HOW CAN YOU LOWER RISK?
Why Shippers Need Cargo Insurance
Damage, loss, and theft can happen to cargo at any time and in any place. And the likelihood increases with multiple points of handling. This article explores the huge financial risk of relying on international freight conventions for compensation instead of securing a good cargo insurance policy.
As every shipper knows, cargo damage, loss, and theft can happen at any time and place, to any type of cargo. In a previous article in this series, we identified some catastrophic cargo events along with other, more mundane loss events occurring every day around the world. Loss and damage are often due to negligence, lack of expertise, laziness, and cost-saving shortcuts. Carelessness, poor attention to detail, insufficient packaging and opportunistic criminals will inevitably increase shipper’s risk.
Multiple Points of Handling
In fact, all of these things can happen when an international shipment involves multiple points of handling. During one journey, there could be multiple stakeholders or ‘hands’ that come into contact with the shipment.
These include suppliers and contractors that load the cargo, as well as logistics providers delivering cargo to hub warehouses and onward from the warehouse to the sea port or airport terminal for example. And there are stevedores who move the goods within the port or airport and onto the vessel or aircraft. Added to this, cargo must be checked and processed by customs officials and moved through customs warehouses. And when the goods finally reach their destination country, they will often need a final truck journey to reach the consignee.
Although there are international conventions for compensation when cargo is damaged or lost, the payout is much lower than the value of the goods. This is because freight liability reimbursements are typically based on cargo weight, not cargo value. And, critically, the cargo owner must prove that the carrier was negligent – an adversarial process that can take months and, logically, will always exclude any type of natural disaster or “Act of God” that the carrier could never be held accountable for.
Mind the Gap
To understand why shippers need cargo insurance, let’s take a look at the gap between compensation without insurance (according to international freight liability conventions and based on cargo weight) and compensation with insurance (based on the full cargo value). Compensation calculations differ depending on the mode of transport, so here are two examples – one involves air freight, the other ocean freight.
Shipping by Ocean
In our first example, two milling machines with a combined weight of 2,850 kg are transported by sea and lost in transit. Assuming the carrier is found liable and the claim is subject to freight liability, under the weight-based Hague Visby rules the shipper will get back only $7,980 in compensation, far less than the machines’ true value. But with a cargo insurance policy in place, the shipper will receive the total value of both machines in compensation – incurring no financial loss to their business at all. That’s a big gap: $7,980 versus $70,000!
Shipping by Air
In our second example, a shipment of luxury handbags and accessories is completely destroyed during transit by air. With this shipment, cargo value is high but the weight is relatively low – the goods are worth $120,000 and the total consignment weighs 1,560 kg. Once again, let’s assume the carrier is liable and the claim is subject to freight liability, this time under the Montreal Convention. Without insurance, the shipper would be compensated just $34,320 but with insurance they would receive $120,000.
When you don’t have a cargo insurance policy, obtaining compensation can be a time-consuming process that distracts your shipping team from their other important tasks, with no guarantee of success. So it makes sense to at least consider insuring your cargo before transporting it, however mundane the move may seem.
Buying the Right Policy
As with any insurance, it’s important to make sure that your cargo insurance policy meets the needs of your specific business as the differences between a good and bad policy can cost your business dearly.