22 June 2022
Cargo Insurance 101
Land, sea or air, from warehouse to customer, commerce depends on the movement of goods around the world. The range of risks is diverse and can vary hugely between different industries and sectors. Cargo insurance, with its wide range of coverage options, helps businesses manage and transfer complex cargo risks. Here’s our beginner’s guide.
Billions of tonnes of goods are transported globally each year. Although most will arrive safely, it is inevitable that some will be lost, stolen, delayed or damaged (either deliberately or accidentally). Cargo insurance protects commercial buyers or sellers of a cargo from financial harm by offering protection to the balance sheet, but given the wide coverage options for cargo insurance, it’s not always easy to identify the right type and level of coverage.
In some instances, cargo insurance is a legal requirement. Even when this is not the case it is almost always advisable to protect cargo with some form of insurance. Who is responsible for acquiring that coverage – whether seller or buyer – depends on the commercial terms of the contract under which the goods are being shipped. Internationally, many contracts will rely on the International Chamber of Commerce (ICC) ‘Incoterms’ or International Commercial Terms; a series of pre-defined commercial terms published by the ICC relating to international commercial law which, while not legally binding, are widely used in international commercial transactions or procurement processes. Since Incoterms standardise and define the monetary and procedural aspects of international shipping practices, they aid the ensuring proper, timely payment of goods and services – thereby helping buyers and sellers better understand their scope of risk.
Stock Throughput
Stock Throughput (STP) insurance covers goods through the complete manufacturing supply chain: from the point the raw materials leave the supplier’s premises, through work in progress, storage of stock, and transit of the finished product to the buyer. Coverage at third-party locations can also be included, such as storage at distribution warehouses. Other features of STP insurance include:
- Pricing: The bundling together of insurance into one contract can provide a ‘bulk buy’ discount compared to the purchase of separate contracts to cover each individual step in the supply chain. The premium is determined by an analysis of exposures, and is adjustable on sales turnover, which minimizes administration and eliminates the need for declarations.
- Basis of Valuation/Loss Settlement: Selling price can be utilised for all stock, including raw materials and work in progress.
- Limits: Expressed as ‘any one loss, any one location’, and apply separately to transits and storage. High limits are available, even in areas prone to natural disasters, e.g., windstorms, flooding and earthquakes.
- Deductibles: STP will generally offer lower deductible options compared to the Property insurance market, and one deductible in respect of locations operating on an occurrence basis for all perils, including named windstorm, flood and earthquake risks.
- Certificates and/or Contracts: May be issued under the STP programme to comply with the insurance requirements of a Letter of Credit (LC) or Sales Contract.
Further benefit to clients can be achieved through layering STP programmes. This involves placing a primary layer with an insurer and/or panel of insurers, with the contract rated on average values exposed to the primary layer. Depending on a number of influencing factors, an excess layer(s) is then structured to maximise capacity. This results in a programme with broader coverage than other solutions available on the Property insurance market, often at more competitive prices.
Excess Inventory Insurance
Excess Inventory Insurance does what it says on the tin, and can be placed either as a standalone policy or in conjunction with a STP programme. Standalone catastrophe peril insurance on inventory can also be placed that is competitive to coverage through the property market.
Project Cargo Insurance
Project Cargo Insurance covers the equipment, materials or goods required for a particular project, e.g., infrastructure or construction developments, as these items are moved from the point of manufacturing to the point of use on a particular project. It can also be dovetailed into a package that includes coverage of any Advanced Loss of Profits or Delay in Start-up penalties, which are incurred as a result of damage or delays to project-critical items during their transit.
Gallagher provides bespoke Project Cargo Insurance coverage, tailored to fit the needs of the insured and their principals. In addition to Advanced Loss of Profits/Delay in Start-up coverage, this could include optional non-vitiation and Loss Lenders Clauses.
Employing some of the leading independent surveyors and/or underwriters’ in-house surveyors, our Project Cargo Insurance services include:
- Checking the quality and suitability of packaging and lifting gears, and supervise the load-out, ensuring items are appropriately secured and covered on their transport.
- Pre-load and unloading surveys, including load and stowage operations.
- Inland transit route survey especially for large/heavy items, or those with an unusual footprint.
- A dedicated claims team, situated alongside the placing team, for better communication and faster resolution should issues arise.
Containers Insurance
The ongoing port congestion and supply chain disruption experienced since 2020 led to a shortage of containers. In 2021, the price of a new 20 foot’ dry freight container nearly doubled from its historical average cost. While prices are now lower than the peaks seen in the second half of 2021, prices remain still considerably higher than the five-year average cost.
In addition to shipping lines and container lessors who are the largest buyers of new containers, container traders and new entrants (including household name retailers) are also buying new builds and using one-way lease or chartered vessels to move the equipment.
Whether you are a container owner, operator, handler, lessor or trader our Container team can arrange insurance to meet your needs. Our insurance products include:
- All risks of physical loss or damage from any external cause, including earthquake, windstorm and flood.
- Third-party liability, including for North American chassis.
- Container handling / storage liability.
- Ship operator risks.
- Marine war risks, strikes and terrorism, including piracy.
- Lessee default: recovery, repatriation, repairs, missing units, and loss of revenue.
Other insurance products available in the property market
In addition to the above, the following insurance products may also be worth considering:
Terrorism Coverage
Prior to 9/11, standard Property insurance policies included Terrorism as part of the cover. Subsequent to this event, insurers began to reassess terrorism risk coverage and pricing. Today, separate Terrorism policies which wrap around STP placements are available in the standalone, specialist Political Violence insurance market. These covers can help businesses protect their balance sheet from both the physical damage losses, and the loss of earnings and business interruption as a result of a terrorist event.
Gallagher’s Crisis Management team are renowned for their robust, competitive terrorism insurance policies and for their consulting services which help clients to anticipate, mitigate, and prevent terrorism incidents, and respond and recover (should the worst happen).
Natural Catastrophe (NatCat)
NatCat insurance protects businesses and residences against natural disasters, including earthquakes, floods, and hurricanes. Gallagher’s Property team help businesses model and understand their changing exposures to NatCat perils, and structuring a programme around those specific risks.
Your guide through the maze
Established in 1994, Gallagher Specialty’s Cargo division, are experts skilled at navigating the world of cargo insurance. With experience placing insurance in all major geographical hubs, including London, the US, Scandinavia and Continental Europe, and Singapore, they bring unique insight into the cargo market and understanding of the risks involved, which allows them to support a broad range of clients and risk profiles.
The Walbrook Building 25 Walbrook London, EC4N 8AW
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Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 119013.