Trouble on the High Seas?

By | September 22, 2008

Understanding and Planning for Exporters’ Risks While Cargo Is In Transit


In the world of foreign trade, making the sale is only half the battle. Once the sale is completed, the arduous process of getting the merchandise from the seller into the hands of the buyer in a timely manner and in good condition begins. Understanding and planning for the risks faced while products are in transit are just as important as selecting a transit carrier and packaging the products.

From heavy weather to customs intervention to theft, exporters are faced with innumerable risks once their products are shipped. Unfortunately, many small and midsize companies put themselves at risk by relying on someone else — whether their freight forwarder or customer — to provide ocean cargo insurance for them.

Consider what happened to a U.S. manufacturer that sold medical equipment to a foreign buyer. In that case, the terms of sale made the buyer responsible for insuring the shipment.

While in transit, the medical equipment was stolen. After the loss, the manufacturer learned that the customer’s insurance policy excluded theft. The buyer refused to pay for the shipment because he could not collect under the insurance policy.

Because the customer was responsible for arranging the insurance and without any ocean cargo insurance of its own, the manufacturer suffered a sizable loss.

Considering the Options

U.S. companies are increasingly turning to overseas markets as the declining value of the dollar makes U.S. exports cheaper and, therefore, more attractive to foreign buyers. As more and more manufacturers, distributors and service organizations export and import products, they need to make sure they have appropriate ocean cargo insurance to protect themselves from a loss.

As the medical equipment manufacturer loss scenario demonstrates, relying on a third party’s ocean cargo insurance may lead to gaps in protection. While relying on freight-forwarders or customers to provide insurance may seem more convenient, the lack of control over the type of insurance purchased and the policy’s terms and conditions may prove costly in the long run. The risks faced by exporters are complex. Understanding them can help exporters decide which insurance route to take.

When evaluating whether to purchase a cargo policy or use a third party, the exporter should consider the following:

  • What is the commodity or property to be shipped and the risks to loss or damage while in transit?
  • How are the goods being packed and prepared for shipment?
  • What are the terms of sale governing the goods?
  • Where are the shipments going and by what route?
  • Will the insurance apply through to final destination or to port of discharge only?
  • What exposures are present in the locations where the property is being shipped to or from? Are roads adequate for overland transit to or from the port or airport? What is the risk of theft or hijacking?
  • If the buyer or logistics company wants to provide insurance for the shipment on importer’s or exporter’s behalf, is the insurance adequate to cover the financial interest?

Knowing the answers to the questions and understanding how the policy in question will respond can help an exporter make the right decision.

It’s also important to consider policy exclusions. Even though a third party may have purchased insurance, the policy may exclude certain kinds of losses, making it difficult to collect on a claim. Without being able to examine and understand the policy language, an exporter is at increased risk.

For example, a machinery manufacturer sold a sensitive high-tech machine, intended for use in a clean room, to a customer in China. When the machine arrived at the port in China, the customs inspector required the shipment be opened. Opening the package exposed the shipment to dust and moisture, which caused significant damage to the machine. When the claim was submitted to the insurer, it was denied as the policy only protected damage done by U.S. Customs agents.

Valuation is also a key consideration in ocean cargo insurance. A U.S. importer may want full replacement cost of the goods being purchased from an overseas vendor. But those goods may be insured only to invoice value under a policy provided by a third party, leaving an exposed, uninsured loss for the buyer.

Reducing the Risks

To reduce the unknown risks to their business due to transportation of their goods, U.S. exporters should consider purchasing their own ocean cargo policy rather than rely on someone else for the protection. This way, they can be confident of the policy terms and conditions.

Open ocean cargo policies, purchased by the company facing the transit exposure to its goods, apply to all shipments made over a specific time period rather than to a specific shipment. The typical candidate for this insurance anticipates a steady volume of shipments to be insured throughout the policy year. Terms and conditions are negotiated based on the commodity being shipped, the packing being employed and the voyages being taken.

“Stray risk” ocean cargo policies are individualized, per-shipment policies. These polices are often purchased by smaller companies who ship items infrequently. The terms and conditions of these policies are negotiated similarly to the open cargo policies, but are established each and every time a shipment is made.

For small and midsize companies, a U.S. ocean cargo policy is typically a good fit. Major global companies with foreign subsidiaries, however, may need a locally admitted policy — a policy issued by a locally licensed insurance company to cover the risks within a particular country (domestic inland) as well as ocean cargo to some jurisdictions. These programs operate similarly to the controlled master program concept for other lines of insurance, where difference in conditions/limits protection is provided on the master, complemented by country-specific local policies issued in the local language.

Global Reach, Local Touch

Whether they are seeking a U.S. policy or a local policy, exporters can benefit by choosing an insurer that is financially strong and has expertise in foreign trade and cargo insurance. The ideal insurer will have a broad global network of company-owned offices that can provide on-the-ground claims handling service.

Although ocean cargo policies can be purchased anywhere in the world, by working with a U.S. insurer, U.S. exporters can also reduce the risk of delayed claims payments and other hassles by working long distance with a foreign carrier.

The shipping industry has come a long way since the days when British and other European merchants were shipping tea, tobacco, silk and spices from their far-flung colonies.

It’s still a risky business, however, and cargo can be lost, stolen or damaged anywhere between the warehouse and the final destination. Ocean cargo insurance provided by freight forwarders or by foreign customers or vendors may fall short and fail to provide U.S. companies with the insurance they need.

By clearly setting out the terms of sale ahead of time and by taking control of the insurance transaction and purchasing their own cargo policy, companies can be sure that their cargo will be protected and will avoid the risk of a loss.

Topics Carriers USA Manufacturing

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Insurance Journal Magazine September 22, 2008
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Agency Technology; High Risk Property/Catastrophe Risks; Digital Product Guide