International Trade Marine Cargo Insurance Explained

Let’s declare some definitions before going into details.

The Applicant (policyholder): the one who purchases the insurance.

Subject matter insured: the goods.

The insured: the person or organization covered by insurance.

The insurer: insurance company.

Principles of International Transportation Insurance

Whatever type of insurance, the insurer and the insured must follow the following principles:

1. The Applicant must have insurable interest in the subject matter insured.  If the Applicant is the Seller, it is clearly true. Unlike other insurances, in international transportation insurance, the insured is not required to have insurable interest in the subject matter when signing the contract. For example, in the case of FOB, the insured (Buyer) does not assume the risk until the goods are loaded on a ship. If the insured is required to have insurable interest in the subject matter, both parties will not be able to purchase the insurance. Simply put, the Applicant could only be the Seller or the Buyer.
2. The insurance contract is signed on the basis of utmost good faith and warranty. Utmost good faith requires the disclosure of all the important facts about the goods so that the other parties know what risk to prepare for. In real life transportation insurances, the insured should tell the insurer the subject matter of the insurance, the shipping conditions, the distance of transportation, packaging conditions, and anything else that relates to the possible risk the insurance is covering for. Warranty is a promise of the insured of doing or not doing something or a promise of some facts being true or false. Here are some examples: It is prohibited to use vessels more than 15 years old; the vessel should not enter some certain sea area; the goods must be legal. Besides warranties written in the insurance contract, there also implied warranties. Implied warranties are written in law or are conventions.
3. Principle of the indemnity means that when the goods are damaged or lost in situations covered by the insurance contract, the insurer (insurance company) has to recover the loss in accordance to the insurance contract. However, the compensation should not exceed the value of the goods.
4. Proximate cause. In cases of two reasons causing the damage or loss, the insurance company only needs to compensate the insured when the first reason caused the second reason. It is a bit complicated. Let’s just look at the examples:

Example 1: the insurer has purchased then water staining insurance for the goods. During sea transport, the outer package was stained by seawater, causing the goods to mold. Because the mold was the direct result of water staining, The insurance company is required to compensate for the loss.

Example 2: During war time, the insurer puts the goods that were insured in a warehouse. The warehouse catches fire when bombed by the enemy, burning all the goods. When asking for compensation, the insurance refused because the proximate cause is bombing, and bombing is not covered by the insurance.

Marine Cargo Insurance

International transport insurances can be divided into marine cargo insurance, inland cargo insurance, air cargo insurance, and post parcel insurance. Among all of them, marine cargo insurance is the oldest and the most widely used one. All other transport insurances have borrowed its principles and developed on top of it.

Risks

Extraneous Risks

The risks caused by things that are not related to the ocean are called extraneous risks.

• General Extraneous Risks. Fresh water rain damage, shortage, theft, tainting, leakage, breakage, humidity, heating, rust, and hook damage.
• Special Extraneous Risks. War, strike, non-delivery, and reject.

Loss and Cost

Depending on if the goods are completely damaged/lost or not, there are two types of loss and cost.

Total Loss

In a case of a total loss, all goods are damaged or lost. It could also be divided into two types:

Actual Total Loss

When all the goods are lost or severely damaged so that they are not usable, it is a case of actual total loss. For example, the cargo container fell into the ocean in bad weather. That is an actual total loss

Constructive Total Loss

When goods are damaged on the way, and total loss is inevitable, or to prevent an actual total loss and keep shipping them to the destination combined cost more than the insured amount, it is called a case of constructive total loss.

When constructive total loss happens, you could ask for full compensation and give up all the rights of the remaining goods; or you could ask for compensation for the lost/damaged goods only and keep the remaining goods.

Partial Loss

There are two types of partial loss:

General Average in Marine Insurance

Imagine a situation where a ship encounters some danger in the ocean. In order to keep as many goods as possible, the crew must give up some of them. When this happens, the goods that were given up are general average. If the engine of the ship broke down in the ocean and need to be repaired to keep going. The cost of repairing it is also general average.

The cost of the general average would be shared by the owner of the saved remaining goods on the same ship.

