Marine Insurance Reduces Risk

Air or Sea Freight Cargo Insurance

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Marine cargo insurance occupies an important position in international trade whilst it is primarily concerned with the protection of ocean-going cargo it also covers against the hazards associated with connecting land conveyances as well as shipments by mail or air.

Why purchase marine cargo insurance?

Goods being transported anywhere in the world are exposed to a wide range of risks some of which include loss or damage due to:

  • theft, pilferage or hijack;
  • mistakes in transportation such as dropping, rough or inappropriate handling;
  • accident to the carrying conveyance such as a vessel sinking, aircraft crashing or vehicle fire, road traffic accident or overturning;
  • exposure to rain or salt water;
  • variations in temperature.

Most of these risks are difficult for the owner of the goods to manage directly. This is because the shipment will be given into the care, custody and control of third parties who will limit their liability for loss or damage to those goods.

When is Insurance mandatory & When is it required?

A prudent trader will ensure that any cargo movement is covered by insurance. This is simply a financial risk management approach to any transaction.

However, there are some instances where the provision of insurance is mandatory in accordance with the chosen contract of sale options, that is the choice of Incoterms 2000.

There are only two terms that require the seller to formally provide to the buyer evidence of insurance for the consignment in the form of an insurance policy or certificate, and these are CIF and CIP.

Incoterms 2000 specify that insurance must be provided on the basis of minimum cover in accordance with the Institute Cargo Clauses or a similar set of clauses.

For the other 11 Incoterms 2000, evidence of cargo insurance cover is not required. This does not mean, though, that a trader will not wish to make arrangements for cargo insurance, regardless of the contractual obligations.

How is the insured value calculated?

Insurance is usually worked on the basis of a percentage applied to the value of the consignment. The percentage applicable is the one provided by the insurer, by way of the premium.

The value of the consignment is the insured value, not the sales value. Usually the insured value is calculated on the basis of the CIF, or equivalent, plus 10% more, that s 110% of the CIF, or equivalent, value.

This is stated in the text of Incoterms 2000 under CIF and CIP. The additional 10% loading on the CIF, or equivalent value, is to allow for notional loss of profit and/or the cost of progressing an insurance claim.

The insured value is important, because the premium is calculated on this figure and also this is the maximum value that the insurer is liable for, in case of a claim.