Exporter, protect thyself!

Ship sinkings, earthquakes, highway robbery: It's a risky world out there. Insuring shipments properly can help exporters protect their own and their customers' interests.; The earthquake in Kobe, Japan, heavily damaged ships, cargo, and shoreside handling facilities. Exporters may want to insure against such unpredictable natural disasters.; When arranging insurance, exporters should take into account whether shipments will move via multiple carriers and modes of transportation.

By Toby B. Gooley -- Logistics Management, 5/1/1999

The world is a dangerous place; perhaps nobody knows that better than exporters. Although chances that shipments will arrive at their destination in good order are far better than they were back in the days of sailing ships, a lot still can go wrong. From man-made problems like theft and civil unrest to natural disasters like earthquakes and hurricanes, risks abound for export shippers.

That's why smart exporters are careful to insure their shipments properly against theft, loss, and damage. Whether they are large companies that purchase their own policies directly from an insurance company or small and medium-sized companies that obtain group coverage through their freight forwarders, they know that when it comes to exporting, it's always best to expect--and prepare for--the unexpected.

Why Insure?

There are several reasons why an exporter should insure its shipments. First and foremost is that cargo in transit between countries faces many risks: Ships may sink, containers may fall off ships mid-ocean, and cargo-handling facilities may be flooded, to name just a few of the more spectacular possibilities. Exporters are more likely, though, to encounter problems like weather-induced delays, rain-soaked cartons, or damage caused when packages are dropped.

Another reason to insure export shipments is that until title to the goods passes to the buyer, the exporter is legally liable for any damage or loss. Where that liability begins and ends is determined by the terms of sale to which the buyer and seller agree when they negotiate a transaction.

Most international transactions are governed by the "Incoterms 1990," which were developed by the International Chamber of Commerce (ICC). The Incoterms define the buyer's and seller's obligations under each of the internationally recognized terms of sale, including responsibility for transportation, documentation, customs clearance, and insurance.

Certain of the Incoterms require the seller to obtain adequate insurance on the buyer's behalf. Other terms are less clear on that matter, warns Michael Ford, vice president for regulatory compliance and consulting at international freight forwarder BDP International in Philadelphia. "Only CIF (Cost, Insurance, and Freight) and CIP (Carriage and Insurance Paid To) state explicitly who covers insurance," he notes. Other terms like DDP (Delivered Duty Paid) and DDU (Delivered Duty Unpaid) place all risks on the exporter until the goods have been delivered, so even though the seller is not explicitly obligated to purchase insurance, Ford says, it's understood that it will do so.

Export financing arrangements also may require the exporter to obtain insurance. When a bank issues a letter of credit or other type of documentary credit transaction, it extends credit on the buyer's behalf and thus temporarily takes on the buyer's risks. In most such transactions, therefore, the issuing bank will require the exporter to obtain insurance and submit an insurance certificate as a condition of receiving payment.

Finally, exporters need cargo insurance because the liability limits set by international treaty for carriers today rarely cover the shipment's actual value. Carriers bear liability of just a few dollars per pound or a maximum amount per package, but that applies only if the carriers can legally be held liable for the loss or damage, explains Terry Montgomery, ocean marine products manager for the Chubb Group of Insurance Cos. in Warren, N.J. "Even if you declare a higher value than the carriers' liability limit, you still have a gap if it's damage for which they wouldn't be considered liable. Your chances of full recovery are not significant."

Covering All the Risks

Exporters that want to insure their shipments have a dizzying array of options. In general, though, export cargo insurance (known as "marine" insurance, even when applied to other modes of transport) is divided into two types: basic "all risks" coverage and "special risk" policies to meet specific or unusual needs. They can be purchased either as an "open policy" that provides blanket coverage for all shipments made within a certain period, or for specific shipments, such as a one-time overseas construction project.

Basic "all risks" insurance typically covers physical, external damage to the goods while in transit from "warehouse to warehouse"--i.e., from the seller's premises to the buyer's premises. The details of these policies vary somewhat among insurance carriers, but exporters can count on coverage for certain types of damage. "If the goods are broken in transit, if they're stolen, if they get wet, if the ship sinks, if it catches fire--an 'all risks' policy will cover it," says Montgomery.

"All risks" is a bit of a misnomer, though. Every such policy specifies "exclusions" that are not covered, such as damage or loss caused by improper packing or inherent vice (spoilage, infestation, etc.), rejection by customs authorities, and loss of future business. Exporters should examine these exclusions carefully and negotiate with the insurance provider to include anything the exporter believes is important--a manufacturer of frozen foods, for example, will want its basic policy to cover damage due to temperature fluctuations.