Particular Average in Marine Insurance

If a ship encounters a risk and some of the goods are partially damaged. That is a case of particular average. Unlike general average, the insurance company is paying for the loss

Types of Marine Cargo Insurance

According to the Ocean Marine Cargo Clauses, there are mainly three types of Marine Cargo Insur-ances.

Free from particular average (FPA)

Here are what FPA covers:

• In a case of total loss, the insured gave up all the rights to the remaining or damaged goods to the insurance company.
• Lost caused by stranding, hitting the rock, sinking, collision, fire, explosion.
• After stranding, hitting the rock, sinking, collision, fire, or explosion, if any natural disaster happens and the goods are damaged or lost.
• When loading/unloading/trans-shipping, one or more piece of goods falls into the ocean.
• The money paid while trying to save the goods in the situations mentioned above. The coverage is not larger than the insured amount.
• The cost of unloading, storage, and trans-shipping at a port of refuge when the ship encounters a shipwreck.
• The share of the total cost to be paid in a case of general average.
• When a ship collision happens, according to the shipping contract, the owner of the goods must pay for the loss. This loss is covered by FPA.

With Average (WA) / With Particular Average (WPA)

WPA covers all cases in FPA. It also covers partial loss caused by a natural disaster like bad weather, lightning, tsunami, earthquake, and flood.

All Risks

Besides everything in FPA and WA/WPA, all risks also cover any loss caused by extraneous risks mentioned above.

The start and end time of the Ocean Cargo Insurances follows the international convention of the warehouse-to-warehouse clause. The insurance starts when the goods leave the departure warehouse and ends when it arrives at the destination warehouse.

Additional Insurances

To cover more risks, you can purchase one or more of the following insurances alongside one basic insurance.

General Additional Insurances

• Clash and breakage
• Taint of odor
• Fresh water and/or rain damage
• Theft, pilferage, and non-delivery (TPND)
• Shortage
• Leakage
• Intermixture and contamination
• Hook damage
• Sweat and heating
• Rust
• Breakage of packing

If you have purchase FPA or WA/WPA, you may choose one of the above basic additional insurances. But if you have purchased all risks insurance already, there is no such need because everything is covered.

Special Additional Risk

Special Additional Risk insurance covers the loss caused by extraneous risk.

1. War. The war risks insurance clause covers the loss caused by war. But it does not cover the risk of nuclear weapons.
2. Strike. The strike risks clause covers loss caused by people’s malicious behaviors during a strike. However, there are exceptions: If the goods were damaged or lost because there are not enough working people or the workers are not able to work normally during a strike, the insurance company is not required to compensate for the loss.
3. Aflatoxin. The aflatoxin insurance will pay for the loss when your goods (typically food or crop) reach the destination and get rejected or confiscated because the concentration of Aflatoxin is above the standards of the importing country.
4. Failure to deliver. If the goods get loaded on the ship and cannot be delivered to the destination within 6 months of the planned delivery date, you can be paid by the total loss standard.
5. On deck. This insurance covers the risk of the goods being dropped or get hit by waves and fall into the ocean.
6. Import duty. When the goods have experienced loss, but you still have to pay for the import duty. The insurance company will cover the import duty for you.
7. Rejection. If the insured product get rejected or confiscated by the importing country’s government, the insurance will pay you the insured value of the goods.
8. Fire risk extension clause (FREC) for storage of cargo at destination Hongkong, including Kowloon, or Macao. After the goods reach Hongkong or Macao and get unloaded, if they are stored at the warehouse designated by the bank, the insurance will cover the fire risk of the goods.

Specialized Marine Cargo Insurances and Clauses

There are three more types of specialized marine cargo insurances. They are all basic insurance. Here are the risks they cover:

Frozen Products

Risks for Frozen Products

The Risks for Frozen Products clause covers all the risks in WA/WPA. It also covers the risk of decay in a refrigeration equipment failure that lasts longer than 24h.

All Risks for Frozen Products

All Risks for Frozen Products clause covers everything in the Risks for Frozen Products Clause. It also covers the decay of the goods caused by any extraneous risks forementioned.

