Table of Contents

Is Your Shipment Safe? Marine Cargo Insurance Explained (Complete Guide)

Sea Freight

shipping container and life saving float

Marine cargo frieght insurance is an essential yet complicated and broad subject in the world of freight, and it is easy to get overwhelmed by the amount of information out there.

That is why we have put together this guide, covering some of the most important aspects to consider when insuring your cargo.

What is Marine Insurance?

You have heard of marine insurance, and maybe seen it mentioned on a commercial invoice, but do you understand exactly what it is?

Marine insurance is a broad term that includes but is not limited to the of risks associated with “perils of the sea” or “maritime perils”. This term can be used to describe insurance for cargo owners seeking to protect their goods whilst being transported, forwarders and other agents involved in the logistical aspects, through to carriers and shipping lines who take possession of cargo to facilitate or transport that cargo.

Despite the word “marine”, marine cargo freight insurance covers the movement of goods by any mode of transport. This means that you will often see the term included for shipments by airfreight, road transport, or by rail – not only by ocean freight.

A note on cargo insurance vs freight insurance

It’s important to highlight a distinction between “Cargo” insurance, and “Freight” insurance.

Cargo insurance predominantly refers to insurance protecting the interests of the party owning the cargo on what you can consider a “first party” basis.

Freight insurance, in a number of markets can be used to refer to liability insurance that forwarders and agents often have that protects their interests under what you can consider a “Third Party” basis.

For clarity, the terms “marine”, “freight”, and “cargo” insurance in this article refer to the provision of insurance on behalf of the owner of cargo on a first party basis.

The risks covered by marine and cargo insurance

Depending on the type of goods and mode of transport, the risks covered by cargo insurance include but are not limited to, loss of or damage to cargo as a result of:

  • "All risks” (except those noted in the insurance policy as excluded)
  • Accidental damage
  • Fire, or explosion
  • Vessel or craft being stranded grounded sunk or capsized
  • Overturning or derailment of land conveyance
  • Collision
  • Discharge of cargo and port of distress
  • Malicious damage
  • Damage from natural disasters
  • Piracy
  • General average sacrifice*, jettison*

*There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.

*Jettison: The intentional throwing overboard of part of the cargo or some piece of the ship to save the ship or its cargo.

Beware that not all risks are covered as part of a standard insurance policy. Some risks can be added, normally subject to caveats and/or conditions, but there are a number of risks that are always excluded so remember to read your insurance policy carefully to understand what is and isn’t covered.

Types of freight cargo insurance coverage

Due to the range of commodities, risks, and budgets you have under consideration, there are several levels of cargo insurance cover.

The following provides you with an idea of the main levels of cargo insurance cover available.

Institute Cargo Clauses (C): named perils

Institute Cargo Clauses (C) offers what is generally considered the most basic level of insurance coverage. It covers loss of or damage to cargo reasonably attributable to the following named perils:

  • fire or explosion
  • vessel or craft being stranded grounded sunk or capsized
  • overturning or derailment of land conveyance
  • collision or contract of vessel craft or conveyance with any external object other than water
  • loss or damage to cargo caused by discharge of cargo at a port of distress
  • general average sacrifice, jettison

Institute Cargo Clauses (B): Named perils  - extended

Institute Cargo Clauses (B) covers the named perils listed under Institute Cargo Clauses (C) but is extended to also include:

  • earthquake volcanic eruption or lightning
  • entry of sea lake or river water into vessel craft hold conveyance container liftvan or place of storage
  • total loss of any package lost overboard or dropped whilst loading on to, or unloading from, vessel or craft

Institute Cargo Clauses (A) or (Air): All-Risks

As the name suggests, this type of cargo insurance covers all risks of loss and damage to the goods – except as excluded. These exclusions are listed in the Institute Cargo Clauses (A) and/or your insurance policy.

Institute Cargo Clauses (A) is the most common level of cargo coverage used for general freight to provide the maximum level of insurance.

