Cargo insurance: do your goods need it?

Does my shipment require cargo insurance?

Little is said about the cargo insurance that a shipment may require. And it’s not about the insurance that the truck in which your cargo is to be transported must have; it’s about the insurance that the owner of the goods should have.

If you still don’t fully understand the difference between cargo insurance on the part of the cargo owner and insurance on the part of the carrier, continue reading. In this blog, we will show you all the details.

What is cargo insurance?

Cargo insurance is a financial instrument that serves as coverage against the risks inherent to transportation, in this case, during the shipment of goods by land, air or sea. Transportation service providers must have cargo coverage to protect themselves and their customers. However, the terms to cover the value of the goods are limited. Therefore, it is suggested that companies purchase individual cargo insurance (in addition to that already offered by the carrier).

The purpose of cargo insurance is to reimburse the policyholder (the company that owns the cargo) for the value of the merchandise if it is damaged or suffers any loss due to causes external to the means in which it is transported.

Whether the goods you are transporting are of high or low value, the financial losses from a single incident can be devastating to your business, jeopardizing your success and the continuation of your operations.

Cargo insurance can cover various risks, among them:

• Damage caused by accidents, natural disasters, theft and piracy.
• Losses resulting from delays, non-compliance with regulations and geopolitical events.

Why is it important to insure my cargo?

Let’s suppose a small company in the United States, called “Pepos Crafts,” specializing in handmade wooden furniture, decided to expand its market by shipping its products overseas. They received a large order from a European retailer for a shipment valued at $50,000. To minimize costs, “Pepos Crafts” opted not to take out cargo insurance, assuming that Cargo insurance was included when contracting the service with the logistics agent and would be sufficient for unforeseen events.

During the sea voyage, a severe storm hit the cargo ship, causing significant damage to a container carrying the furniture. The furniture was exposed to seawater and suffered irreparable damage. Upon arrival, the retailer refused to accept the damaged goods.

“Pepos Crafts filed a claim with the logistics company, only to discover that the carrier’s liability was limited to $10,000, a fraction of the total value of the shipment. The carrier’s limited liability left Pepos Crafts with a substantial financial loss of $40,000.

The company now faced a desperate situation:

• They lost the entire shipment value, which they had not insured.
• They had to bear the costs of recovery or disposal of the damaged furniture.
• Their reputation with the European retailer was tarnished, which could jeopardize future business opportunities.
• The financial pressure of the loss significantly hampered their expansion plans and threatened the overall stability of their business.

Had “Pepos Crafts” invested in cargo insurance, even at an estimated cost of $250 (0.5% of the value of the cargo), it would have been protected from this catastrophic mishap. The insurance payout would have covered the loss, allowing them to fulfill the order with replacement goods or recover their production costs. They would have preserved their relationship with the retailer and maintained their business momentum.

This example evidences the critical importance of cargo insurance in protecting companies from potentially devastating financial losses associated with unforeseen events during transportation. While the initial cost of insurance may seem like an extra expense (we all try to avoid those), it pales in comparison to the potential consequences of not having coverage when it is needed most.

How to protect my goods with cargo insurance?

There are two main ways to protect the security of your shipment:

1. Protection built into the carrier’s insurance

Similar to the basic insurance included when you hire a moving company. It’s already included in your shipping costs, but there’s one important detail: it has limits. Think of it as a safety net with a maximum cap. For example, if the carrier’s insurance has a single-incident limit of $100,000, that’s the most you’ll be able to recover if something goes wrong, regardless of the actual value of your shipment. Here, of course, the terms and conditions of the carrier’s insurance also come into play depending on the type of loss.

The per occurrence limit is the amount applicable to a single shipment and the terms and conditions specify for which cases. When discussing cargo insurance with a logistics and transportation company, it is important to ask about the per occurrence limit and not the aggregate limit of insurance. The aggregate limit of insurance is the total amount of the carrier’s coverage and can be misleading, as it is usually considerably higher than the per occurrence limit.

2. Cargo Insurance (Shipper’s Insurance)

This provides additional insurance for specific items of value. While it increases your costs (typically starting at around 0.3% of the value of your cargo), it gives you greater control and better coverage. It is precious when shipping high-value items that exceed the carrier’s standard coverage.

