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Guide to Cargo Insurance

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Guide to Cargo Insurance


This guide is designed to give importers, exporters, bankers, freight forwarders, logistics professionals, and others involved in international trade a grounding in the principles of marine insurance as it applies to cargo insurance. Note that marine cargo insurance covers shipments by sea, air, and land. This discussion of marine cargo insurance is structured as follows: 1. 2. 3. 4. 5. 6. 7. 8. Overview of Marine Insurance When to Insure How to Insure How Much to Insure Terms and Conditions of Coverage Cost of Insurance In case of Loss or Damage Adjustment of Claims

It is recommended that the trader establish a good working relationship with a competent insurance agent or broker who can assist in structuring the most appropriate insurance coverage for their trade operation.

Overview of Marine Insurance


Insurance is a form of risk management where individuals, businesses, and other organizations, in exchange for the payment of a sum of money (a premium), are given compensation for losses resulting from certain perils under specified conditions.

Marine Insurance
Marine insurance is the specialized form of insurance that covers loss or damage to ships, ship hulls, cargo carried on marine vessels, airplanes, trucks, wharves, ports, harbors, container terminals, oil platforms, and drilling rigs, as well as certain liabilities that may devolve to ship owners and operators as a result of their activities. Technically, marine insurance is divided into two categories: inland marine insurance and ocean marine insurance. The former deals with risk of loss to moving or movable property (transport vehicles and cargo). The latter with international transport by sea and air.

Hull Insurance
Hull insurance is a subset of marine insurance that deals with covering risk to the structure of a ship or airplane as well as to the machinery used to operate the vessel. Hull insurance is contracted for by the vessels owners, not by merchants shipping goods.

Cargo Insurance
Cargo insurance is another subset of marine insurance; it protects international traders against the risk of loss or damage to cargo transported by all types of carriers and methods of shipment including oceangoing vessels, inland waterway vessels, trucks, railcars, and airplanes. An international trader may obtain cargo insurance either directly from an insurance company or through the carrier, freight forwarder, or logistics firm handling the shipment.

The Insurance Company


An insurance company is a firm that, for a fee (the premium), agrees to issue an insurance policy and pay any claim that may arise from loss, delay, or damage covered by the terms and conditions of the insurance policy.

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The Insured
The insured is the individual or business entity that pays a premium to an insurance company and whose risks are mitigated by the insurance policy. The insured must have an insurable interest in the property being insured and be able to provide information about the cargo, vessel, vehicles, and voyage in question. It is the responsibility of the insured to procure the proper amounts and type of insurance prudent for each situation and to make timely payments of the insurance premiums. It is also incumbent upon the insured to know and understand the policy including the exclusions as defined by the policy.

Underwriters
Underwriters are the insurance companies that issue insurance policies. (In the 17th century, ship owners and traders listed maritime adventures on a board at Lloyds coffeehouse in London. Individuals who wished to insure a vessel or shipment would sign their name and state the percentage of the risk they would cover under the listing, thus becoming underwriters of the adventure.) Underwriters calculate the risks involved in a proposed policy and assign a premium cost and exclusions based upon that risk. Underwriting is the most technical part of the profession.

Brokers
Insurance brokers are typically firms that represent and sell the services of a number of insurance underwriters. Brokers can operate independently, or as part of a freight forwarding or logistics firm.

Agents
Insurance agents generally represent a single insurance underwriter in the sale of insurance services.

The Risk
In insurance terms, a risk is a specific exposure to potential loss or damage associated with an insurance policy. In the case of cargo insurance, risk relates to the potential for loss, damage, or delay to a shipment. Elements that relate to marine insurance risk include: type of merchandise shipped, perishability of merchandise, value of shipment, physical size of shipment, countries of origin, transshipment and destination, method of shipment, company transporting the shipment, and packaging (including whether the shipment is palletized, crated, barreled, or containerized). Insured risk will only cover fortuitous events and not those deemed inevitable, reasonably preventable, or done purposely.

The Premium
An insurance premium is a fee paid by the insured to the insurer in consideration for insurance covered by an insurance policy. Underwriters calculate risk and the premiums required to insure against it based upon the probability of the event occurring and the possible extent of the resulting damage or loss. The higher the probability and the higher the potential damage, the greater the premium. The receipt of premiums by the insurer will legally bind the insurance contract. Late or lapsed premiums generally void the contract. Premium payments may have a grace period during which they can be paid after the stated due date, but this cannot be assumed. Nowadays, a traceable electronic transfer is the best and most reliable means of maintaining a proper premium payment schedule.

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Types of Insurance Policies


There are three general types of insurance policies available:
1. Open Policy

This is an insurance policy that covers multiple shipments. This type of policy can be set for a specific total value that requires renewal once the insured amount reaches its limit, or it can be open for shipments of any total value, but for a set period of time (e.g., one year).
2. Voyage or Specific Policy

This policy covers a single shipment (voyage) and must be renewed for each successive shipment.
3. Contingency Policy

This is a supplemental insurance policy, generally for exporters, in situations where the importer may be responsible for insurance, but where the exporter may retain insurable interest in a shipment. More details on these types of policies are in the Terms and Conditions of Coverage section that follows.

The Insurance Policy as Contract


An insurance policy is a legally binding contract between the insured and insurer that defines the obligations of each party with regard to risks covered, exclusions, duration, claims, benefit of insurance, minimizing losses, avoidance of delay, law, and practice. Insurance policies are generally complex and detailed in stating the obligations and rights of both the insurer and the insured.

Insurable Interest
To purchase an insurance policy, an individual or organization must have an insurable interest in the outcome of the event against which insurance cover is sought. Insurable interest is defined as a valid, determinable, and direct economic stake of an individual (the policy holder or beneficiary) in the continued existence or safety of the insured person or property. This means that the policy holder or beneficiary must stand to suffer a direct financial loss if the event against which insurance is purchased occurs. For example, an individual may purchase cargo insurance on a shipment of goods owned by that individual, but not on a shipment of goods owned by an unrelated individual.

The Coverage
Traditionally, there have been three recognized levels of cargo insurance coverage: All Risks (AR), With Average (WA), and Free of Particular Average (FPA). A large percentage of the world trade community, however, offers these insuring conditions by way of what is called the Institute Cargo Clauses (ICC). They do not translate precisely, but in short form, Clause A denotes All Risks, Clause B denotes With Average, and Clause C denotes Free of Particular Average. Most U.S. insurance companies have their own policy wordings and do not use the Institute Cargo Clauses, but their policies are similar in coverage. In addition, other insurance coverage is available for: war risk; strikes, riots, and civil commotion; pollution; port security; rust, oxidation, and discoloration; and others.

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For a complete discussion of these additional insurance coverage clauses, see the Terms and Conditions of Coverage section that follows.

Legal Terms, Legal Meanings


Policies are legal documents and the wording of these documents is extremely important. Common words when placed in cargo insurance policy contracts (e.g., average, adventure) might have entirely different meanings from common usage outside of insurance. While the insurer does have some obligation to clarify any areas of the policy requested, it is the duty of the insured to understand the policy before signing it.

Expressed or Implied
Insurance policies can imply all sorts of coverage by using general terms like damage or reasonable, and it is assumed that the terms refer to commonly understood concepts. However, both parties (but especially insurers) like to place express language in the policy in order to limit the amount of risk they will assume. Express language always takes precedent over implied language should a dispute about claims arise.

Exclusions
Exclusions are specific situations, conditions, or circumstances that are listed in an insurance policy as being excluded from coverage. Exclusions can be a significant issue, especially when shipping perishable goods, high-value goods, goods into or through war zones, arms, and armaments, as well as goods that have been insufficiently or unsuitably packaged. The first thing insurers look at when the insured files a claim is the list of exclusions to see the limits of coverage in the policy. Review these thoroughly before signing the contract policy.

The Loss
Insurance losses can occur from a wide variety of reasons including theft; piracy; barratry (unlawful acts by the master or members of a vessels crew); jettisoning (throwing cargo overboard in time of emergency to save a ship at sea); sinking of a vessel; cargo or containers going overboard in a storm or as a result of improper stowage; damage to cargo while loading, shifting during voyage, or unloading; or exposure to the elements; to name but a few. The losses can be partial or total, and the delay of delivery of perfectly maintained goods can result in loss of market. The types and extent of losses covered by the insurance policy are stated in detail within the contract. When a loss occurs is not the best time to be reviewing contract details for the first time.

The Claim
If an insured experiences loss of, damage to, or delay of the goods consigned to shipment, it may file a claim for compensation under the terms of the insurance policy.

The Adjustment
The insurer will review the claim and determine if the circumstances of the loss, damage, or delay were wholly, partially or in no way covered by the terms of the insurance policy. Compensation to the insured will be paid based upon these findings. This process is called the adjustment. In the event of a disagreement, the insured may, in most cases, appeal the decision of insurer to a third-party arbitrator or to the court system. Routine claims, however, are usually handled quite quickly once all the paperwork is properly filed.

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When to Insure
One of the most basic and fundamental principles of insurance is that of insurable interest. Insurable interest determines when it is necessary or appropriate to acquire insurance coverage. Insurable interest exists when a person has a valid, determinable, and direct economic stake in the continued existence or safety of a person or property. In the international trade of products, a person has insurable interest when he or she will benefit from the safe arrival of a vessel or its cargo, or when he or she will be prejudiced by its loss, damage, or detention. In addition to owners, there are others who may experience a benefit or loss as a result of the loss, damage, or detention of a vessel or cargo. In the case of cargo insurance, insurable interest falls into two categories: the insurable interest of owners and the insurable interest of non-owners.

Insurable Interest of Owners: Terms of Sale


When sellers and buyers are face-to-face, and goods and payment are in close proximity, it is easy to establish when title to goods changes hand from the seller to the buyer. In modern international trade, however, sellers and buyers are not face-to-face, and goods and payment are not at all in close proximity. Transactions are more complex. Intimately combined with the issue of ownership (when does title to the goods pass from the seller to the buyer?), are questions of carriage (who arranges for it?), customs clearance (who arranges for it?), risks (when does risk transfer from the seller to the buyer?), costs (who pays for carriage, insurance, customs clearance, import duties, storage, and other fees?), and payment (when and how is payment effected?). In international trade, as with domestic trade, the terms of sale of a transaction govern the relationship of property and ownership. Understanding the different terms of sale, therefore, is an essential part of knowing when ownership and risk passes from the seller to buyer and when each party to the transaction has insurable interest.