Additional options for coverage

Additional insurance cover can also be provided, with the most common being:

  • War risks
  • Strikes
  • Theft, pilferage and non-delivery
  • loss or damage to refrigerated cargo reasonably attributable to breakdown of refrigerating machinery

Marine cargo insurance by transport legs

In addition to the level of cover which you need, you also need to ascertain which part of the journey your goods are covered for.

Here are a couple of examples of how transit insurance can be covered by legs:

Warehouse-to-warehouse

Warehouse-to-warehouse transit insurance provides you with maximum duration of insurance cover, from the time the cargo is loaded at origin, continuing throughout the ordinary course of transit until unloaded at the final destination. This includes all modes of transport, whilst being transhipped,  and whilst contained within incidental storage, e.g. port storage awaiting delivery, customs clearance, etc.

Whilst your insurance policy may provide this broad scope, please bear in mind that the terms of sale (Incoterms) you have elected to use will determine when the risk to the cargo transfers from buyer to seller, and also who is responsible for insurance at those points.

Inland marine cargo insurance coverage

Inland cargo insurance can often be as simple as a local inland shipment within a region, state or country. These shipments can be at a much lower risk of loss or damage because they do not get subjected to the perils of the sea or multiple loading/unloading/transhipment points that occur for overseas transits.

This can also be applicable to imports and exports where your responsibility for insurance commences upon the unloading of an overseas shipment at the  destination port, or finishes when the cargo is placed onboard a vessel at the port of loading. Dependent on the Terms of Sale (Incoterms) your risk for loss or damage to cargo is diminished and is at the risk of the other transacting party.

The terminology used for inland transit can vary. Terms “All Risks” can be replaced with “Accidental Damage”, and also include other named perils like “Theft and non delivery”.

The difference between air freight vs sea freight insurance

Whether or not your goods are moving by air or sea, most insurers will still refer to your coverage as marine cargo insurance.

The difference in risk to an insurer comes entirely from the different risks involved between sea and air voyages.

How much does marine cargo insurance cost?

Cargo insurance premiums can be calculated in multiple ways but the most common method is based on applying a percentage rate to the insured value of the cargo.

Multiple risk factors are used to determine pricing. Some of these factors include:

  • The type of cargo
  • The value of the cargo
  • Packing and shipping methods
  • Mode of transport
  • Length of journey and/or the countries involved.
  • Level of cover required.
  • Deductables/excess.

This blog cannot comment on the premiums that are normally applicable because there are too many variables involved across multiple insurers and multiple countries that all have their own methodology. However, it is safe to say that the lower the risk across the factors noted above, the more competitive your insurance premium should be, and vice-versa.

For more information, see our guide on a breakdown of all sea freight costs.

What are the main types of insurance policies?

Cargo owners can decide to take out individual single transit policies.

This can be beneficial because they declare the specific shipment and only pay a one-off premium for it.

If the cargo owner has multiple shipments per year, they may elect to take out an annual policy. This can take the form of the following two most common options:

  • Open cover: Cargo owners declare shipments as they happen under an open cover policy based on agreed conditions and premium and is payable at agreed intervals, immediately, monthly, quarterly etc.
  • Annual Policy: Cargo owners declare the estimated annual sendings upfront, and pay a premium. Then, upon expiry of the policy, they declare actual sendings and an adjustment is made to premiums using the agreed premium rate.

How much should I insure my cargo for?

You should take into account the costs involved during shipping that you will potentially lose should your cargo be damaged, such as:

  • The value of the goods
  • Costs of shipping:
    • Freight costs, customs agents/clearance fees, packaging, documentation, carrier fees, inland haulage, warehousing and packing
  • Duty if incurred.

Once you have a more holistic view of the costs that can be incurred, you can choose the level of cover that balances risk vs premium cost.