Types of cargo insurance policies

• All Risk Coverage: This comprehensive policy covers many risks, providing maximum protection for valuable goods.
• Named Perils Coverage: This policy covers specific risks described in the policy, offering a more tailored approach to cargo insurance.
• Open Cover: This policy offers continuous coverage for multiple shipments during a given period, which is suitable for companies that ship goods frequently.
• Total Loss Only: This policy covers only the total loss of the cargo, a less expensive option when the risk of partial damage is low.
• Contingent: This policy provides coverage when standard cargo insurance falls short, as a backup plan for complex claims between shippers and carriers.
• Land Cargo Insurance: This policy is designed specifically for goods transported by land and covers risks such as theft, collision damage, and more.
• Marine Cargo Insurance: This policy covers goods transported by sea, including coverage for air transport if necessary.
• Air Cargo Insurance: This policy is designed for goods transported by air, protecting against the specific risks of air transit.

Benefits of cargo insurance

• Robust financial protection: This type of insurance acts as an economic shield, protecting your investment against physical damage to cargo during an accident, natural phenomenon, theft, or other mishaps listed within your coverage.
• Guaranteed operational continuity: The real benefit of cargo insurance goes beyond simple financial compensation. It facilitates:

• Quick resolution of claims to minimize disruptions.
• More immediate resources to replace damaged goods.
• Maintaining commitments to customers despite setbacks.
• Protection of long-term business relationships.
• The ability to respond quickly to incidents and keep your operations up and running is invaluable to the reputation and sustainability of your business.

• International regulatory compliance: In international trade, cargo insurance is not just a prudent precaution; it is often a legal requirement. It offers:

• Compliance with international trade regulations.
• Facilitation of customs processes.
• Standardized documentation for international transactions.
• Legal protection in multiple jurisdictions.
• This compliance avoids costly delays and legal complications affecting your international operations.

• Business credibility and trust: Cargo insurance communicates professionalism and accountability to your business partners. Demonstrates:

• Stronger business relationships.
• Increased customer confidence.
• Competitive advantage in bids and contracts.
• Better terms in commercial agreements.

How to obtain cargo insurance

1. Assessing insurance needs: A company should thoroughly assess your specific needs based on the nature of your goods, frequency of shipment, transportation routes, and other relevant factors.
2. Choose a reliable insurance provider: Research and compare different insurance providers. Finally, select a reputable company with a strong claims handling and customer service track record.
3. Understand the insurance documentation: Carefully review the insurance policy documents, understand the terms and conditions, coverage limits, exclusions and claims procedures to avoid surprises later.

What is the difference between cargo insurance and a Motor Truck Cargo policy?

It is very common for there to be confusion about the differences between cargo insurance and a Motor Truck Cargo policy. And while they may sound similar on paper, they actually have enough differences to make them different:

Cargo insurance

• Provides broader coverage for goods in transit via ALL modes of transportation (ocean, air, road, rail).
• Covers cargo from “warehouse to warehouse” i.e., from the point of origin to final destination.
• Usually purchased by the cargo owner (shipper).
• May cover international shipments.
• Usually follows the cargo regardless of the method of transportation used.
• Covers such things as:
  • Natural disasters.
  • Theft.
  • Damage during loading/unloading.
  • Loss in transit.
  • General average (maritime law term for shared losses).

Motor Truck Cargo Insurance (Motor Truck Cargo):

• Specifically covers goods while being transported by truck.
• Covers only the overland portion of the trip.
• Mandatory by law for trucking companies/carriers.
• It is contracted by the trucking company, not the shipper.
• Limited to trucking.
• Usually covers: Collision damage, fire damage, loading/unloading accidents specific to trucking.

In conclusion

The difference between having or not having adequate cargo insurance can mean the difference between a minor mishap and a business crisis. Although we are not an insurance provider, our experience allows us to advise you on the best practices to protect your cargo.

When you work with UTB Logistics, you have a partner who:

• Helps you understand the risks specific to your operation.
• Clearly explains your protection options.
• Guides you to make informed decisions.
• Accompanies you in every step of the logistics process.

Don’t leave your cargo and the future of your business to chance. As your international logistics advisors, we want to make sure you have all the information you need to make the best decisions for your business.