Incoterms 2010
The most widely used terms in international trade are Incoterms. Incoterms rules are internationally accepted definitions of trade terms, and were developed by the International Chamber of Commerce (ICC), Paris, France, in 1936, and are regularly revised to reflect changes in transportation, documentation, and security. Incoterms is a contraction of INternational COmmercial TERMS. The current version is Incoterms 2010 which enter into force January 1, 2011. For a comprehensive discussion of these rules, refer to the World Trade Press Illustrated Guide to Incoterms 2010 in this book. However, for this discussion of risk, insurable interest, and insurance, we have also developed a World Trade Press One-Page Illustrated Guide to Incoterms 2010 which is reproduced on the following page. This guide gives at-a-glance information about seller and buyer responsibility for carriage, risks, and costs associated with each of the 11 trade terms. Each term specifies responsibilities for sellers and buyers. Each term also notes when risk for a shipment transfers from the seller to the buyer, but not necessarily when title transfers from seller to buyer. Technically, the contract for the sale of goods and legal precedent will determine when the transfer of title occurs.

Obligation vs. Financial Risk


Broadly, there are two reasons to purchase insurance coverage: 1) obligation to the other party, and 2) self-interest mitigation of financial risk.

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That said, note that only two Incoterms 2010, CIF and CIP, mention an obligation to provide insurance coverage to the benefit of the other party. (In both cases, it is the sellers obligation to the buyer to provide insurance.) In all other instances, mitigation of financial risk is the key factor. As a result, understanding when each party has insurable interest is critical to knowing when prudence dictates obtaining insurance coverage. For example, even with the CIF and CIP terms, the seller is responsible only to provide minimum coverage insurance, which may not fully cover the buyers interests. Ultimately, we recommend that you speak with a knowledgeable international cargo insurance specialist or your logistics provider, and review all aspects of your trade transactions to establish the most appropriate form of insurance coverage. The following is a discussion of each of the 11 Incoterms 2010 and related insurance issues.

1. EXW (EX Works...named place of delivery)


General Provisions (summary)

In Ex Works, the seller/exporter/manufacturer merely makes the goods available to the buyer at the sellers named place of delivery, which is commonly, but not necessarily, the sellers place of business. With EXW, the seller has no responsibility to load the goods onto a truck or other transport vehicle or to clear the goods for export. This trade term places the greatest responsibility on the buyer and minimum obligations on the seller.
Insurance Obligation

Neither the seller or the buyer has an obligation to the other party to provide insurance.
Risk Exposure

Under the EXW term, the buyer has insurable interest the moment the seller makes the goods available at the named place of delivery within the time stipulated. Insurance coverage should be scheduled to begin accordingly, for this time and place of delivery to its final destination (warehouse to warehouse). For example, if the buyer is obligated to pick up the goods at the named place within a specific time, but is delayed, the buyer has insurable interest even if he or she is not in possession of the goods. Prudence dictates that insurance coverage begin at the moment the buyer is scheduled or obligated to pick up the shipment.

2. FCA (Free CArrier...named place of delivery)


General Provisions (summary)

In Free Carrier, the seller/exporter/manufacturer clears the goods for export and delivers them to the carrier specified by the buyer at the named place of delivery. If the named place of delivery is the sellers place of business, the seller is responsible for loading the goods onto the transport vehicle. If the named place is any other location, such as the loading dock of the carrier, the seller is not responsible for unloading. When using the FCA term, it is advisable to clearly specify in the contracts of sale and carriage the precise point of delivery.
Insurance Obligation

Neither the seller nor the buyer has an obligation to the other party to provide insurance.

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Risk Exposure

Under the FCA term, if the named place of delivery is the sellers place of business, the buyer has insurable interest from the time the goods are loaded onto the buyers transport vehicle at the sellers place of business. If the named place of delivery is any other location (such as at a carriers terminal), the buyer has insurable interest from the time the goods start being unloaded from the transport vehicle at that location. In either case, insurance coverage should be arranged accordingly. The seller also has risk and insurable interest related to loading the goods at his or her place of business, or for transport of goods to the carrier at another location, and insurance coverage should be arranged accordingly.

3. FAS
(Free Alongside Ship...named port of shipment)
General Provisions (summary)

In Free Alongside Ship, the seller/exporter/manufacturer clears the goods for export and places them alongside the ship (on a dock or barge) at the named port of shipment. When using the FAS term, it is advisable to clearly specify in the contract of sale, and in contracts of carriage, not only the named port of shipment, but also the precise loading point at or within the named port of shipment. This is particularly the case when the named port of shipment is large and options abound for delivery points. With FAS, the seller has the option to deliver the goods alongside the ship, or to procure goods already so delivered. This is a reference to so-called string sales, where a single shipment might be resold multiple times during transport, as is common in the commodity trade.
Insurance Obligation

Neither the seller nor the buyer has an obligation to the other party to provide insurance.
Risk Exposure

Under the FAS term, the buyer would obtain insurance that attaches (starts) from the time the goods are placed alongside the vessel, or after being loaded onto lighters if customary at the port. Insurance companies typically use the issue date of a Dock Receipt or a Received for Shipment Bill of Lading, or similar document issued by the carrier to determine when risk of loss passes from the seller to the buyer. The seller is advised to obtain contingency insurance in the form of what is known as an FOB Endorsement, which protects the seller from transit risks from the point of origin to the point at which title passes to the buyer.

4. FOB
(Free On Board...named port of shipment)
General Provisions (summary)

In Free On Board, the seller/exporter/manufacturer clears the goods for export and delivers them on board the named vessel at the named port of shipment.

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This is a change from Incoterms 2000, where the seller was responsible only to deliver the goods past the ships rail. With FOB, the seller has the option to deliver the goods on board the vessel, or to procure goods already so delivered. This is a reference to so-called string sales, where a single shipment might be resold multiple times during transport, as is common in the commodity trade.
Insurance Obligation

Neither the seller nor the buyer has an obligation to the other party to provide insurance.
Risk Exposure

Under the FOB term, the seller has risk until the goods are loaded on board the ship at the named port of shipment. This includes transportation from the sellers warehouse, possible storage, and the actual loading of the shipment on board the ship. Insurance coverage should be arranged accordingly. The buyer assumes risk the moment the goods are loaded on board the ship at the named port of shipment, and insurance coverage should be arranged accordingly. Evidence of transfer of interest and risk is usually provided by a clean on board bill of lading or other transportation document issued by the carrier. In another situation, if the sale has been made under a letter of credit where an on board bill of lading is a required document and loss or damage occurs before the goods successfully pass the ships rail, neither the seller nor the buyer may be able to get the benefit of insurance that the buyer may have arranged. In such situations, the seller is generally advised to obtain contingency insurance in the form of what is known as an FOB Endorsement. This protects the seller from transit risks from the point of origin to the point at which title passes to the buyer.

5. CFR
(Cost and FReight...named port of destination)
General Provisions (summary)

In Cost and Freight, the seller/exporter/manufacturer clears the goods for export and delivers them on board the ship at the port of shipment (not destination). This is where risk passes from seller to buyer. The seller, however, is responsible for contracting for and paying the costs associated with transport of the goods to the named port of destination. This is where costs transfer from seller to buyer. It is important to note that the transfer of risk from seller to buyer occurs at a different point than the transfer of costs. When using the CFR term, it is advisable to clearly specify in the contract of sale and in contracts of carriage, not only the named port of destination, but also the precise point at or within the named port of destination. With CFR, the seller has the option to deliver the goods on board the vessel, or to procure goods already so delivered. This is a reference to so-called string sales where a single shipment might be resold multiple times during transport, as is common in the commodity trade.
Insurance Obligation

Neither the seller nor the buyer has an obligation to the other party to provide insurance.

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Risk Exposure

Under the CFR term, the seller arranges and pays for carriage to the named port of destination, but the buyer assumes risk the moment the goods are loaded on board the ship at the named port of shipment. Therefore, the buyer arranges for insurance coverage that begins when the goods are loaded on board the ship at the named port of shipment. Evidence of transfer of interest and risk is generally provided by a clean on board bill of lading or other transportation document issued by the carrier. As with the FOB term, the seller assumes risk until the goods are loaded on board the ship at the named port of shipment. This includes transportation from the sellers warehouse, possible storage, and the actual loading of the good on board the ship. As with the FAS and FOB terms, the seller is generally advised to obtain contingency insurance in the form of what is known as an FOB Endorsement. This protects the seller from transit risks from the point of origin to the point at which title passes to the buyer.

6. CIF (Cost Insurance and Freight...named port of destination)


General Provisions (summary)

In Cost, Insurance and Freight, the seller/exporter/manufacturer clears the goods for export and delivers them on board the ship at the port of shipment (not destination). This is where risk passes from seller to buyer. The seller, however, is responsible for contracting for and paying the costs associated with transport of the goods and minimum cover insurance to the named port of destination. This is where costs transfer from seller to buyer. It is important to note that the transfer of risk from seller to buyer occurs at a different point than the transfer of costs. When using the CIF term, it is advisable to clearly specify in the contract of sale and in contracts of carriage, not only the named port of destination, but also the precise point at or within the named port of destination. With CIF, the seller has the option to deliver the goods on board the vessel, or to procure goods already so delivered. This is a reference to so-called string sales, where a single shipment might be resold multiple times during transport, as is common in the commodity trade.
Insurance Obligation

The seller is responsible for procuring and paying for insurance for 110 percent of the value of the contract to the named port of destination. This obligation to provide insurance, however, is only for minimum coverage, but war risk is sometimes included. It is generally advisable that both marine and war risk insurance be from the same carrier. The insurance policy must allow the buyer to make claims directly from the insurer. The seller is also responsible for delivery of the insurance document to the buyer. This is one of only two Incoterms that contains an obligation to provide insurance. The other term is CIP. The buyer has no obligation to the seller for insurance.
Risk Exposure

Under the CIF term, the sellers risk ends and the buyers risk begins when the goods are loaded on board the ship at the port of shipment, even though the seller is responsible for providing insurance coverage from the port of shipment to the named port of destination. Evidence of transfer of interest and risk is provided by a clean on board bill of lading or other transportation document issued by the carrier. Insurance coverage should be arranged accordingly.

