CARGO INSURANCE: A REMEDY TO LIMITED FREIGHT LIABILITY
Even when cargo is handled with the utmost care, the Freight Forwarding Experts know that in ocean logistics, unexpected events can occur and goods can be damaged, lost or stolen. Included in any contract of carriage, shippers and consignee wrongly assume that freight liability protects the value of their cargo, often ignoring its stark limitations. Find out why your next shipment needs cargo insurance.
What Freight Liability Covers & What It Does Not
Freight liability is included in any carriage contract. Ocean shippers and consignees will nonetheless be interested in additional cargo insurance because in case of a claim, freight liability reimbursements will typically be based on weight and not on the value of your cargo, thus dangerously exposing their bottom line.
Moreover, this partial reimbursement can only occur if the cargo owner manages to prove that the carrier was negligent – this process alone generally takes several months, leaving the bottom line exposed. This duty of proof of negligence logically excludes any type of natural disaster or a sinking ship.
What the Rules Are & What They Say
The rules of freight liability were established in 1926 with the Hague agreements. Nowadays, most shipments will be covered by the Hague-Visby rule (a 1968 revision of the former), the Hamburg rule (1978) or the Rotterdam rule signed off in 2009. The rule in usage will depend on the country in which your carriage contract has been signed and your individual business partner. The three rules do however cover generally similar terms, especially when it comes to the responsibilities of the carrier.
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The three rules generally say that the carrier is responsible for making the ship suitable for a sea voyage, man it with enough crew members, and handle the cargo with reasonable care. This includes loading and unloading.
The period for which he is responsible is limited and is defined as:
- Under the Hague-Visby and Hamburg rules, the time between the loading of the goods onto the ship and their discharge
- Under the Rotterdam rule, the scope is simply referred to as wherever the carrier becomes in charge of the cargo.
Your cargo is only covered by freight liability when it is in the hands of the carriers – contrary to your shipment’s journey, freight liability does not go door-to-door!
The duty of proof is shared: to claim liability, the cargo owner will have to prove that the carrier failed to perform their duties during the applicable period; the carrier will have to prove that they did not.
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While the Hague-Visby and Hamburg rules also cover similar dispositions, the Rotterdam rule lists with greater clarity all the circumstances under which the freight liability will not cover cargo owners, notably including:
- Acts of God, like an earthquake or a tsunami
- Accidents that can occur at sea, like a ship sinking
- War, piracy and acts of terrorism
- Theft
- Quarantine restrictions
- Strikes
- Fire on the ship
- Any act considered to be the shipper’s responsibility, like poor packing or loading
How Much Can I Get Reimbursed With Freight Liability?
The three rules also share similar reimbursement values in case of a liability claim, as they are all based on weight.
Consider the following example: you are shipping goods worth US$ 70,000, weighting a total of 2,850 kg. The ship transporting your cargo sinks, and your goods are lost. Here are the approximate valuations you would be looking at if you managed to prove that the unfortunate accident was the ocean carrier’s fault:
- If your carriage contract was signed under the Hague-Visby rule: US$ 8,000
- Under the Hamburg rule: US$ 10,000
- Under the Rotterdam rule: US$ 12,000
While the Rotterdam rule is the most advantageous, it does not come anywhere near the actual value of your cargo.
Covering your sea shipment with additional insurance is vital because Ocean Freight’s liability terms feature the lowest weight-to-valuation ratio of all. A shipment valuated at US$ 8,000 under the Hague-Visby rule is valued at US$ 70,000 under Air Freight liability terms and US$ 30,000 under Road Freight.
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Under the Hague-Visby, Hamburg and Rotterdam rules, cargo value is calculated in Special Drawing Rights (SDR), an asset introduced by the International Monetary Fund (IMF) in 1969. As with any exchange rate, its exact value against other currencies varies daily.
As a matter of example, consider that it averaged at just short of US$ 1.40 throughout July 2020:
Liability value per KG of cargo*
Liability value per package*
Rule
In SDR
In US$ (if 1 SDR=US$ 1.4)
In SDR
In US$ (if 1 SDR=US$ 1.4)
Hague-Visby
2
2.80
666.67
933.34
Hamburg
2.5
3.50
835
1169
Rotterdam
3
4.20
875
1225
*whichever is greater.
Visit the IMF’s website for more information on the SDR and its real-time valuation.
How Do I Pick the Right Insurance?
Keep in mind that your cargo insurance is not designed to preserve your shipment – its purpose is to protect your bottom line. We have prepared the following checklist in consequence – and your insurance provider should be ticking all the boxes.
The right insurance:
- Covers the full value of your goods
- Covers the cost of freight in addition
- Covers your shipment on an all-risk basis
- Covers your high-risk commodities too
- Covers all locations of the shipment’s journey, door-to-door
- Features no deductibles and no excess, meaning that you do not have anything to pay towards a loss
- Provides claims settlement support in your own language
- Settles claims in your own currency
- Settles claims fast. While the classic freight liability process takes several months to settle, DHL Global Forwarding aims for the settlement of your claim within 30 days.
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You have read it in our first article on Incoterms the Incoterms distribute costs, but also the risks inherent to sea transportation. While the Carriage and Insurance Paid to (CIP) terms oblige the seller to contract an insurance policy from origin to destination, The Cost, Insurance and Freight (CIF) terms only to oblige them to insure the sea leg – and the others do not stipulate anything at all.
As a shipper or a consignee, you may want to double-check where the risks will be transferred to you (it does not always happen at the same time as the shipping cost) to know what your responsibilities – and that of your business partner – are! Just because one of the two parties insures the part of the journey under their responsibility does not always mean that the entire shipment is covered.
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You will generally be able to ensure your goods through your freight forwarder or a separate insurance provider.
The benefit of booking your insurance with your freight forwarder is that they will already be in possession of most of the documentation you need to make a claim and submit it for you.
It is possible to book your insurance separately, it will however then be your task to collect all the necessary documentation from all providers that partook in your shipment (forwarder, customs broker, ocean carrier...) prior to submitting your claim yourself.
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It depends on how frequently you ship goods. If you ship a few cargo shipments per year, you can just book it at the same time as your shipment.
If you are a regular shipper (with more than 5 shipments a year for instance), you are likely to benefit from yearly insurance, covering all your shipments at a reduced rate.
The content of this article is intended to provide a general understanding of the subject matter and does not qualify as legal advice. Specialist advice should be sought prior to contracting.