In most cases, cargo is insured for 110% of the value plus freight. This may be due to the requirements of a Letter of Credit, or to ensure that any other additional costs that may be incurred (or currency fluctuations) can be catered for.

Excess

Insurers will often apply a Deductible (excess). This is normally the first amount a policy holder is required to pay in the event of a loss.

Insurers apply deductibles to align the interests of the cargo owner with them to ensure both parties have an interest in mitigating/minimising the risk of loss.

As with any insurance, the level of cover you choose should be relative to the risk of loss that you face and your business’ ability to rebound if there is an issue.

Little-known limitations of marine insurance

You are not always covered, even if you have marine cargo insurance

Even under ‘All Risks’ cargo insurance there are limits. Here are some of the common exclusions for loss or damage to cargo that you can find within most marine cargo insurance policies:

  • Ordinary leakage, loss in weight or volume, wear and tear
  • Rejection or destruction of the shipment by customs authorities
  • Inherent vice
  • Insufficiency of packing/packaging when carried out by the policyholder or prior to the start of the transit
  • Intentional or criminal acts performed by the policyholder or their employees
  • Delay
  • Insolvency or financial default of the carriers (if the policyholder is aware of said insolvency/financial default)
  • Nuclear weapons, radioactive contamination/waste/fuels, etc

You can make a claim against the carrier or your forwarder

In the event that a loss is not recoverable by insurance, you may be able to make a claim against the carrier or forwarder, which is normally a condition of your insurance policy.

Carriers and forwarders traditionally operate under robust Bills of Lading or other Terms and Conditions. This often allows them to reject any demand against them or at the very least limit their liability.

Their limitation of liability depends a lot on what the underlying International Acts or Conventions are in effect, e.g. Carriage of Goods Act, Montreal Convention, Haigue Visby. This liability is calculated using the weight of your cargo and Special Drawing Rights (SDR), which is a virtual currency maintained by the International Monetary Fund (IMF).

With the risk of not receiving compensation from carriers, forwarders and/or receiving partial recovery, it becomes very important for cargo owners to protect their own interests and source their own cargo insurance policy.

Without cargo insurance, obtaining a successful recovery against a carrier can be difficult. If your insurer has paid out your claim, they may be more successful in obtaining a recovery with the help of their various recovery agents or legal support, which is reimbursed against your claim resulting in a healthier claim record.

You may not be paid in full if the carrier declares General Average on your cargo

General average is declared by the vessel owner where a sacrifice is made to maintain the safety of the vessel. For example, if cargo is thrown overboard when a vessel is grounded due to shallow tides and too much weight.

When general average is declared, the loss of goods is compensated in part by the other cargo owners who share the transit – as well as the carrier themselves. General Average ensures that all parties who benefited from the sacrifice share the loss proportionately.

The contributions made by cargo owners are determined by the value of their goods against the total value of goods on board and the value of the goods that were sacrificed.

General Average payments are covered by marine cargo insurance. However, it should be noted that cargo owners who fail to insure their cargo will have to pay their share of General Average from their own pocket.

Forwarder, Importer & Carriers: who is liable for what?

When it comes to marine freight insurance, understanding the liability of each party is essential when making a claim.

Here is a basic overview of each party’s responsibilities when it comes to freight and cargo coverage:

Forwarder

Your freight forwarder is required to provide correct and complete information to the carrier so that they can make the appropriate arrangements for the cargo.

Failure of the forwarder to notify of details relating to hazardous goods, for example, can cause incorrect stowage position and increase the risk of damages.

Importers and sellers

Depending on the Incoterm used, the shipper or the importer will be responsible for booking carriage and loading the goods. The seller may not know the route the goods will take, or they will be the one deciding it.

It is the responsibility of the importer and seller to communicate with each other regarding the route and the modes of transport involved so that the goods are packaged appropriately for transit. This information must also be given to forwarders and carriers so that they can make informed decisions on their responsibilities. Both parties should also ensure that they know which party is responsible for insurance.