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It must be noted once again that the CIF term requires that the seller provide only minimal cover insurance. It is therefore advisable that the buyer either specify more complete coverage in a sales/purchase contract, or arrange for supplemental insurance from their own carrier. The buyer will also want to cover risk of loss or damage after the goods have arrived at the named port of delivery until they are delivered to their final destination. The buyer may also wish to procure insurance cover for Free of Particular Average losses, as well as total loss after arrival and customs entry, but before delivery. As with several other terms (such as with FOB), the seller assumes risk until the goods are loaded on board the ship at the named port of shipment. This includes transportation from the sellers warehouse, possible storage, and the actual loading of the goods on board the ship. As a result, the seller is generally advised to obtain contingency insurance that offers protection from transit risks from the point of origin to the point at which title passes to the buyer. The seller must use ordinary care in the selection of a financially sound insurance underwriter. Should claims arise from a shipment, it is the buyers responsibility to secure settlement, however, with the goodwill of the customer in mind, the seller should select an underwriter providing fair, prompt, and convenient loss service. Finally, one problematic issue is that the named port of destination is often not the final destination. Because letters of credit are often used to finance CIF transactions, invoices, insurance documents, and other documents must all have the same location named, or risk being rejected by the banks as improper documentation.

7. CPT
(Carriage Paid To...named place of destination)
General Provisions (summary)

In Carriage Paid To, the seller clears the goods for export and is responsible for delivering the goods to the carrier at an agreed-upon place of shipment (not the destination). This is where risk passes from seller to buyer. The seller, however, is responsible for contracting for and paying the costs associated with transport of the goods to the named place of destination. This is where costs transfer from seller to buyer. It is important to note that the transfer of risk from seller to buyer occurs at a different point than the transfer of costs. When using the CPT term, it is advisable to clearly specify in the contract of sale and in contracts of carriage, not only the named place of destination, but also the precise point at or within the named place of destination.
Insurance Obligation

Neither the seller nor the buyer has an obligation to the other party to provide insurance.
Risk Exposure

Under the CPT term, the seller assumes risk until the goods are loaded on board the ship at the port of shipment. This includes transportation from the sellers warehouse, possible storage, and the actual loading of the goods on board the ship. Insurance coverage should be arranged accordingly. Conversely, the buyer assumes risk the moment the goods are loaded on board at the port of shipment, and insurance coverage should be arranged accordingly. Evidence of transfer of

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interest and risk is provided by a clean on board bill of lading or other transportation document issued by the carrier. In such situations, the seller is generally advised to obtain contingency insurance, which offers protection from transit risks from the point of origin to the point at which title passes to the buyer.

8. CIP (Carriage and Insurance Paid To ...named named place of destination)


General Provisions (summary)

In Carriage and Insurance Paid To, the seller/exporter/manufacturer clears the goods for export and is responsible for delivering the goods to the carrier at an agreed-upon place of shipment (not the destination). This is where risk passes from seller to buyer. The seller, however, is responsible for contracting for and paying the costs associated with transport of the goods and minimum cover insurance to the named place of destination. This is where costs transfer from seller to buyer. It is important to note that the transfer of risk from seller to buyer occurs at a different point than the transfer of costs. When using the CIP term, it is advisable to clearly specify in the contract of sale and in contracts of carriage, not only the named place of destination, but also the precise point at or within the named place of destination.
Insurance Obligation

The seller is responsible for procuring and paying for insurance for 110 percent of the value of the contract to the named port of destination. This obligation to provide insurance, however, is only for minimum coverage, but war risk is sometimes included. It is generally advisable that both marine and war risk insurance be from the same carrier. The insurance policy must allow the buyer to make claims directly from the insurer. The seller is also responsible for delivery of the insurance document to the buyer. This is one of only two Incoterms that contains an obligation to provide insurance. The other term is CIF. The buyer has no obligation to the seller for insurance.
Risk Exposure

Under the CIP term, the seller assumes risk until the goods are loaded on board the ship at the port of shipment. This includes transportation from the sellers warehouse, possible storage, and the actual loading of the goods on board the ship. Insurance coverage should be arranged accordingly. The buyer assumes risk the moment the goods are loaded on board the ship and insurance coverage should be arranged accordingly. Evidence of transfer of interest and risk is provided by a clean on board bill of lading or other transportation document issued by the carrier. In such situations, the seller is generally advised to obtain contingency insurance that offers protection from transit risks from the point of origin to the point at which title passes to the buyer.

9. DAT
(Delivered At Terminal...named terminal at port or place of destination)

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General Provisions (summary)

In Delivered At Terminal, the seller clears the goods for export and is responsible for their delivery to the named terminal at port or place of destination. In DAT, the seller makes the goods available to the buyer unloaded from the arriving means of transport. (This is the only Incoterm that requires the seller to unload the arriving means of transport.) The terminal can be of any sort: a sea, road, air, or rail terminal; a warehouse, a quay or container yard; and covered or uncovered. When using the DAT term, it is advisable to clearly specify in the contract of sale and in contracts of carriage, not only the terminal by name, but also the precise point at or within the terminal at the named port or place of destination.
Insurance Obligation

Neither the seller nor the buyer has an obligation to the other party to provide insurance.
Risk Exposure

Under the DAT term, the seller has risk from when the goods leave the place of origin until they have been made available unloaded at the named terminal at the port or place of destination. Insurance coverage should be arranged accordingly. The buyer assumes risk the moment the goods are made available at the terminal, unloaded, and insurance coverage should be arranged accordingly. Either the seller or the buyer may be liable for storage costs and risks if there is a discrepancy between the time the goods are made available by the seller, unloaded, and the time the buyer takes possession of the goods. Risk contingency should be taken care of with insurance cover.

10. DAP
(Delivered At Place...named place of destination)
General Provisions (summary)

In Delivered At Place, the seller/exporter/manufacturer clears the goods for export and is responsible for their delivery to the named place of destination. In DAP, the seller makes the goods available to the buyer on the arriving means of transport at the named place of destination, not unloaded. When using the DAP term, it is advisable to clearly specify in the contract of sale and in contracts of carriage, not only the named place of destination, but also the precise point at or within the named place of destination. In DAP, the named place of destination is domestic to the buyer and is often the buyers place of business. In DAP, the seller is not responsible for import customs formalies, duties, fees, or taxes.
Insurance Obligation

Neither the seller nor the buyer has an obligation to the other party to provide insurance.

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Risk Exposure

Under the DAP term, the seller has risk from when the goods leave the place of origin until they have been made available, not unloaded, at the named place of destination, and insurance coverage should be arranged accordingly. The buyer assumes risk the moment the goods are made available on the arriving means of conveyance, not unloaded, and insurance coverage should be arranged accordingly.

11. DDP (Delivered Duty Paid...named place of destination)


General Provisions (summary)

In Delivered Duty Paid, the seller/exporter/manufacturer clears the goods for export and is responsible for their delivery to the named place of destination. In DDP, the seller also clears the goods for import in the country of destination and pays for all import customs formalities, duties, fees, VAT (value added tax), and other taxes. In DPP, the seller makes the goods available to the buyer on the arriving means of transport at the named place of destination, not unloaded. When using the DDP term, it is advisable to clearly specify in the contract of sale and in contracts of carriage, not only the named place of destination, but also the precise point at or within the named place of destination.
Insurance Obligation

Neither the seller nor the buyer has an obligation to the other party to provide insurance.
Risk Exposure

Under the DDP term, the seller has risk from when the goods leave the place of origin until the goods have been made available, not unloaded at the named place of destination. Insurance coverage should be arranged accordingly. The buyer assumes risk the moment the goods are made available at the named place of destination, not unloaded, from the arriving means of transport, and insurance coverage should be arranged accordingly. Both the seller and the buyer may be at risk if there is a discrepancy between the time the goods are made available by the seller at the named place of destination, not unloaded, and the time the seller unloads the goods. Both parties should have this contingency taken care of with insurance cover.

Insurable Interest of Non-Owners: Financial Interest


In practice, insurance coverage attaches on individual shipments at the time the assured becomes responsible for loss or damage, and ceases when the assureds responsibility for loss or damage ceases.

Sellers Viewpoint
If the seller has received payment at or before the actual shipment of goods, he or she is likely to cease having insurable or financial interest at the time of shipment and probably does not need special insurance coverage. However, there are situations where the seller has an insurable interest, even though title has passed to the buyer. For example, perhaps the seller has sold on open terms, or the terms of payment call for sight draft against documents, or for acceptance at 30-60-90 days sight. In

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general, the seller will have a financial interest in the goods until payment has been received, and the prudent trader will see that his or her interests are protected. Here are some examples of situations that put the seller at financial risk: The buyer may be uninsured or underinsured. The buyers insurance company may be less liberal in loss adjustments than the insurance company of the seller. The buyers insurance company may be hampered in transmitting funds because of currency restrictions. Claims paid by the buyers insurance company may be expressed in currencies that have a poor exchange rate record with the sellers currency of choice. If the buyer becomes insolvent, claims collected against an insurance policy may be paid out in favor of the insolvent business rather than to you as the seller in a foreign country. If a total or partial loss occurs, the country of import may restrict payment of foreign exchange unless the goods have actually landed and been cleared through customs. While some of these contingencies are remote, they make the point that the loss or damage to a shipment has the potential to impair the buyers desire to make payment as originally contemplated. Ultimately, the seller bears financial risk until such time as payment from the foreign buyer is in hand. Experienced sellers often handle these potential problems by stipulating in sales contracts that they will be responsible for providing insurance with a company that is domestic to their operation and responsive to their needs. Note that many insurance policies cover all or most of these situations, however, you must speak with your insurance agent to make certain that your risks are covered. Also note that there are some countries that require that insurance on imports be placed with local insurance companies. The exporter, however, still has the option of obtaining contingency or difference in conditions insurance to protect their interests in the event the importers insurance fails or falls short.

