Cargo Insurance Explained
Learn why shippers need a cargo insurance policy and how to lower your risk
A chemical fire on the cargo ship MV Express Pearl off Colombo, Sri Lanka in May 2021 reminds us all that valuable goods can be lost and damaged in transit; cargo can also be stolen while it’s on the move.
What Could Go Wrong?
In May 2021, we were reminded that cargo can suffer irretrievable loss and damage in transit. Hour-by-hour reports from Sri Lanka described the chemical fire raging on the cargo ship MV Express Pearl as the vessel floundered in waters off the capital city and major port of Colombo. All crew members were rescued by the Sri Lankan navy but the ship and its freight containers were catastrophically damaged.
Although rare, major maritime failures tend to be spectacular. One of the worst on record is the destruction of MOL Comfort, which broke in two in mid-2013 sending nearly 4,300 containers to the bottom of the Indian Ocean. Fortunately all crew members survived by abandoning ship swiftly and safely.
Research by the World Shipping Council (WSC) in 2017 noted that some 6,000 container ships were active on the world’s seas and waterways at any one time. This volume of cargo amounts to approximately 90% of all global trade.
Statistically, the skies provide the safest way to travel but air freight can still suffer damage and cargo loss from time to time. High-profile incidents include the 2010 Lufthansa cargo flight 8640 which touched down too hard in Riyadh, Saudi Arabia and broke up on the runway, with a fire destroying the midsection of the airplane. The captain and first officer on board were able to evacuate but sustained injuries.
Road accidents account for significant levels of cargo loss each year. In addition cargo theft is a growing threat, occurring at truck stops, roadside parking, and even with burglaries from truck yards. Entire vehicles and trailers can be hijacked at gunpoint and, while a driver takes a break, their vehicle may be forcibly opened and the contents emptied. Food, beverages, alcohol, and tobacco are most commonly stolen as well as auto parts and electronics.
Rail disasters are relatively few and far between, but there was a cluster of derailments in March 2021, for example. More than 40 railcars carrying mixed freight including hazardous materials crashed into the sand of the Southern Californian desert. Another 20 carriages of a freight train derailed in Russia’s Siberian region, and more than 20 carriages derailed in Plymouth, MN, fortunately all without injuries. And just a couple of weeks later, two freight trains collided in the Czech Republic.
Cargo loss also occurs with cargo during storage. The catastrophic 2020 warehouse explosion at the port of the city of Beirut resulted in an estimated $15 billion in property damage and tragically more than 200 deaths and 7,500 injuries.
How Much is Lost?
Container cargo losses in any particular year can vary substantially. In 2020, when overall maritime traffic was significantly lower due to the COVID-19 pandemic, almost 2,000 containers were lost in just a single incident in December – this “cargo carnage” was incurred by the ONE Apus container ship 1,600 nautical miles northwest of Hawaii.
Considering cargo theft, records estimate the cost to be tens of billions of dollars worldwide each year. Back in 2015, the British Standards Institute assessed global cargo crime cost $22.6 billion and, more recently, analysis suggests the US alone now has a $15-$30 billion dollar problem.
In EMEA cargo theft incidents doubled between 2018 and 2019 (rising from 3,981 to 8,548 incidents), with an average “major cargo crime” value of $641,200, according to the Transport Asset Protection Association. In two separate incidents, car parts worth more than $2,000,000 were stolen from trucks in Romania and in Germany. Most spectacular of all, jewelry and precious metals worth nearly $21 million were stolen from a facility in South Africa.
What Else Can Happen?
Alongside headline-making disasters and crimes at sea, in the air, and on land, there are a multitude of small and sometimes quite mundane loss events. While steps should always be taken to protect cargo loss, the chance of in-transit freight damage or loss is much higher than the chance of, say, a house fire.
If a container or some item of cargo is dropped or broken, this can cause physical freight damage. Another risk is wet damage, typically caused by moisture, condensation, rain, and seawater ingress. In addition, cargo can be damaged by contamination and infestation, and may suffer temperature related damage if the goods are perishable. And opportunistic threat is a constant danger.
Reasons for these cargo loss events can include improper or insufficient packaging to protect the cargo, using the wrong container type, failing to maintain the correct temperature and humidity settings in a temperature-controlled container, overloading and improper weight distribution, and incorrect labelling – particularly for hazardous goods – causing incorrect stowage as well as security and oversight failures.
With all of these risks in mind, there’s a strong argument for securing a good cargo insurance policy rather than relying on international freight conventions for compensation.
How Can You Lower Risk?
We identified some catastrophic cargo events along with other, more mundane cargo loss events occurring every day around the world. Cargo 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. Now let’s explores the huge financial risk of relying on international freight conventions for compensation instead of securing a good cargo insurance policy.
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 a cargo insurance policy, 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 a cargo insurance policy 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 Cargo Insurance 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.