Carriers

The carrier of the goods, no matter the mode of transport, is responsible for transporting the goods in a safe manner. This involves but is not limited to:

  • Providing a well-maintained vehicle/vessel for transport.
  • Following all safety procedures relating to transferring the goods from terminal to vehicle and vice-versa.
  • Ensuring that the goods are secured properly whilst on board.
  • Completing all interchange documentation and notifying of any damages in transit at the time of transfer.

Instances marine insurance is mandatory

Although marine cargo insurance is not mandatory for all movements, it is recommended to protect you from loss and/or damage.

There are some circumstances when you must have a contract of insurance for the goods in transit. These include but are not limited to:

  • When the Incoterms include the provision of insurance.
  • When the commercial contract of sale is not inclusive of an Incoterm which must include insurance, but it is otherwise listed as a condition of sale.
  • When trade agreements between the selling and buying country dictate that insurance is compulsory for your commodity, or when the laws of either country otherwise mean that insurance is mandatory during trade.
  • When the commodity requires cargo insurance for the carrier to accept the contract of carriage, such as when transporting some dangerous goods.

Incoterms and marine insurance

There are two international commercial terms (Incoterms) which include the mandatory provision of freight insurance by the seller:

  • Carriage and Insurance, Paid-to (CIP)
  • Cost, Insurance, and Freight (CIF)

When you are buying or selling goods with these Incoterms, although the risk to the cargo transfers to the buyer, the seller is responsible for ensuring that insurance is in place before the goods are shipped. Even if you are the buyer, you should check with the seller this is in place to avoid complications in the event of an accident.

If you are not trading with the CIF or CIP Incoterms, then you still need to know when you are at risk and when the other party is.

Here is the point when transfer of risk from the seller to the buyer occurs with the other Incoterms:

  • Ex-Works (EXW): at the seller’s premises.
  • Free Carrier (FCA): at the nominated collection point.
  • Free Alongside Ship (FAS): once the goods are on the port.
  • Free On-Board (FOB): once the goods pass the ships rail (are no longer at port).
  • Carriage Paid To (CPT): at the nominated collection point. *
  • Cost and Freight (CFR): once the goods pass the ships rail (are no longer at port) *

Delivered at Place (DAP), Delivered Duty Paid (DDP), and Delivered at Place Unloaded (DPU) are all the seller’s responsibility until delivery at the destination. Whilst not obligated to insure under these Incoterms, sellers are the ones at risk of loss or damage so should consider arranging insurance.

*Note that the transfer of responsibility for insurance does not align with the transfer of costs for carriage with the CPT and CFR Incoterms, meaning that the seller will pay for the freight, but the liability is with the buyer.

Incoterms® 2020 chart

How do I make a freight cargo insurance claim?

If you do need to make a claim, then it is important to ensure that you follow the correct processes so that you can make it as easy as possible.

What to do in the event of loss/damage which may result in a claim:

  1. Always inspect the cargo on arrival including but not limited to:
    • If your cargo arrives in a container, ensure that the container and its seals are examined immediately.
    • If the container is delivered damaged or with seals broken, missing or with seals other than that stated in the shipping document, make a note of this on the delivery receipt and retain all defective or incorrect seals; and
    • Take photographs of the damage wherever possible.
  2. Immediately notify the claims agent whose details can be found on your insurance certificate.
  3. Immediately notify your insurer or insurance representative.
  4. To assist in handling your claim a surveyor may be appointed to inspect the cargo and gather information.
  5. You are required to co-operate with the surveyor to enable the timely investigation/settlement of your claim.

How to protect your subrogation/recovery rights (and those of the Insurer) against third parties

  1. Immediately lodge a written claim against third parties for any loss or damage. This must be done even if you are unable to fully quantify the loss/damage. Check the Bill of Lading or Airway Bill for specific notification periods.
  2. DO NOT give clean receipts where cargo is in doubtful/damaged condition.
  3. In all cases:
    • Take all reasonable steps to minimise further loss or damage.
    • Act to safeguard the insured cargo; and
    • DO NOT dispose of any damaged cargo without first giving Insurers and/or their agents the opportunity to inspect it.