Buyers Viewpoint
The situation facing importers is somewhat reversed from those mentioned above. The domestic buyer/importer purchasing on CIF terms must rely upon the good faith and solvency of a foreign insurance company. Many of the disadvantages of an FOB foreign sale will apply to CIF purchases. The importer can mitigate many of these problems by purchasing on FOB, CFR, or similar terms, and arranging for his or her own insurance.

Sellers and Buyers


Both the seller and the buyer, regardless of which is the domestic or foreign trader, are advised to consult with competent insurance agents or brokers to establish which insurance coverage is best suited to their needs.

How to Insure
Introduction
Historically, marine insurance policies were written to cover individual shipments of goods on a particular voyage. These specific or voyage policies are still written, but generally only for those not regularly engaged in international trade. Today, there are three common types of marine policies: open cover, voyage, and contingency policies.

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Open Cover Policy


Open cover policies are by far the most commonly used policies in international trade. Open cover policies are designed to cover a number of shipments over a period of time. The policy can be set at a specific value that will require renewal once the insured amount reaches its limit. Or it can be positioned as a permanently open policy that will serve for an agreed-upon time (e.g., one year), but allowing for any number of shipping consignments during the period. Open cover policies have significant advantages over other policy types, especially for the active trader. Some open cover policies have been in effect for more than 100 years.

Voyage (Specific) Policy


A voyage policy covers a specific shipment of goods on a one-time-only basis. This type of policy is appropriate for those shippers who make only a few shipments per year or are just starting out in the import/export business. The policy covers a single shipment (voyage), and a new policy must be taken out for each additional shipment. Voyage policies are also used by firms to cover a special or unusual shipment.

Seller's Interest (Contingency) Policy


Contingency policies are designed to cover sellers (exporters) for risks that devolve from reliance upon the buyers (importers) insurance to cover loss or damage. For example, an exporter may have sold on open account with FOB terms. This makes the buyer responsible for insurance once the goods are loaded on board the ship (Incoterms 2010), but what if the buyer does not have valid insurance? If the goods are lost or damaged, especially prior to importation, the buyer may not be able or willing to make payment to the seller. Exporters who obtain contingency insurance are advised not to let the buyer/importer know that the policy has been established.

The Open Cover Policy


An open cover policy or marine open policy is an ongoing insurance facility that allows the assured to automatically insure a number of shipments over a set period of time with predetermined rates and terms and conditions. An open policy establishes: 1. 2. 3. 4. 5. 6. Types of goods to be covered Routes to be covered Basis of valuation of goods to be insured, (e.g., FOB + 15%, C&F + 10%) Maximum value per shipment Premium rates All terms and conditions of insurance contract

Open Policy Advantages

All lawful shipments within the approved scope of the policy are automatically covered Premiums are based on the actual value of each shipment Insurer cannot refuse to cover any shipment that falls within the parameters of the insurance cover Unintended failure to declare a shipment does not void the coverage Relieves the shipper from having to arrange a new policy for each shipment The shipper knows in advance the premium rate Ongoing relationship with insurance company or agent facilitates understanding of traders business Unusual shipments that are outside the limits of the open policy can be arranged on an individual basis In an open policy, the policyholder simply agrees to declare all shipments and to pay premiums when due.

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Open policies are considered to be in the best interests of the insurance company, the agent, and the insured.

Declaring Shipments on Open Policies


There are several methods of reporting import or export shipments under open policies.
Declaration

The declaration is a paper or electronic form used to report a single shipment to the insurance broker or agent. The form is filled out by the assured and forwarded daily, weekly, or monthly to the insurance agent or broker. It is a non-negotiable document. If full information is not available at the time of initial reporting, a provisional report may be made. The declaration calls for information on: vessel and sailing date, points of origin and destination, commodity, quantities, amount of insurance desired, and the number of the open policy. Declarations are most commonly used for imports where there is no need to provide evidence of insurance for third parties. See Special Marine Policy and Insurance Certificate below.
Bordereau

The bordereau is a paper or electronic form used to report multiple shipments within a prescribed reporting time (usually a month) to the insurance broker or agent. The form is filled out by the assured and is non-negotiable. The bordereau is most commonly used for exports where there is no need to provide evidence of insurance for third parties. See Special Marine Policy and Insurance Certificate below.

Special Marine Policy and Insurance Certificate


Both the declaration and bordereau provide notification of shipments to the insurance broker or agent. However, they are not sufficient as evidence of insurance for third parties such as buyers and banks, especially when using letters of credit, or where specific evidence of insurance is required, such as in CIF and CIP terms (see Incoterms). To provide such evidence, the exporter will need either a special marine policy (SMP) or an insurance certificate. The biggest difference between the two is that a SMP is an actual insurance policy and is a negotiable instrument, whereas an Insurance Certificate is simply proof of insurance and is a non-negotiable document.
Special Marine Policy

A special marine policy (SMP) is a marine cargo insurance policy covering a single shipment of goods and is a negotiable instrument. The SMP is typically used by exporters in CIF (Cost, Insurance, and Freight) or CIP (Carriage and Insurance Paid) sales situations where a negotiable insurance document is required by the buyer/importer, or when an export sale is financed by banks using a letter of credit, and a negotiable insurance document is a required document. A special marine policy contains the same information as a Declaration, but also includes: marks and numbers of the shipment, the name of the party to whom loss shall be payable, and the applicable policy provisions. The party to whom loss shall be payable is usually the assured, but can also be listed as or orders, thus making the insurance policy a negotiable instrument upon endorsement by the assured. The special marine policy is generally prepared in four or more copies. The original (and duplicate if necessary) is negotiable and is forwarded with the shipping documents to the consignee. The remaining documents serve as office copies for the assured and for the insurance company.

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A special marine policy may be prepared by the assured, by the freight forwarder, by the insurance agent or broker, or by the company. It is important that it be completed with care. The shipment should be described in sufficient detail to make identification clear, especially if more than one shipment is going forward by the same vessel.
Insurance Certificate

An insurance certificate is a document prepared by the exporter or the freight forwarder to provide evidence that insurance against loss or damage has been obtained for the export shipment. A standard (one-sided) insurance certificate, however, is a non-negotiable instrument and is generally not acceptable to the buyer or the buyers bank. However, a cargo insurance certificate that includes most, if not all, of the policy language (a two-sided certificate) is generally acceptable in satisfying the terms of a letter of credit. In such situations, banks will require that specific language be included in the Special Conditions blank found on most cargo insurance certificates. If the certificate of insurance is a comprehensive two -sided document that includes policy terms in almost their entirety, such a document can be negotiable. These certificates are sometimes referred to as a special marine policy.

How Much to Insure


Valued Basis
Unlike some other forms of insurance, marine cargo insurance is valued. That means that when the insurance is placed, a value is agreed upon between the insurer and the insured. In the case of an insured total loss, the full face value (amount) of the policy is paid (less any applicable deductible), while in the case of a partial loss, a percentage of the total insured value is paid. This is true whether the loss occurs immediately after delivery to the carrier, or immediately prior to final delivery. As a result, depreciations or appreciations in the market value of the shipment are not a factor in the case of loss and settlement.

Being Made Whole


Since the purpose of insurance is to be made whole in case of loss (indemnify), the trader must compute all the costs of the shipment, including: invoice cost, packaging, inland freight, ocean freight, forwarder charges, consular fees, and insurance premiums. Exporters cover their loss of profits by insuring for their sales invoice value. Importers on the other hand, if they want to insure against lost profits, must ask for the valuation clause known as Selling Price Less Incurred Expenses. Otherwise, the importer will recoup only their purchase price plus related expenses, including customs duty if elected. Cargo insurance is typically written with a 10 percent loading or policy advance. This additional 10 percent of the value is not necessarily intended to cover loss of profit. The intent is to cover costs overlooked in the original calculations, as well as unexpected costs like losses due to currency fluctuation. Valuation can be handled two ways: through a valuation clause, or by use of a formula. If a valuation clause is used, the insurance premium is itself included in the valuation as a specific item to which the increase also applies. A typical valuation cause reads: valued premium included at amount of invoice, including all charges in the invoice and including prepaid and/or advanced and/or guaranteed freight, if any, plus _____%. (This is usually 10% on exports.)

Computing All Costs


To establish full insurance value, it is necessary to add all costs incurred in making the sale and delivery of goods. The following is a simple example of computing costs.

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Invoice Value of Merchandise $10,000. Cost of Packing Inland Freight Ocean Freight Freight Forwarding Charges Insurance (on $12,000 value) Consular & Other Fees Total Cost 10% loading TOTAL 100. 300. 250. 150. 150. 50. $11,000. 1,100 $12,100

Increased Value Clause


For traders involved in the sale or purchase of volatile commodities such as crude oil, rubber, coffee, cotton, or sugar, it may be prudent to arrange for an Increase in Value Clause. This coverage protects the trader in situations where the commodity traded has increased in value during the shipment, but where there is loss or damage. Under this coverage, both the premium paid and losses are adjusted on the basis of the peak value of the commodity while in transit. In the trade of certain commodities, there are special valuation clauses that have become industrywide standards through long usage, and legal precedent and may be incorporated into an insurance policy.

Terms and Conditions of Coverage


With the origins of marine insurance reaching back almost 4,000 years, it is understandable that insurance terminology appears to be, and indeed is, archaic. Some observers have opined that the archaic terminology is a sign of an industry with a rich heritage, while others feel that it is a barrier behind which insurance companies deny claims. For example, many insurance policies still contain wording such as in this perils clause: touching the adventures and perils which this company is contented to bear, and takes upon itself, they are of the seas, fires, assailing thieves, jettisons, barratry of the master and mariners and all other like perils, losses and misfortunes (illicit or contraband trade excepted in all cases) that have or shall come to the hurt, detriment or damage of the said goods and merchandise or any part thereof. Marine insurance has come a long way, but it is still an industry that has its own distinct terminology, and nowhere is this terminology more prevalent than in the terms and conditions clauses of coverage.

