Global Logistics: Cargo insurance: Are you insured? Are you sure?

Many shippers feel certain that they’re carrying adequate protection when importing or exporting internationally. However, a rude awakening may be in store for those who report a loss on a segment of the journey. Are you aware of your coverage options?

By Patrick Burnson, Executive Editor -- Logistics Management, 4/1/2008

Are you sure your insured?

From point-to-point, you may be carrying multiple insurance policies for carriers and trade segments and feel that you’ve obtained a comprehensive blanket of protection. Do so at your peril, say legal and insurance experts.

“The one thing many shippers fail to check is whether they are protected by the ‘omissions and error’ clause in their policies,” says Robert Pisani, a partner with Pisani & Roll PLLC in Washington, DC. “Whether you buy from a pure-play insurance carrier, a broker, or a transportation provider, it’s vital to have this coverage.”

Pisani, a trade law attorney who specializes in Customs compliance, says all the major insurance providers can be reliable, but that doesn’t mean shippers should scrimp on due diligence.

More on Customs compliance:

Having your goods seized by Customs, however, is hardly the worst situation a shipper can face. “It’s funny how some shippers will do everything right when it comes to moving goods from one point to another, except when it come to choosing an insurance partner,” says Matt Walker, director of international logistics operations for forwarding giant, A.N. Deringer. “We try to explain to them that this is a highly specialized buy that we can help them with before they’re exposed to too much risk.”

For Deringer, the insurance broker is Roanoke Trade Services, Inc., one of the oldest insurance companies in the industry. Walker uses them to cover every related segment of the shipment. “We had one customer who sent a shipment tens of thousands of miles quite safely until the final mile of its journey,” Walker recalls. “When the container spilled off the back of a truck doing the drayage, the entire load was damaged beyond repair. Because we had all the fine print covered, we could compensate the shipper even while the trucker was contesting the issue.”

Roanoke’s vice president Robin McEntee has similar war stories to tell. “A seller and buyer of food products was shipping a load of frozen goods in a refrigerated container,” recalls McEntee. “But the ocean carrier forgot to plug it in. The policy covered cargo deterioration only if the refrigeration unit failed for a 24-hour period, but since it was never started in the first place the damage claim was denied.”

According to McEntee, the cost to the shipper was about $40,000, yet the loss was unnecessary because its standard cargo policy could have been modified to cover the risk. “The basic refrigeration clause needed to have language to address negligence,” says McEntee.

The fact remains that many shippers are not aware of their coverage options and continue to put their freight at great risk. Here are just a few coverage options and useful tips to demystify the cargo insurance conundrum.

Upstart insurance solution providers for logistics companies

For many other forwarders, the choice has been to go with a new player in this field—Avalon Risk Management, Inc. based in Chicago. While only ten years old, the upstart insurer is making inroads with freight middlemen who had been faithful Roanoke customers.

“Although the supply chain may have become more secure through security initiatives to protect from terrorism after the events of 9/11, this may not protect your cargo,” says Wanda Sample, director of trade relations for Avalon. “However, these same initiatives have often increased the risk of damage to your cargo since commodity descriptions must be clearly displayed on bills of lading providing even more detail for cargo theft.”

Additionally, the number of examinations has increased leading to damage claims, packing problems, and secure seal issues. “In fact, statistics have shown that cargo theft and damage continue to increase each year,” says Sample.

Oops!

Through Avalon, as well as other cargo insurance brokers, shippers can insure freight by vessel, aircraft, truck, rail, and even during warehouse storage. The types of insurance available are:

All-Risk,
Free of Particular Average (FPA), and
With Average (WA).

All-Risk is the broadest form of coverage available and is first-party protection on approved general merchandise for physical loss or damage to cargo from external causes. “With this coverage everything is covered, except what is excluded, so a thorough review of the cargo policy is required,” adds Sample.

However, Sample sends this caveat: “The need for insurance is not considered by most importers because they think nothing will happen to their cargo, or if something does, the carrier is responsible. The contrary is true.”

Mark Robinson, a vice president at UPS Capital’s Trade Protection Services in Atlanta, agrees with Sample’s warnings, but believes importers and exporters can gain even more protection by going to a “one-stop shop.”

“Buying insurance from multiple brokers in multiple trade lanes can pose a lot of problems,” he says. “We like to think that we have a slight advantage when it comes to adjusting to international standards and regulations.”

Robinson believes that as a wholly-owned subsidiary of UPS, his division has “historical precedence” to provide the necessary protection in the global marketplace. “When you are trying to penetrate new markets, or are doing business where government leadership has changed, you are exposed to a whole new set of risks,” Robinson says.

He recalls how gaps in the chain of custody caused problems for one shipper prior to using his service. “Getting paid for a claim was a headache for this guy,” he says. “As an exporter to Mexico he had specific terms of sale in place, but the buyer refused to pay for the goods because he said they were damaged in transit. Had the shipper come to us first, we could have helped him evaluate the credit and credibility of this customer,” adds Robinson.

Tips for securing a policy provider

Underscoring just how big transport insurance has become in today’s global marketplace, one of the world’s biggest insurers has emerged to take on a larger role in the transport sector.

“The regulatory environment for both importers and exporters, domestic and abroad, can be daunting,” says David Drake, vice president-cargo, Zurich Insurance.

“There are also a number of regulations that are specific to a particular country’s insurance licensing, mandatory coverages, and premium tax rules. The fines and penalties for noncompliance can be severe.”

According to Drake, Zurich has made a substantial investment in developing the Multinational Insurance Application (MIA), a proprietary intranet-based tool for its underwriters. “MIA provides underwriters across multiple lines of business, including ‘marine,’ with local insurance licensing rules and premium tax requirements,” he says. “The application helps determine the tax liabilities and local insurance requirements so that a customer’s coverages are in synch with local legislation.”

Drake, like Robinson, also endorses the concept of purchasing policies from a single provider: “We hold the client-insurance producer relationship as sacrosanct and a competent producer is a crucial element to a successful insurance partnership,” he says.

If the relationship is indeed sacred—like all such business agreements—it must be clarified. A multinational cargo program is really a coordination of multiple cargo policies that must be issued to be compliant with local insurance regulations, argues Drake. “In many cases, policy issuance is accomplished through the insurer’s network of wholly owned or controlled subsidiary companies that are locally incorporated and licensed,” he says.

But there is one single point of reference that should always be considered. According to Drake, the master policy sets the parameter for the broadest terms and conditions as negotiated. These negotiations usually occur between an insurer, insurance producer and the client corporate risk manager or risk management designee. The adjunct local policies will mirror the master policy coverages in as much as local laws and customary practices allow.

“Occasionally, the local policy coverage is not as broad as the master policy and this creates a coverage gap either by way of the perils insured against or by way of the dollar amount of coverage available,” says Drake.

The key here, he says, is a coordinated program structure that is purchased from a single source by a single buyer. “Multinational programs that are not handled in this way run the risk of having coverage gaps, and risk being noncompliant in the hardening licensing, tax and legal environments overseas.”

And as you’re mulling over all of your options and learning more about they types coverages that makes sense for you, we leave you with this: Cargo insurance, which has been in existence in some form or another since 3000 B.C., reached its zenith when shippers were searching for ways to protect their financial interest against physical loss or damage during transit during the golden age of trade in the 17th century. Back then it was simple: “Lloyd’s of London” was the only game in town. The rule for the 21st century: Seek and ye shall find.