Documents required for processing your marine claim

  1. Completed claim form
  2. Loss details and date of loss
  3. Original policy or certificate of insurance (where applicable)
  4. Bill of lading/air way bill/consignment note
  5. Commercial invoice in respect of the cargo
  6. Packing list/s (where applicable)
  7. Charterparty and/or contract of affreightment, if applicable
  8. Copy of correspondence exchanged with third parties regarding notification of loss or damage and their response, if any
  9. Documentation relating to outturn/receipt of cargo
  10. Quote for repairs/replacement
  11. Police report number (if applicable)
  12. Copy of temperature records (if applicable); and
  13. Copy of any specific packing/stowing instructions given to the carrier
  14. Any orders from authorities e.g. destruction orders

Please note that this list is not exhaustive and further documents may be required.

DO NOT accept any offers of settlement from third parties without first receiving authority from your insurers.

Liaise with the Claims Adjuster

In many cases, your cargo insurance company will send their own or an independent surveyor to look at the goods so that they can verify your claim. They can help assess damage, quantify your loss, direct you to claiming against third parties and assist with determining any salvage options.

Keep track of your claim and be patient

Depending on the nature of your claim, you may have a quick resolution or a lengthy delay. The latter is often true when there are multiple parties involved, such as when there is a vehicle collision and fault has not yet been assigned.

Read our helpful guide on advice on what to do if your cargo is delayed or goes overboard.

What happens if I do not have marine insurance?

If you do not have insurance, you are not only exposed to the loss of your cargo but also to:

  • Legal fees.
  • General Average contributions.
  • Loss of reputation if you cannot afford to quickly replace the goods for your end customer.
  • Additional freight costs to re-ship replacement cargo.

For these reasons, always consider the worst-case scenario and not only the loss of your goods when deciding on whether to take out marine insurance or not.

Is it worth insuring my goods in transit?

Whether or not you feel it is worth insuring your goods in transit will depend on your business’ ability to recover from an accident without it.

If you are considering saving money by not having cargo insurance, consider the following:

  • Can my business survive the total loss if there is a problem?
  • Can I afford to quickly replace goods if there is a problem so that I can provide for my customers?
  • Is there room in the margins to accept a small reduction in profit?

If you answered yes to the last one and no to either of the first two, it is recommended that you get marine insurance. Generally, it is easier to always incorporate your premium costs into your overall costs for the shipment than it is to rebound from a significant loss – and it is better to be safe than sorry.

Preventing the most common type of claim: Cargo Damage

A shift of the load in transit is a common type of claim that importers experience. This is when the packages, whether palletised, in cartons, or otherwise, move from their position and become damaged or unstable.

Depending on the type of commodity, the damage can render the shipment useless or result in the cargo being diverted elsewhere for safe unloading or examination. For example:

  • A pallet of paper must be stacked dead straight for feeding into a printing machine. If it tips over or gets a lean because another pallet has fallen on it, the only value is now in scrap.
  • Water infiltrating a container of seeds might create conditions for moulds and other toxins to multiply, making some of cargo unfit for human consumption and attracting fees from health inspectors.
  • A shift in metal pieces might make removal from a container by forklift impossible, so the shipment must be diverted to a yard with special equipment for unloading. This attracts additional storage, warehousing, and haulage fees.

This is why it is essential to package your goods in a way which can withstand weeks on end at sea, as well as the container or airfreight container being lifted multiple times. Check our guides below on how to do so:

Packing Cargo for Sea Freight: How to Prepare Your Shipment

Packing Cargo for Air Freight: How to Prepare Your Shipment

Dead Space Charges: How to Avoid Them When Packing Your Cargo

Case study I – Real Example of Cargo Damage Claim

Our client received an airfreight shipment with broken cardboard pallet feet, caused by water damage from rain.