Wood-Oil Bulk

This clause covers the shortage, leakage, staining, or decay of wood-oil caused by anything risk.

Livestock & Poultry Insurance

This insurance covers the death of livestock and poultry in transport, except in the following cases:

• Before the insurance takes effect, the livestock and poultry being transported were already in bad health condition
• Death caused by the pregnancy or vaccination
• Death caused by diseases or infectious diseases
• The livestock and poultry were ordered by the government to be butchered due to infectious diseases.
• Death caused by the shortage of food
• The livestock and poultry were forbidden to be exported/imported or failed to meet the standards.

The Practices of Marine Cargo Insurance

Determine The Insured Amount

The insured amount is the amount of money the insurance company will pay if the covered damage happened. It is determined by the insurable value, which includes the value of the goods, cost of transportation, the insurance premium, and expected income.

According to Chinese Maritime Law, the insured amount should not be larger than the insurable value, and the excessive value is invalid.

When trading under CIF or CIP, the Buyer is obliged to buy the insurance. The insured amount of such insurance should be at least 110% of the price of the goods.

Insurance Rate

There are two types of insurance rate: general rate and rate for specified goods. If the goods are listed in the table of specific goods with an additional rate, then the insurance rate would be general rate + specified additional rate.

Let’s see an example.

A batch of goods is exported from country A to country B at a CIF price of $30,000. All Risks insurance is purchased at 0.6% rate, war insurance 0.03%. The insured value is 110% of the CIF price.

Total insurance premium = 30000 x 110% x (0.6% + 0.03%) = 307.9

Open Policy

Open policy is often used by companies with frequent shipments. Coverage is automatically provided in the open period specified in the policy. In this way, the company does not have to purchase insurance every time they ship.

Endorsement

After the insurance being issued, if the Applicant needs to add, delete or alter the terms, they can ask the insurance company to make an endorsement.

Claiming The Insurance

When a risk happens within the coverage of insurance and cost loss, you can ask the insurance company to make up for your loss. Here are the general steps:

1. Notify. You should notice the insurance company as soon as possible when the goods are being damaged by the risks covered in the insurance.
2. Claim for compensation from the carrier and other related parties. If you find shortages or damages when you receive the goods, you should also ask for documents from the carrier or the customs that prove the goods are damaged upon arrival. If the damage is related to the carrier, port, or the loading/unloading company, you should also claim compensation from them.
3. Take reasonable measures. Measures should be taken to prevent the goods from being further damaged. If you receive any guidance from the insurance company after you notify them, follow their guidance. The insurance company will also cover the cost that happened while saving the goods.
4. Prepare documents for the insurance claim.
   • Examination report of the damaged goods
   • Insurance documents
   • Shipping documents
   • Related receipts and invoices
   • Documents that could prove the responsibility of related third parties.

Insurance Clauses in Trading Contracts

For contracts using FOB, CFR, FCA, or CPT, the insurance clause can be written as:

Insurance: To be covered by the Buyer

For contracts under CIF or CIP, the insurance clauses need to specify who should buy the insurance, what type of insurance should be bought, and how the insurance amount will be calculated. General terms like usual risks, customary risks, or marine clauses.

Here are some good examples:

Insurance: To be covered by the Seller for …% of CIF/CIP total invoice value against …, as per and subject to the relevant ocean marine cargo clauses of the China Insurance Clause dated …

Insurance: To be covered by the Seller for …% of CIP total invoice value against Overland Transportation All Risks and All Risks as per Overland Transportation Cargo Clauses “Train, Truck” and Ocean marine Cargo Clauses of the China Insurance Clause dated …, including War Risks as per Overland Transportation Cargo War Risks Clause (by Train) dated …, and Ocean Marine Cargo War Risks Clauses dated …

Insurance: To be covered by the Seller for …% of total invoice value against …, …. as per institute Cargo Clauses … dated …

Here are some examples clauses of additional insurances:

Including Risk of Clashing and Breakage

Including shortage in weight in excess of 0.5% on the whole consignment.