Insurance Coverage
In simplified terms, marine insurance has historically been offered in three levels of coverage: 1. All Risk (AR) (Comprehensive, but does NOT include ALL risks) 2. With Average (WA) (Free of Particular Average coverage plus partial losses due to heavy weather at sea) 3. Free of Particular Average (FPA) (Basic coverage) There are also two broad categories of additional coverage: 4. War Risk Coverage 5. Contingency (Specific Perils) Extensions (This includes a number of optional coverage items)

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Institute Cargo Clauses


While much of the language and terminology have survived intact, a major change occurred in 1982 when the Institute of London Underwriters modernized the historic three levels of insurance coverage with what are known as Institute Cargo Clauses A, B, and C. These clauses standardized marine insurance contract terms for: the risks covered, exclusions, duration, claims, benefit of insurance, minimizing losses, avoidance of delay, and law and practice. Institute clauses are widely accepted worldwide. The new Institute Cargo Clauses are taking the place of the historic clauses in many policies, but are not exact replacements. Note that most U.S. insurance companies have their own policy wordings and do not use the Institute Cargo Clauses, but their policies are similar in coverage. Historic Cargo Clauses All Risks (A.R.) With Average (W.A.) New Institute Cargo Clauses Institute Cargo Clauses A Institute Cargo Clauses B

Free of Particular Average (F.P.A.) Institute Cargo Clauses C Think of each Institute Cargo Clause as a shorthand way the industry has agreed to describe a whole list of contract provisions. In summary:

Clause A
Clause A coverage essentially replaces the historic All Risks clause. It is the most comprehensive of the three, and covers fortuitous loss but not inevitable loss. It excludes willful misconduct, ordinary wear and tear, insufficient packing, natural decay of goods, delays, default by the carrier, and deliberate damage by the carrier. For the full text of Institute Cargo Clause A, go to: www.lmalloyds.com/AM/AMTemplate.cfm? template=/CM/ContentDisplay.cfm&ContentID=14813.

Clause B
Clause B coverage essentially replaces the historic With Average clause and includes Clause C coverage as well as loss due to earthquake, volcanic eruptions, lightning, cargo washed overboard, entry of sea, lake or river water into the transport vehicle or the storage facility, and damage caused during loading and unloading. For the full text of Institute Cargo Clause B, go to: www.lmalloyds.com/AM/AMTemplate.cfm? template=/CM/ContentDisplay.cfm&ContentID=14814.

Clause C
Clause C coverage essentially replaces the historic Free of Particular Average clause and is the most restrictive. It covers loss due to fire or explosion; the stranding, grounding, capsizing, or sinking of the vessel; the damaging contact of the vessel with any object other than water; the derailment or overturning of land vehicles; emergency off-loading of the cargo at a nondestination (distress) port; or the jettisoning of the cargo at sea during an emergency. For the full text of Institute Cargo Clause C, go to: www.lmalloyds.com/AM/AMTemplate.cfm? template=/CM/ContentDisplay.cfm&ContentID=14811.

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Average Terms
Average is a loss to a shipment of goods that is less than a total loss. It comes from the French word avarie, which means damage to ship or cargo, (and ultimately from the Arabic word awarijah, which means merchandise damaged by sea water). A particular average loss is one that affects specific interests only. A general average loss is one that affects all cargo interests on board the vessel as well as the ship herself. Average losses are shared by all parties to the adventure, regardless of whether their cargo was lost or damaged or whether they had insurance. Average losses, therefore, are a risk to the trader.

General Average
General average is an ancient principle of equity in which all parties in a sea adventure (ship, cargo, and freight) proportionately share losses resulting from a voluntary and successful, a) sacrifice of part of the ship or cargo to save the whole adventure from an impending peril, or b) extraordinary expenses necessarily incurred for the joint benefit of ship and cargo. The concept can be traced back to 750 BC in Ancient Rhodes. A general average loss may occur whether goods are insured or not.

Free of Particular Average


Free of Particular Average (FPA) is insurance that provides coverage for partial losses resulting from perils of the sea, in addition to total losses, but only in the event that the carrying vessel has stranded, sunk, burnted, been on fire, or been in collision.

With Average (WA)


With Average is a broader form of insurance coverage than FPA. WA gives the assured protection for partial damage by sea perils, if the partial damage amounts to 3% (or other percentage as specified) or more of the value of the whole shipment or of a shipping package. If the vessel has stranded, sunk, been on fire, or been in collision, the percentage requirement is waived and losses from sea perils are recoverable in full. Additional named perils may be added to the WA clause. Theft, pilferage, nondelivery, freshwater damage, sweat damage, breakage, and leakage are often covered. The combination of perils needed by a particular assured will naturally depend upon the commodity being shipped and the trade involved.

Exclusions
Exclusions are specific situations, conditions, or circumstances that are specified or implied in an insurance contract as not covered. Many of the potential losses listed here are excluded, either by expressed exclusions, conditions, or warranties written into the policy, or by implied conditions or warranties that are read into every marine policy by legal precident. Note, however, that most (but not all) all of these exclusions can be reinstated or included in a policy. Just ask your insurance agent for specifics.

Express Exclusions
Express exclusions are those specifically listed in the policy and often refer to those specific to shipments of certain commodities.

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Implied Warranties
Implied warranties are representations that may not be written into the contract of insurance, but are considered so basic to the relationship that the law gives them much the same effect as if they were written. The top three are: 1. That the insured will exercise utmost good faith in disclosing to the insurance company all facts that are material to the risk when applying for insurance 2. That the generally established usages of trade applicable to the insured subject matter are followed 3. That the assured shall not contribute to a loss through willful fault or negligence

War Risk
Includes exclusions for: War risk and damage resulting from war, civil war, revolution, rebellion, insurrection, or civil strife, or any hostile act by or against a belligerent power. Loss damage or expense arising from the use of any weapon of war employing atomic or nuclear fission, and/or fusion, or other like reaction or radioactive force or matter. Loss or damage resulting from capture, seizure, arrest, restraint, or detainment (piracy excepted), and the consequences of any attempted threat. Loss or damage resulting from derelict mines, torpedoes, bombs, or other derelict weapons of war.

Strikes
Includes exclusions for loss, damage, or expense caused by strikers, locked-out workers, or persons taking part in labor disturbances, riots, or civil commotions caused by any terrorist or any person acting from a political motive.

Inherent Vice
Inherent vice is a broad term that describes inherent physical characteristics of goods that may cause them to suffer deterioration or damage without outside influence (not the result of a casualty or external cause). Because insurance is designed to protect against fortuitous loss, and specifically from external causes, losses due to inherent vice are excluded from all insurance policies. This exclusion is reinforced by wording that coverage is against risks from any external cause. In other words, insurance protects against hazards, not certainties. Inherent vice clauses also include exclusions for ordinary leakage, ordinary loss in weight or volume, or ordinary wear and tear of the subject-matter insured. Examples of inherent vice risks include: Ordinary leakage Ordinary loss in weight or volume Ordinary wear and tear Insufficient packaging Unsuitable packaging Normal loss of weight due to evaporation (trade loss)

Note that in shipping and insurance, packing is considered to be an integral part of the item(s) shipped, and damage to the original packing, or lack thereof, does not arise from an externality.

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Seaworthiness of the Vessel


Modern cargo clauses exclude coverage if the assured (or their servants) are privy to the unseaworthiness or unfitness of a vessel for the safe carriage of the insured goods.

Legality of the Venture


Legal precedent has established an implied warranty by the trader of legality of the venture. This means that insurance will not cover a loss arising out of an illegal venture.

Insolvency
Includes exclusions for loss, damage, or expense arising from insolvency or financial default of the owners, managers, charterers, or operators of the vessel.

Delay, Loss of Market, Trade Loss


The delay clause excludes claims for loss of market and for loss, damage, or deterioration arising from delay. This exclusion appears in all three Institute Cargo Clauses. Insurance companies are reluctant to assume any liability for loss of market, which is generally considered a trade loss and uninsurable. A market loss, furthermore, is an indirect or consequential damage. It is not a physical loss or damage. Similarly, such insurance excludes coverage for ordinary and unavoidable loss of weight caused by evaporation, as in ore shipments. Such loss of weight is either considered an inherent vice or a trade loss, allowed for in the price quoted between traders and, from an insurance viewpoint, should not be regarded as a loss at all. In the United States, it is not unusual to recognize this kind of exclusion, which would otherwise be implied, by stipulating the normal and expected shortage for which the underwriters will not respond.

Other Clauses & Terms


A number of other clauses may be included in open marine insurance policies.

Perils of the Sea


Coverage for loss or damage caused by heavy weather, strandings, strikings on rocks or on bottom, collision with other vessels, contacts with floating objects, etc.

Fire
Coverage for loss or damage due to both direct fire damage and also consequential damage, as by smoke or steam, and loss resulting from efforts to extinguish a fire.

Assailing Thieves
Coverage related to a forcible taking of a vessel or its cargo rather than clandestine theft or mere pilferage.

Jettison
Coverage related to the throwing of cargo overboard, usually to lighten the ship in time of emergency.

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Barratry
Coverage for loss or damage caused by the willful misconduct of master or crew. Includes theft, wrongful conversion, intentional casting away of vessel, or any breach of trust with dishonest intent.

Explosion
Coverage for loss or damage to include explosion however caused, except by war perils. Explosion resulting from fire is covered under fires.

Sue and Labor (Clause)


Language in marine and inland marine policies requiring the policyholder, in event of loss, to take all necessary steps to save the property from further loss, and to recover from others who caused the loss. The insurer agrees to pay reasonable costs of this effort.

Inchmaree Clause
An extension of the marine policy to cover loss resulting from a latent defect of the carrying vessels hull or machinery. Defined as a defect that is not discoverable by due diligence, latent defect is not, by law, recoverable from the vessel owner, and the Inchmaree clause thus plugs a gap that would otherwise exist in complete protection. So-called for a celebrated legal decision involving a vessel of that name.

Subrogation
The right of an insurer, upon payment of a loss, to the benefit of any rights against third parties that may be held by the assured himself. This usually involves recoveries from carriers that handled the shipment.

Shore Clause
Coverage that extends to certain hazards while a shipment is on land. Includes risks of collision, derailment, overturn, sprinkler leakage, windstorm, earthquake, flood, and collapse of docks or wharves.