Upon arrival in Australia, the airfreight ground handler collected all pallets and tied them down onto the truck. But due to the wet legs, it was clear they could not be transported safely without damage.

The pallets were removed from the truck and the customer called to discuss breaking down and repalletising the cargo.

We understand that cardboard pallets were used for cost efficiencies: cardboard is lighter than plastic or wood, hence cheaper as airfreight costs are calculated based on volumetric ratios (a formula that considers weight and size of the goods – including the packaging).

An alternative would be for the shipper overseas to pack a ULD (Unit Load Device) themselves as this will ensure that only their freight is on the unit as opposed to being consolidated with other freight. The ULD (aka airfreight containers) would then be broken down when it arrives at the destination and delivered as pallets to the receiver – a process with less risk of damage.

Always lean on your forwarder to weigh your options before making a decision.

The claim process

In this case, when ICE advised the agent at origin about the claim against their insurance, they sent ICE a form asking for the following details:

  • Reason for lodgement.
  • Number and weight of affected pieces.
  • Amount claimed ($ value).
  • Copy of airway bill.
  • Copy of ‘Intent to claim’ acknowledgement receipt.
  • Copy of House Airway Bill (if applicable).
  • Copies of the Commercial invoice and/or packing list
  • Destruction certificate (if goods have been disposed)
  • Repair quotation (where applicable)
  • Evidence of attempts made to mitigate losses (if available)
  • Copy of loss adjustor/marine surveyor’s report (if applicable)
  • Subrogation letter from insurers to advise (if money has been paid re the claim under any policy or from another source)

Also included were the following timelines for claim validity:

  • Total loss - 120 days from issuance of airway bill
  • Partial loss - 14 days from receipt of goods
  • Damages - 14 days from receipt of goods
  • Delay - 21 days from when the cargo was placed at disposal of person entitled to delivery

Case study II – a near miss

Another client received a full container to their site for unloading, and discovered there was water inside the plastic wrap of the palletised cartons. When the client sent photos to ICE, we investigated with the shipper to see how this could have happened.

Our agent sent photos of the loading and we ascertained that it had been raining on site shortly before the container was packed. The goods were also packed and wrapped inside the container.

This meant that any rain droplets that had landed on or condensed onto the cartons were not given the opportunity to dry before the doors were closed – trapping the water inside the container.

In this case, there was no mould or damage to the cargo itself, so the client did not proceed with the claim. However, we were able to provide their shipper with guidance on how to avoid damage in the future.

Bonus Tips: Container damage claims

It costs a lot of money to keep containers in good condition, so carriers pay close attention to damages and ensure that they get the responsible party to pay for them.

This is why it is important for you and your buyer/seller to document how containers are received for loading and how they are received for unloading.

Here are some tips for avoiding container damage claims from the carrier:

  • Take photographs with timestamps before loading and unloading, and include a photo with the container number in the set. This includes getting a photo of the seal before breaking it. Also, take photos as you unload to show the condition of the container as you get deeper.
  • Notify your forwarder of any damages immediately so that they can inform the carrier and the freight insurance provider.
  • Make sure that the container is completely clear of debris once unloading has finished. Carriers are known to charge hundreds of dollars for removing debris that you can do with a five-minute sweep out.
  • Be careful with machinery such as forklifts during loading and unloading.
  • Reject containers for loading if there are noticeable issues which could become big problems in transit.

In general, ensure that you leave the container in such a condition that you would be happy to load it if it arrived for your export shipment.

Request a Marine Insurance Quote, Obligation-Free

Always ask your forwarder to include cargo insurance in your shipping quote. This is free of charge and will help you make an informed decision.

Disclaimer: this information is of a general nature only and does not take into account the specific needs of any one company, person, or cargo owner.

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