Cargo Insurance: Definition, Types, Importance & Best Policies (2021)

With globalisation making the world small, businesses have crossed the geographical boundaries. Nowadays, businesses are not localised in nature. Manufacturers are selling their items far away and exploring untouched markets for his or her products. That is why the transportation of goods in one spot to another has turned into a common practice for almost all businesses. For this reason cargo insurance becomes of utmost importance to many businesses.

Though transportation of goods helps businesses expand their market, the risks associated with such transportation can't be ignored. If the goods are damaged on the road, the company incurs huge loss. To pay for such losses suffered by businesses, marine insurance coverage is available. These policies cover the damages suffered when goods are transported in one place to another.

Marine insurance is broadly divided into two parts – cargo insurance and hull insurance. While cargo insurance covers the products being transported, hull insurance covers the transportation vehicle. Cargo insurance is relevant for businesses transporting goods and it is, therefore, very popular. Let's know very well what cargo insurance is about –

What is cargo insurance?

Cargo insurance coverage is a type of marine insurance policy which covers the goods that are transported from one place to another. A cargo insurance plan usually covers the products from their place of transport towards the destination. The policy, thus, safeguards the business from the loss suffered when the goods being transported are damaged before reaching their destination.

Covered transportation under cargo insurance

A cargo insurance policy covers transportation with the following means –

• Water
• Air
• Road
• Rail
• Registered postal parcel
• Courier

You can also purchase a policy for covering transport by several from the above-listed means.

Who can purchase cargo insurance?

Cargo insurance can be purchased by the following –

1. Merchants involved in importing and exporting of goods
2. Buyers of goods
3. Sellers of goods
4. Buying agents
5. Banks
6. Contractors, etc.

What is included under cargo insurance?

Coverage within cargo insurance plan is dependent upon the Institute Coverage Clause which you buy using the policy. ICC may be the standard coverage under cargo insurance which is accepted by all marine insurance providers. There are three types of ICCs which are as follows –

1. Institute Coverage Clause 'C'

   This clause gives the basic coverage within cargo insurance plan. The policy includes only named perils that are as follows:

   1. Fire and/or explosion
   2. Overturning, collision or derailment from the transportation vehicle
   3. Jettison
   4. Discharge of the cargo at a reason for distress
2. Institute Cargo Clause 'B'

   This clause is wider than ICC 'C' as it covers the damages suffered due to the following perils:

   1. Perils covered under ICC 'C'
   2. Earthquakes
   3. Lightning
   4. Volcanic eruptions
   5. Water seepage into the transport vessel or storage area
   6. Losses suffered when loading or unloading the goods

• Institute Cargo Clause 'A'

  This is also called 'All Risk Cover' as it includes all the perils with the result that the products could be damaged. The coverage includes the following perils:

  1. Perils covered under ICC 'C' and ICC 'B'
  2. Loss because of rainwater
  3. Theft, pilferage or other kind of malicious damage
  4. Shortage, breakage or any type of partial loss
  5. Any other losses suffered by the cargo other than the excluded ones

You can pick any kind of coverage clause but ICC 'A' is better due to the comprehensive scope of coverage it provides.

Exclusions under cargo insurance

Though cargo insurance policies provide a significant comprehensive scope of coverage, there are some perils and cases of loss which are not taught in policy. Common exclusions under marine cargo insurance plans include the following –

1. Damages suffered due to negligence and/or wilful misconduct
2. The loss suffered because of delay in transportation
3. Damages which occur when goods are improperly packaged
4. Perils like war, riots, civil commotion, strike, etc.
5. Costs incurred in taking out the wreckage following a damage
6. Damages suffered because of biological, nuclear or chemical weapons
7. Damages due to radioactive contamination
8. If the charterers, managers, owners or operators of the vessel become financially insolvent and therefore are not able to transport the goods, the consequent losses wouldn't be covered
9. Inherent vice within the cargo which is sure to cause damage
10. Normal reduction in weight from the cargo and leakage or breakage of goods
11. If the transportation vehicle is unseaworthy, i.e., unfit to move the products, but the vessel can be used for transportation, consequent losses wouldn't be covered

Types of marine cargo insurance policies:

Now that you know the policy and exclusions under cargo insurance coverage, it's also wise to be aware of different types of plans which are available in the marketplace. Because the transportation needs of different businesses may be different, cargo insurance plans are available in the next variants –

Important terms related to cargo insurance

Marine cargo insurance plans possess some terminology related to them that might confuse you. So, here are a few common technical jargons simplified –

1. EXW

   The full form of EXW can be Ex-works, ex-warehouse, ex-place, etc. Under EXW cargo insurance coverage, the buyer should really collect delivery of the goods in the seller. Any damage to the cargo before the buyer collects it would be the liability of the buyer. As such, the customer buys a cargo insurance policy on EXW to insure his liability.

2. FOB

   FOB means Free on Board. FOB policies allow it to be the seller's liability for loading the goods around the ship. If the merchandise is damaged before they are loaded on the vessel, the vendor would face a loss. That is why the seller buys a FOB cargo insurance policy for covering his liability. The seller's liability is over when the goods are loaded. The customer then must buy another policy to pay for the chance of damage during transportation and unloading from the goods.

3. CFR

   The full form ofCFR is Cost and Freight. When the seller pays the freight charge for booking the transportation vehicle, he incurs an additional cost. To pay for this cost the vendor buys CFR policy which pays the loss of freight should the goods are damaged.

4. CIF

   CIF means Cost, Insurance Freight. When the buyer asks the seller to purchase a marine cargo insurance plan from the seller's warehouse to his warehouse, the vendor can purchase a CIF policy. This is just one policy covering all of the risks from the origin to the destination. The insurance policy would belong to the seller before the merchandise is loaded onto the transportation vehicle. Once loaded, the ownership of the policy would change and also the buyer would end up being the policyholder. Thus, just one policy would cover the risks faced through the buyer as well as the seller.

5. DDP/DAP

   DDP/DAP meansDelivered Duty Paid / Delivered at Place. These contracts are applicable if the buyer has superiority over the relation to transportation. Usually, such situations, the sellers are required to transport the goods towards the buyer's place. Thus, the vendor faces the liability of loss when the goods are damaged until they reach the buyer's place. To pay for this liability the sellers purchase a DDP/DAP cargo policy and also the buyers aren't required to buy any plan given that they don't face any risk of loss in transportation.

   Cargo insurance coverage can be a bit complicated if they are not understood properly. So, comprehend the policy in detail, its coverage clauses, perils covered and also the important terms related to it before you purchase so you are aware the policy thoroughly.

Frequently Asked Questions:

1. Who is responsible to buy cargo insurance?

   A cargo insurance policy will be bought by the buyer or seller depending on the liability faced by them.

2. Is inland transportation covered under cargo insurance?

   Yes, transportation of goods within India is also covered under cargo insurance.

3. What is the Institute Cargo Clause ?

   This coverage clause does apply if the goods are being transported by air.

4. Do cargo insurance policies provide extensions?

   Yes, coverage extensions can be found under marine cargo insurance plans. Common extensions range from the following –

   1. Costs incurred on loading and unloading of goods
   2. Customs duty
   3. Removal of debris following the loss has incurred, etc.