Deductibles
Most insurance policies have clauses that exclude small claims by introducing deductible averages and franchises into the policy.

Deductible Average
The deductible average is an amount that is subtracted from each loss whereby the assured always bears part of the loss.

Franchise
A franchise is a deductible below which the insurer pays nothing, but at or above which the insurer pays the entire amount of the loss up to the entire sum insured.

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The franchise can be stated as either a percentage of the insured amount or as a set amount in the national currency of the insurance policy. The franchise effectively rules out very small claims.

Currency (Term) of Insurance


Historically, marine insurance policies covered shipments only for the duration of the voyage: from the time the goods were loaded on board an ocean vessel at the port of shipment, until they were discharged and safely landed at the port of destination. This was called waterborne coverage. Over time this coverage was expanded with the clause including transit by craft, raft, and/or lighter to and from the vessel. This coverage, however, was not deemed sufficient to cover traders risks.

Warehouse-to-Warehouse Clause
Warehouse-to-warehouse coverage attaches from the time the goods leave the warehouse at the place named in the policy, certificate, or declaration, for the commencement of the transit, and continues during the ordinary course of transit, including customary transshipment, if any, until the goods are discharged overside from the vessel at the final port. Thereafter, the insurance continues while the goods are in transit and/or awaiting transit, until delivered to the final warehouse at the destination named, or until the expiry of 15 days, or 30 days if the destination to which the goods are insured is outside the port limits, whichever shall first occur. The time limits referred to above are reckoned from midnight of the day on which the discharge of the goods insured from the overseas vessel is completed. The assured is held covered in the case of delay in excess of the time limit specified, if it arises from circumstances beyond his control and if he gives prompt notice and pays additional premium. Warehouse-to-warehouse coverage, however, like waterborne coverage, assumes the goods remain in transit, specifically that they are not placed in storage along the way, and arrive at their destination within certain time limits. This has its drawbacks.

Marine Extension Clause


The marine extension clause broadens warehouse-to-warehouse coverage by eliminating the requirement that the ordinary course of transit be maintained, as well as the 15- or 30-day time limit at destination. Continuation of coverage is provided when certain conditions necessitate discharge of goods from vessel at a port other than the original destination. The insured, however, must act with dispatch in resolving issues related to such an unintended discharge of goods. This clause is now found in practically all open cargo policies.

Summary
The currency (term) of marine insurance has, over time, been broadened from waterborne only to full warehouse-to-warehouse protection as extended. Underwriters must be notified and additional coverage secured only if interruption of transit under the assureds control is contemplated. Such situations will occur at times, and assureds should fully inform their insurance agents or brokers of their needs in this respect so that coverage may be extended as necessary.

Extensions of Coverage
Three specialized types of coverage are also provided by the open cargo policy.

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Shipments by Aircraft
The first covers shipments by aircraft on all risks conditions, irrespective of percentage, but excluding loss due to cold or changes in atmospheric pressure. While it is true that insurance on air express and air freight shipments can be obtained from the airlines, this has disadvantages over controlling the insurance of such shipments by declaring them under an open policy. The insurance purchased from the airlines may merely cover the shipment while it is in the possession of the carrier, without providing full warehouse-to-warehouse coverage. Moreover, the insurance perils may not be as broad as under the shippers own policy. In addition, when insuring with the airlines, the shipper will be unable to deal with his own underwriters at the time of loss adjustment.

Mail Shipments
The second covers mail shipments, also upon all risks conditions, the insured warranting that all packages will be mailed in conformity with parcel post or foreign mail regulations in force at the time of shipment in the country of exportation. While mail insurance can be purchased through the post office, it has the same disadvantages as those given above for insurance purchased from airlines.

Import Duties (US)


The third covers U.S. import duties in the case of shipments sustaining partial damage. A separate amount is declared on import shipments to cover the duty that will be due, and the assured agrees to make all reasonable efforts to secure refunds of duty on shipments arriving in damaged condition.

Endorsements
There are many endorsement (optional coverage) options. This is only a partial list.

Domestic Transit
Extends coverage to domestic transit by rail or truck.

S.R.&C.C.
(Strikes, Riots & Civil Commotions) Extends coverage to physical loss or damage to property insured directly caused by strikers, locked-out workers, or persons taking part in labor disturbances, riots, or civil commotions.

Increased Value Clause


Coverage that protects the trader in situations where the commodity traded has increased in value during the shipment, but where is there is loss or damage. Under this coverage, both the premium paid and losses are adjusted on the basis of the peak value of the commodity while in transit.

War Risk Policy


A separate and distinct policy, but written in conjunction to an open cargo policy, that extends coverage only against war risks as outlined in detail in some dozen rather specific paragraphs. The policy conditions must be read for complete understanding. In general, they cover risks of capture and seizure; destruction or damage by warlike operations in prosecution of hostilities, civil wars, and insurrections; or in the application of sanctions under international agreements.

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Delay or loss of market is excluded. Loss or expense arising from detainments, nationalization of the government to or from which the goods are insured, or seizure under quarantine or customs regulations is also excluded.

FOB Endorsement
Extends coverage to transit risks from the point of origin to the point at which title passes to the buyer.

Other Endorsements
Rust, oxidation, and discoloration Spontaneous combustion Sweating Heating Contamination Tainting Freshwater Shortage and non-delivery Country damage Pollution risk Port Security risk Political risk

Cost of Insurance
Unlike most other types of insurance rates, marine insurance rates are not fully standardized. Rates are determined by a number of factors, all related to the level of risk associated with a shipment, commodity, route, and even the trader. Insurance premiums are generally quoted as a percentage of the value of the shipment or as a percentage of the shipments sales invoice. In the U.S., rates are most often expressed as a rate per $100 of insured value (e.g., $0.50 per $100 of value insured). The cost of insurance will vary widely depending upon risk factors such as commodity, loss history, volume, security, and geographic scope. The following is a list of factors that will affect the cost of insurance for an international shipment:
1. Type of Insurance Coverage/Risks

The more risk covered by the insurance, the higher the rate and premium paid. In the two systems of coverage, 1. Institute Cargo Clause A provides the greatest coverage, then B with less coverage, and C with least coverage. 2. All Risk coverage provides the greatest coverage, With Average less coverage, and Free of Particular Average the least coverage. Various contingency covers will also add to the cost.
2. Goods Shipped

Shippers of goods that are susceptible to theft and or damage will pay a higher premium. High value items such as gemstones, jewelry, and computer chips have a high value to size/weight ratio and will pay a higher rate than a shipper of iron ore. Fragile artwork and glass products are more susceptible to damage than cast-iron foundry work and would also pay a higher rate. Shippers of perishable goods such as food and flowers will pay a higher premium rate than shippers of products that are not perishable.

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3. Countries and Ports of Origin and Destination

Shipments from, through, or to high-risk countries or ports will pay a higher premium. This includes countries experiencing war and civil unrest, but also specific ports known to have high losses due to theft and corruption.
4. Mode of Transport

Each mode of transport will have its own rate structure. For example, air cargo typically has the lowest insurance rates. This is because air freight security is better than all land and sea freight, and air freight shipments are quicker to reach their final destination. In increasing levels of premium rates are: air freight, land freight, and ocean freight.
5. Carrier(s)

Underwriters are very aware that some carriers have better loss records than others and price insurance accordingly.
6. Route, Length of Voyage, and Transshipments

Certain routes are known to produce higher losses. Some routes go through war zones, others through zones known for piracy and poor weather. In general terms, the longer the voyage, the greater is the risk of loss and damage. Also, a shipment that requires transshipment, meaning that it is loaded, unloaded, and then loaded and unloaded again, will be at greater risk of loss or damage. The more times merchandise is handled, the greater is the risk of loss or damage.
7. Storage

Storage and where storage occurs will affect rates and premiums. Intended storage is often not covered by marine insurance policies. If a shipment is to be stored at any time during a voyage, you must let the underwriter know.
8. Packing

Packing is a significant issue for insurance underwriters. So much so that insufficiently or unsuitably packaged shipments are specifically excluded from coverage on most all policies. It is therefore incumbent upon the importer to insist upon proper packaging and for the exporter to provide appropriate packaging. The underwriter will want to know both the commodity and the packaging to assess suitability. Also, break bulk shipments, especially those prone to pilferage, will require a higher rate and premium than those that are correctly palletized and containerized.
9. Value

While the insurance rate is quoted as a percentage of value, there are certain situations where the higher the value, especially in a value-to-size ratio, the higher the insurance premium rate. Examples typically include such high-value shipments as computer chips, precious stones, fine jewelry, artwork, and electronic components.
10. Assureds Experience as an International Trader

Those new to international trade tend to make more mistakes than those with years of experience. Underwriters are interested to know a traders experience.

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11. Assureds Attitude Toward Claims

The assureds attitude toward claims is another risk factor for underwriters. Traders with a history of filing nuisance claims for minor damage or for unsubstantiated damage will pay higher rates.
12. Assureds Attitude Toward Third-Party

Recoveries Some traders are very reluctant to press suppliers and certain carriers for recovery as they fear it will damage their relationships with these trade partners. Insurance companies, on the other hand, will want to recover as much as possible from responsible third parties.

Loss Prevention
The primary function of insurance is to redistribute risk and loss in order to manage risk. An equally important function of insurance, and one that is economically more creative, is the actual prevention of loss. As a result, loss prevention has become a significant issue for marine insurance companies. In fact, larger companies will have a loss prevention department devoted to assisting international traders with information about packing, containerization, and other proactive measures to lessen loss or damage to shipments. Proper packaging, in export-quality cartons or containers, palletization, and containerization, are key factors in lessening risk of loss and damage. Container shipments, especially when the container is packed and sealed at the point of origin and unloaded at the final destination, require less handling and better protection for a shipment than a break bulk. Theft, especially pilferage is dramatically reduced. Likelihood of damage is also much lower, as the goods are subject to less handling. Break bulk shipments, therefore, are subject to a greater insurance premium rates than container shipments.