Standard "all risks" policies do apply to multimodal shipments, since they include "warehouse to warehouse" or "origin to destination" coverage. If, however, there is a significant interruption in transit--for example, a U.S. exporter ships product to Paris, where it remains in storage awaiting purchase orders from customers in other European countries--then the goods won't be covered by the original policy while in transit between the intermediate stop and the ultimate buyer, says Montgomery. In that case, he says, either a separate policy or a temporary "extension" to the original would be required.

Ford cites another reason for obtaining such an extension: "If a shipment has door-to-door coverage and it's moving into the interior of South America, you may want coverage for an extended stay," he advises. It's not uncommon for shipments to be held up by customs authorities, port congestion, weather delays, and other problems that may prevent the shipment from arriving at its final destination before the policy's time limits expire, he explains. These time limits usually are stated as so many days after arrival at the destination port or airport.

"Special risk" policies are used to cover losses that may occur in transit but fall outside of the basic policy coverage. Some examples include coverage for loss of market or use of product, product recall and rejection, errors and omissions by a carrier, fraudulent documentation, buyer's failure to pay, and high-value or perishable cargo coverage. "Marine insurance only covers theft, loss, or damage to the cargo, not an exporter's total financial loss," notes BDP's Ford. "Special risk" policies can help reimburse exporters for the consequences of those losses.

Some provisions that are not included in the basic "all risks" policy are considered to be standard coverages that every exporter should have. These include coverage for "strikes, riots, and civil commotion" and for "general average" (a maritime legal tradition that requires all cargo owners to share the cost of a major loss to a vessel). Most exporters have a separate "war risk" policy as well.

Montgomery also recommends special coverage that protects the exporter from losses incurred up until the point when the buyer's insurance takes over. "When the terms of sale don't require the exporter to fully insure a shipment to destination," he says, "there can be a gap there, which leads to a common and frustrating loss for the exporter." Another type of special risk coverage protects the exporter in case the buyer refuses to pay for reasons beyond the exporter's control. Montgomery tells of one client that shipped high-value goods to Venezuela. The buyer failed to provide the level of security required under its own insurance policy, the shipment was stolen, and the local insurer refused to pay the claim. The buyer then refused to pay for the goods, and the U.S. exporter was out many thousands of dollars. If the exporter had purchased contingency coverage, he says, that loss would have been covered.

The Cost of Security

When insurance brokers, direct insurance carriers, and freight forwarders calculate appropriate coverage and set pricing for export cargo insurance, a host of considerations come into play. Some of the factors that affect the extent and cost of coverage include origin and destination points; monthly and annual shipment volumes and weight; commodity value and special characteristics or associated hazards; modes of transport, including inland transportation; type of packaging and outer packing; and whether cargo will be stored for any length of time and the location of that storage.

As with any type of insurance, risk factors play a big role in pricing. Policies for commodities prone to theft, regulated as hazardous materials, or requiring special handling or storage all command higher premiums than the norm. A shipment's final destination also affects cost, notes Montgomery. Some countries are hot spots for theft and fraud, and so premiums and deductibles are likely to be high. Current trouble spots include Russia, the former Soviet republics, Mexico, Central and South America, some parts of Africa, and Italy.

Exporters that have a history of frequent losses will pay more than those who experience very few, says Ford. That's why it pays to avoid situations that generate insurance claims and to work with insurance providers and freight forwarders to identify the source of problems and ways to prevent them. Exporters of high-value goods that can show they've taken specific security precautions, for example, may be able to reduce their rates.

Work With the Experts

Purchasing export cargo insurance can be a complicated and very customized process. To be sure they are getting the right coverage at a reasonable cost, exporters would be well advised to work closely with an experienced, knowledgeable insurance provider that specializes in international coverage. Whether that's a freight forwarder, an insurance broker, or the insurance carrier itself, working with the experts can mean the difference between a satisfied claim and a financial disaster.

For More Information ...

The best source of information about export cargo insurance is an experienced insurance broker, insurance carrier, or freight forwarder that specializes in this field. Most offer manuals, instructional videos, or in-house training for customers. It's even possible to take self-study courses over the Internet: Roanoke Trade's Internet-based "Learning Center," for example, offers five such courses.

The following Web sites also contain a wealth of helpful information:

Chubb Group of Insurance Cos.: www.chubb.com

Export Insurance Services Inc.: www.exportinsurance.com

Intercargo Corp.: www.intercargo.com

MOAC: www.moac.com

Poulton Associates Inc.: www.poulton.com

Roanoke Trade Services: www.roanoketrade.com

Western Overseas Corp. (freight forwarder): www.westernoverseas.com