all rights to insured goods that, due to circumstance, cannot be retrieved. This enables the insurer to treat the claim as it would a total loss.
What else is important?
The Institute of Cargo Clauses
basic clauses, last updated in 2009, form the standard templates of any marine insurance policy. Both the insurer and the assured may however update the underlying content of these clauses, so be sure to discuss any additional and circumstantial cover you want to include with your broker before signing.
The institute of cargo clauses range from a comprehensive policy (Clause A) to very basic cover (Clause C), and even includes policies that would take effect if your cargo were to be delayed by war or strikes.
Click here to download your copy of the Institute of Cargo Clauses.
The Rule of General Average
Due to the nature of freight, cargo onboard a ship or plane that threatens the safety of other cargo, the crew or the vessel itself must be jettisoned (thrown overboard). E.g. A container that catches alight must be disposed of before it can ignite the one next to it. Defined by the York Antwerp rules 1994, the rule of general average acts as a guideline for the distribution of loss in such an event.
According to the rule of general average, the liability of cargo lost for the sake of limiting damage must be proportionately distributed amongst all parties who have cargo on board, regardless of whether their goods were affected. This includes loss and damages to the ship itself. E.g. If machinery and stores belonging to the ship had to be jettisoned. In addition, the cost of operations for any efforts made to retrieve the lost goods is shared by all cargo holders.
Although the rule of general average is a separate agreement from the assured’s marine insurance policy that exists between the carrier and the owners of the cargo on board, any standard marine insurance policy will cover a general average sacrifice (if your goods were thrown overboard), or a general average expenditure (if you are held partially liable for goods that have been thrown overboard). Be sure to study your policy for any requirements on how a general average claim must be made and how to obtain a general average guarantee from your insurer so that your goods may be released before a claim is settled.
Don’t Make These Mistakes!
Choosing marine insurance based on price instead of cover
Inexperienced traders often view insurance as a grudge purchase and opt for very basic cover at a low price in the hopes that nothing goes wrong. Although international transport is safer now than it has ever been, accidents, damages and resulting losses do happen. If your insurance policy did not cover a total or partial loss, would you be able to take the financial strain of not only replacing the goods, but potentially a contribution to general average as well?
If you cannot confidently say yes to this, compromising on insurance for the sake of cost is simply not a risk worth taking. Bear in mind that in the eventuality of a claim, you’ll be suffering the loss of your goods, as well as a delay in earning profits as a replacement shipment will take time to manufacture.
Be careful to not go for the most expensive option either. More spend does not necessarily equate to better cover. Be sure to understand the underlying content of marine insurance policies you are offered and use that as a point of comparison instead of the cost.
Agreeing to a large deductible.
The deductible, also known as the excess, stipulated by a marine insurance policy is the once-off payment the assured has to pay upfront before the insurer can settle a claim.
Signing a policy that stipulates a low premium due to a high deductible may seem like a good compromise. After all, if no claim is made you would have saved a lot. But what if you do claim? Will losing capital for the sake of paying a huge deductible warrant your saving in the long run?
Letting someone else choose your insurance policy
Importers especially have to be wary of using an incoterm which requires the other party to provide marine insurance cover. The 2010 edition of CIP and CIF, as well as the updated 2020 Incoterms CIF requires the seller to take out a very basic policy in line with Clause C of the Institute of Cargo Clauses. Unless a more comprehensive policy is specified in the sales agreement, you would likely need to purchase additional cover anyway. Also bear in mind the difficulty of claiming from a foreign insurer from who’s perspective you are not their primary client.
Being the policy holder averts all these concerns and saves you paying profit your supplier may have added to their insurance costs. Most importers and exporters would agree, arranging international transport and insurance yourself is the safest and most cost effective way to do business.
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