In Case of Loss or Damage


Most international shipments depart and arrive as planned with no loss, damage, or delay. The insurance policy will, in the majority of cases, have served its purpose of limiting risk without ever having been exercised. However, loss and damage may occur, and you will need to know how to proceed in order to protect your own interests and the interests of your insurance company. The following are procedures for receipt of shipment, handling loss or damage, and filing claims. At the very least, procedures for receipt of shipment should be known by anyone who may be asked to sign for a shipment received.

Best Practices for Receipt of Shipment


It is the responsibility of the consignee to thoroughly inspect all shipments at time of receipt. 1. Thoroughly check the consignment against the bill of lading and other paperwork. 2. Match the number of cartons, packages, pallets, barrels, drums, or crates to the bill of lading or waybill. 3. Carefully inspect the exterior packaging for damage, wetting, or other visible damage. 4. Document any damage with photos or video, as well as with written notations. Note the time of discovery. 5. State the number of cartons, pallets, or drums received on the delivery paperwork. If there is a discrepancy with the quantities stated on the paperwork, state the number missing as well. 6. If there is damage, be certain to note on the delivery paperwork the extent of damage. For example: nine cartons crushed with contents destroyed, or 22 cartons soaking wet.

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7. Do not sign for receipt without inspection or without notations of loss or damage on the bill of lading.

Loss or Damage: Duties of the Assured


The assured has three very specific responsibilities to the insurance company in the case of loss and damage.
Secure Your Goods

You must make every effort to protect the cargo from additional loss or damage as the circumstances permit. This is the Sue and Labor clause of an insurance policy. Reasonable expenses incurred for this step are usually reimbursed by the insurance company. In short, the insurance company expects the insured to do what they would do if the shipment were not insured. Do not destroy or abandon damaged goods until your insurance company has released them as part of their acceptance of the claim. Additional storage costs or cleanup fees generated by keeping damaged goods may be covered by your insurance policy.
Notify the Insurance Company

Contact your agent, broker, or insurance company immediately so that they can arrange for a survey of the damage. Damaged property and packing materials should be kept in the condition received until after the survey, unless doing so will contribute to further loss or damage. Send duplicates of any provisional claim information sent to the carrier, as well as any additional documentation demonstrating the extent and causes of the damage or loss.
File a Claim in Writing Against the Carrier

Immediately file a claim against the carrier for the damage or loss. This claim may be made using almost any form or format, but should include the words Notice and Claim for Loss or Damage, the name of the consignee, the date, the bill of lading number, the name of the carrying vessel, a full description of the loss or damage, a statement that the carrier will be held responsible for the loss or damage, and the name and title of the person making the claim. A follow-up telephone call is recommended. The claim against the carrier is made to protect the interests of the insurance company for what is called subrogation. Subrogation is the right of an insurer, upon payment of a loss, to the benefit of any rights against third parties that may be held by the assured himself. This usually involves recoveries from carriers that handled the shipment.

The Insurance Claim


You must notify your agent or broker immediately. The insurance company will provide the proper forms for making a formal claim. These vary in content and often must be made in a specific language to be valid. Along with the claim forms, a claim typically includes the following: 1. 2. 3. 4. 5. 6. 7. 8. A copy of the original insurance document A copy of the original commercial invoice Packing list and/or other evidence of shipment A copy of the bill of lading or waybill A copy of Notice and Claim for Loss and Damage to carrier A copy of insurance company or independent survey report Documentation of loss or damage with photos Any other documents deemed necessary to demonstrating the need for compensation

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Time Limits
Various jurisdictions of the world are not unified in their time limitations regarding the filing of claims. Listed below are internationally recommended best practices and statute of limitations for filing such claims for intermodal transport. Time Limits for Filing Claims Mode of Transport Sea Transport Air Transport Rail Transport Road Transport Covering Regulation The Hague Rules The Warsaw Convention CIM Convention CMR Convention Notice of Claim for Loss or Damage (Apparent) Immediate upon receipt Immediate upon receipt Immediate upon receipt Immediate upon receipt Notice of Claim for Loss or Damage (Hidden) 3 consecutive days 7 -14 consecutive days 7 consecutive days 7 consecutive days Statute of Limitation 1 year 2 years 1 year 1 year

Adjustment of Claims
Assumptions
In this discussion, it is assumed that: 1. You have valid insurance coverage 2. You have sustained loss or damage to a shipment that is covered by insurance 3. You have followed through on all Duties of the Assured as described in the In Case of Loss or Damage section on the preceding page. You have: 1. Secured the goods 2. Notified the insurance company 3. Filed a claim against the carrier 4. Filed a claim with the insurance company and provided all the required documentation. It cannot be overstated that the policy holder has specific responsibilities to the insurance company. These are stated in the sue and labor clause of the insurance policy and outlined in the Duties of the Assured section on the preceding page. If the assured does not follow through on these duties, the outcome of the insurance adjustment can be severely impacted and delayed.

The Adjustment
Adjustment is the settlement of an insurance claim. In the case of loss or damage, it is the responsibility of the insurance company to indemnify the assured according to the terms and conditions of the insurance policy. Insurance companies also have a responsibility to their shareholders not to pay claims that are not covered by insurance policies. It is the insurers dual role of responsibility to the assured and to their shareholders that can create friction between the parties. The two greatest problems are: 1. The assured didnt understand or didnt take the time to completely understand what insurance he or she was buying, and/or 2. The assured did not obtain complete insurance coverage for their shipment.

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The vast majority of insurance companies make every effort to provide fair compensation based on the facts of the claim and coverage, but the insured has to be prepared for the possibility that the insurers interpretation of the policy may be different from the insureds. It is for these reasons that traders must understand coverage, archaic language notwithstanding, and obtain complete insurance coverage for their shipment. Reading the details of the policy for the first time right before filing a claim is bound to lead to disappointment. As a result, it is strongly recommended that traders avail themselves of an experienced insurance agent or broker with specific experience in marine cargo insurance. Consider this person to be an important part of your professional teamas important as your customs broker, freight forwarder, logistics professional, lawyer, and accountant.

The Process
The adjustment process is based upon a complete review of the insurance claim documents and a complete review of the terms and conditions of the insurance policy. If claim documents are missing or incomplete, this will delay the process. The adjuster will review the claim and policy and: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Determine if loss or damage has occurred Determine if the loss or damage was covered by the insurance policy Determine the type of loss Determine the extent of loss Establish whether there is third-party responsibility Establish whether the insurance company has claim against third parties (rights of subrogation) Start salvage procedures Start subrogation procedures against third parties Determine what compensation is due the policyholder Arrange to make compensation to the policyholder

Compensation is often paid to the assured through the local agent or broker or directly from the insurance companys main office.

Types of Losses
Total Loss
Actual Total Loss

An actual total loss occurs when the goods are destroyed, when the assured is irretrievably deprived of their possession, or when the goods arrive so damaged as to cease to be a thing of the kind insured. Examples of this last, which is spoken of as a loss of specie, are cement arriving as rock or textiles as rags. Adjustment of actual total losses usually involves little difficulty. The policy being a valued one, payment for total loss is in the full amount of the policy. Disasters likely to give rise to total loss include fire, sinking, or stranding of the vessel, collision, and loss overboard in the course of loading or discharge.
Constructive Total Loss

A constructive total loss occurs when the expense of recovering or repairing the goods would exceed their value after this expenditure had been incurred. In the adjustment of constructive total losses, the value of any remaining salvage abandoned to underwriters may at time, by agreement, be taken into consideration, with payment to the

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assured upon a net basis. Otherwise, underwriters pay full insured value and may then dispose of the salvage for their own account, provided they have elected to accept abandonment. A survey report may not be practicable when a total loss has taken place, but the documents should include evidence that the shipment was actually loaded on board the ocean vessel in the full quantity claimed. If the loss was due to sea peril, a masters protest will usually be required. This certifies the fact that unusually heavy weather or other exceptional circumstance was encountered during the voyage and is extended to confirm the loss of the shipment in question. In claims for total loss, it is especially necessary that a full set of insurance certificates and bills of lading be submitted to the insurance company representative.

Particular Average Loss


There are two kinds of particular average losses: the total loss of a part of the goods, and the arrival of goods at the destination in a damaged condition.
Total Loss of Part of the Goods Shipped

In the first situation, it is necessary to determine how much of the total amount insured is applicable to the missing item. In homogeneous or fungible cargo, that is, cargo which is capable of mutual substitution, like oil or coalit is frequently a matter of simple arithmetic. The value of the unit of measurement of the cargo is found by dividing the amount of insurance by the total number of units in the shipment. This value multiplied by the number of missing units gives the value of the loss. Trade Loss Where a normal or trade loss is to be expected, as in cargo subject to leakage, slackage, or loss of moisture during the voyage, the method of calculation is slightly different. The value of the insurance is divided by the number of units in the expected outturn, that is, the expected arrived quantity rather than the shipped quantity. This can be determined either by the normal percentage of trade loss for similar shipments or by examinations of sound arrived cargo forming part of the shipment in question. While this method will produce a somewhat higher insured value per unit, it naturally requires the normal or trade loss to be deducted in calculating the actual shortage sustained. Diverse Articles In the case of general cargo, with the policy covering diverse articles as invoiced to the purchaser and insured in a lump sum, it will be necessary to apportion the total insurance over the specific item for which a claim is being made. The following example shows the usual method of doing this: Total invoice Insured for Insurance ratio Invoice value of items lost Insured in proportion (110%) $1,000 $1,100 110% $50 $55

Damaged Goods Adjustment of claims on goods arriving in a damaged condition requires a different method of approach. Here the consignee and the surveyor attempt to reach an agreed percentage of depreciation, and this is applied to the insured value of the damaged articles. At times, the depreciation agreed upon may be in terms of units of goods (as yards of cloth, for example), and in such cases, the insured value of such quantity is the loss recoverable. On the other hand, a flat dollar amount of depreciation may be assessed. When the percentage of depreciation cannot be mutually agreed upon, the damaged goods must be sold in order to arrive at the extent of loss. When this method is used, the calculation is a comparison of the sound wholesale value of the goods with the damaged values at the time and place of sale. This percentage is then applied to the insured value of the damaged articles. Auction charges and other costs of sale are added to determine the total amount recoverable. The element of market fluctuation is thus eliminated.

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It is sometimes incorrectly assumed that when damaged goods are sold to determine the extent of loss, the underwriter is obligated to pay the difference between the amount of insurance and the net proceeds of the sale. This method of adjustment, known as salvage loss is regularly used only if goods are justifiably sold short of destination. If damaged goods can be advantageously repaired at destination, the underwriter will pay the actual cost of such repairs, not exceeding the insured value of the article. A specialized situation arises in the case of damage to machinery. Here the policy provides that either the company will be liable for the proportion of the insured value of the lost or damaged part, or it will be liable, at the assureds option, for the cost and expense (including labor and forwarding charges) of replacing or repairing the lost or damaged part. In no event, however, will the companys liability be greater than the insured value of the complete machine. Labels or Wrappers A somewhat similar situation arises in the case of damage to labels or wrappers. Here, the policy ordinarily provides that the underwriter shall not be liable for more than an amount sufficient to pay the cost of new labels, together with the cost of reconditioning the goods, but in no event for more than the insured value of the damaged merchandise.

General Average Loss


A general average loss may occur whether goods are insured or not. It is one that results from an intentional sacrifice (or expenditure) incurred by the master of a vessel in time of danger for the benefit of both ship and cargo. The classic example of this is jettison to lighten a stranded vessel. From the most ancient times, the maritime laws of all trading nations have held that such a sacrifice shall be borne by all for whose benefit the sacrifice was made, and not alone by the owner of the cargo thrown overboard. The principles of general average have been refined over the years, and they have inevitably come to reflect the increasing complexity of present-day commerce. A vessel owner may and does declare his vessel under general average whenever, for the common good in time of danger, an intentional sacrifice of ship or cargo has been made, or an extraordinary expenditure has been incurred. In actual practice, general averages result mainly from strandings, fires, collisions, and engaging salvage assistance or putting into a port of refuge following a machinery breakdown or other peril. The preparation of a general average adjustment is a complex accounting operation. It is entrusted to professionally trained average adjusters (not the insurance company) and frequently requires two or three years for completion. Security While the shipper need not concern himself with the adjustment itself, he or his consignee must take action at three points. He or she must: 1. Post security in order to obtain release of cargo at port of destination. 2. Furnish certain information relating to the value of the shipment. 3. Pay the general average contribution at such time as the assessment is finally levied. Security is required by vessel agents before they release cargo under general average. Until this security has been provided, the ship owner has a lien on the goods and has the right to retain them in his possession. The security is in two parts. First is the general average bond or agreement signed by the cargo owner himself (not the underwriter), by which he agrees to pay such general average contribution as may become due. This document should be signed and returned directly to the adjusters, to save valuable time. Second is a cash deposit or an underwriters guarantee, which is held by the ship owner as security for the ultimate general average contribution. General Average Deposit An insured cargo owner will usually ask his underwriters or their agents to furnish the guarantee. The uninsured cargo owner will have to make a cash deposit or furnish equivalent security. The general average deposit receipt is a negotiable instrument and should be carefully preserved. It must be tendered to the average adjusters upon completion of the adjustment for refund of any excess payment over and above the general average contribution as finally determined. (In practice, the required cash deposit or guarantee will

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slightly exceed the anticipated contribution in order to provide a margin of safety.) An assured who has not waited for an underwriters guarantee and has posted a cash deposit should surrender his general average deposit receipt to his underwriters at the first opportunity. If fully insured, he will then be reimbursed in full. The general average adjusters will also require of the cargo owner certain information, in order that they may calculate the landed value on which the contribution is to be based. This information will include a certified copy of the original shippers invoice and a statement of value showing the gross wholesale market value at the port of discharge. It is desirable that these documents, together with copies of the bills of lading, be routed through the underwriter to the general average adjusters. If the cargo owner is insured to value, his eventual payment of the general average contribution will be made by the underwriter who furnished the guarantee. If but partially insured, contributions and credits are shared pro rata by the assured and underwriter. In the case of the uninsured cargo owner, the contribution will be offset against his cash deposit plus any credit for sacrifices (see General Average: Illustration below), and the balance refunded to him. The underwriters may not be liable for the full general average contribution of an assured unless the amount of insurance equals the landed value of the goods. The valuation clause in the open policy (which provides for declaring insurance in the amount of invoice, plus insurance, plus freight, plus 10%) provides a measure of leeway for just such a situation. An insured cargo owner will collect his physical damage loss from his underwriters as in a particular average claim. Cargo interests that have had part or all of their goods sacrificed for the common safety will be entitled to receive an allowance in the general average. This appears as a credit entry in the adjustment and is offset against the contribution to determine the net amount to be paid or to receive. It is a fundamental principle of general average that contributions are assessed against credits allowed or made good for general average sacrifices. Otherwise, the interests receiving allowances would be better off than those whose goods had not been sacrificed.
General Average: Illustration

A simplified illustration based upon an actual case will help to make the application of general average more understandable. A vessel carrying a bulk cargo of ore was stranded. In attempts to get free, part of the cargo was jettisoned, both the engines and the ship were damaged, and a salvage vessel was employed. The ship was refloated after 10 days and put into a port of refuge for repairs. Adjustment of the general average will work out as follows: Sound market value at destination of jettisoned cargo (less duty and handling charges) . . . . . . . . . . . . . . . . . . . . . $20,000 Cost of hull and engine repairs chargeable to general average, i.e., resulting from "intentional" damage in efforts to refloat . . . . . . . . . . . $50,000 Services of salvage vessel. . . . . . . . . $70,000

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Disbursements at port of refuge and other charges. . . . . . . . . . $35,000 Total "vessel" sacrifice . . . . . . . . . $155,000 . . . . $155,000

Total to be allowed or "made good" in general average . . . . . . . . . $175,000

Value of cargo (including sacrifice) . . . . . . . . . . . . $100,000 Value of vessel (including sacrifice). . . . . . . . . . . . $400,000

Total contributory values . . . . . . . . . . . . . . . . . $500,000 Rate of general average contribution . . . . . . . . . . . . . . . $175,000 . . . . . . . . . . . . . . . . . . . . . .$500,000 . . . . . 35%

The cargo and the vessel will each contribute 35% of their respective values, and they will receive their sacrifices and expenditures. The final reckoning will then be as follows: Cargo Vessel Pays contribution of Receives Balance $35,000 $20,000 (35% of $100,000) $15,000 to pay

$140,000 $155,000 $15,000 to receive (35% of $400,000)

If the cargo owner was fully insured, he will have had his underwriters furnish a general average guarantee in order to secure possession of the balance of his ore at destination. He will have been reimbursed for the insured value of the ore jettisoned. He will then be relieved of any further participation in the general average. If the cargo owner was uninsured, he will have had to give security in the amount of about $30,000 in order to gain custody of the balance of his shipment of ore. Eventually, he will be credited with the allowance for the jettisoned ore, and this will reduce his balance to pay to $15,000, which will represent an out-of-pocket expense. In addition, of course, he will have had to stand the $20,000 loss of the ore jettisoned. The example given above has assumed a single cargo owner. The same principle applies equally to general cargo vessels, and each individual shipper must personally sign a general average bond, and he or his underwriter must furnish further security and pay any balance due after receiving credit for allowances. It is clear that liability for contribution in general average is far from an academic matter to the ocean shipper or consignee. His ownership of cargo entails certain personal obligations (such as signing the bond and furnishing information), which he cannot avoid. But by fully insuring his goods, the financial obligation can be transferred to his underwriters.

Subrogation
Recovery from Carriers
It might be thought that the assured has no further interest in a claim once it has been settled. This is not the case. It is basic in the law of insurance that the insurer, upon payment of a loss,

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is entitled to the benefit of any rights against third parties that may be held by the assured himself. Recoveries from vessel owners and others play an important part in reducing the loss experience under an open policy. It is thus of very real value to the shipper to be insured by a company that vigorously pursues its rights of subrogation against inland and ocean carriers and other parties that may be held responsible for losses covered by the policy. When goods arrive at destination in a damaged condition, the question arises as to the extent of the carriers liability for such damage. Liability will depend in part upon the provisions of the bill of lading as the contract of carriage, in part upon common law modifications of the freedom of contract in this field, and in part upon statutory enactments, notably the Harter Act of l893 and the Carriage of Goods by Sea Act of 1936 (known as COGSA). The degree to which a steamship company can be held responsible for damage sustained by a specific shipment is frequently difficult to determine. COGSA applies to import and export shipments and, by agreement, to much coastwise and intercoastal business a well. Where COGSA applies, general speaking, the vessel is responsible for damage resulting from negligence in the loading, stowing, and discharge of cargo. It is not responsible for damage resulting from errors of navigation or management of the ship, from unseaworthiness of the vessel (unless caused by lack of due diligence to make it seaworthy), or from perils of the sea, fire, and a number of other listed causes. The burden of proof in establishing fault will rest at times upon the shipper and at times upon the carrier. The intricacies of these situations cannot be dealt with at length here. The subject is complex and one that calls for expert handling, if maximum recoveries from carriers are to be secured. For many years, certain underwriters have found it expedient to utilize the service of a recovery agency devoted entirely to their own claims work. The results have amply justified this specialized attention.

Selecting the Insurer


In selecting a marine insurance company, shippers should not fail to satisfy themselves as to the competence of its recovery facilities. The subrogation efforts of insurance companies benefit the individual account by keeping down the insurance cost. They are also an important factor in securing improved cargo handling by ocean carriers. The overall loss policy of the insurance company is important to the assured. The purpose of an insurance company is to pay losses. Losses covered by the policy should be adjusted fairly and paid without delay. In fairness to others, losses not covered by the policy cannot be accepted. Borderline situations are bound to occur from time to time. For one reason or another, full information as to the cause and extent of damage cannot always be secured. At these times, the assured has a right to expect that his claim will be sympathetically considered and that he will be given every reasonable benefit of doubt that the circumstances permit. Regardless of the type of claim, the assured is entitled to prompt, courteous, and competent loss adjustment. Those marine underwriters who have a long-established record of honorable dealing to maintain will make every effort to meet these exacting standards and to justify the continued confidence of policyholders in the trading community throughout the world.

Copyright 1998-2011 World Trade Press. All Rights Reserved. No sample or information therein may be used without the express written permission of World Trade Press.

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