Tricks of the Trade: Why Shippers Need Cargo Insurance
Shipments in transit are subjected to numerous perils; goods may be damaged in a storm or fire, stolen by ghosts in the night, involved in a collision, or just plain mishandled, much like the ill-fated journey in “Deliverance.” To help protect against financial loss or another frightful travesty, shippers should consider obtaining Shipper’s Interest Cargo Insurance.
Many folks mistakenly believe that standard carrier insurance will protect their shipments, but this is not always the case. Carriers do not pay claims unless they directly cause or contribute to the loss. Even when carriers are legally liable for loss or damage, the amount they will pay is limited based on the mode of transport, leaving shippers vulnerable to the lurking dangers of the logistics world—where the only thing scarier than a horror movie is an uninsured shipment!
Ocean Freight
The Carriage of Goods by Sea Act (COGSA) governs carrier liability for goods shipped via ocean to/from the United States. Recovery is limited to $500 per customary freight unit, and only when the carrier is negligent. A “freight unit” can vary from one container to one pallet.
International Air Freight
For air carriers, two liability conventions exist:
- Warsaw Convention: Limits liability to $9.07 per pound or $20 per kilogram.
- Montreal Convention: Used in the United States, this convention changes the limitation to 22 Special Drawing Rights (SDRs), or about $30 per kilogram.
Domestic Shipping
Many domestic air, intrastate road carriers, and warehouse operators limit their liability to $0.50 per pound or $50 per shipment, based on their bill of lading or warehouse receipt. Interstate truckers are governed by the Carmack Amendment, which dictates full value but allows limitations of liability in bills of lading, tariffs, or contracts. Some carriers will also have inadequate or no liability insurance and may be unable to fund a loss out of pocket.
Trick-or-Trade: Declared Value vs. Cargo Insurance
Declaring value to a carrier is not the same as having Cargo Insurance. In order to submit a claim against a carrier, the shipper must prove that the cargo was damaged while in the carrier’s care, custody, or control. The carrier then has multiple defenses to prove they weren’t liable, making recovery extremely difficult. Cargo Insurance provides protection without having to prove carrier liability. This is particularly important in instances where a loss is attributable to an “Act of God,” which seems to be a regular occurrence in recent years.
| Examples of Claims | Description of Loss | Declared Value for Carriage | Cargo Insurance |
| Lightning Strikes a Truck | While a trucker was en route, the truck was struck by lightning, causing a fire and resulting in a total loss of the cargo. | Even if a value is declared, there would be no automatic right or recovery because the trucker did not act negligently. The loss was considered an “Act of God.” | This type of claim would be paid under “All-Risk” Cargo Insurance coverage. |
| Heavy Weather at Sea | Several days after an ocean vessel left the port, it ran into heavy weather. A large wave hit the vessel, and containers were washed overboard. | “Heavy Weather” is excluded under COGSA. The ocean carrier would deny liability, and no payment would be forthcoming. | This type of claim would be covered by “All-Risk” Cargo Insurance, as well as With Average (WA) coverage. |
The Haunting Truth: Why Cargo Insurance is Essential
Cargo Insurance not only covers loss or damage but also protects against General Average, pays for the costs to minimize a loss (lawsuit and labor), and pays for damage inspection (survey). Carriers have limited liability and are provided legal defenses that can absolve them of responsibility entirely. Cargo Insurance pays covered claims without the need to prove fault.
What is General Average?
Before we answer our own question, a history lesson! The concept of General Average began when sailing the oceans blue was a very hazardous journey in smallish “sailboats.” When there wasn’t a shipowner to be found to move valuable goods, the risks of those voyages had to be shared by shipper merchants and vessel owners. Despite the relative safety of today’s commercial flotilla, though a vessel a day still sinks (!), General Average is alive and well and has been since the Greeks and the Romans ruled the Earth,
General Average is a principle incorporated into virtually all ocean bills of lading. It is used when a voluntary sacrifice is made to save the vessel, cargo, or crew from a common peril (e.g., jettison of cargo to extinguish a fire or maintain balance in a storm). All shippers on-board contribute to the loss based on their cargo’s value. If the cargo isn’t insured, it won’t be released until the shipper posts a guarantee (cash, bank guarantee, or bond). If the cargo is insured, the insurance company will handle all arrangements on the shipper’s behalf.
For a more in-depth look at General Average check out our blog.
Cargo Theft
Estimates of cargo theft in the United States range from 15 to 35 billion dollars (USD) annually. Officials estimate that nearly 80% of cargo thefts involve employee collusion. Drivers are often paid to leave their truck unattended at a specific place and time.
Statistics:
- Within 24 hours of theft: The goods are already delivered to an alternate location. Thieves are no longer in possession of the merchandise.
- Within 48 hours of theft: Cargo is split into about five consignments and distributed.
- Within 72 hours of theft: Goods are being marketed and sold.
Spooktacular Cargo Insurance Coverage Options
Shapiro offers comprehensive “All-Risk” coverage for cargo in transit, including Free of Particular Average (FPA) and With Average (WA) alternatives.
“All Risk”
Provides the broadest form of protection available. Goods are covered for loss or damage without the need to prove liability. An easy way to remember “All-Risk” coverage is “everything is covered, except what is excluded.” Typical exclusions include improper packing, inherent vice, or rejection of goods by Customs.
Free of Particular Average (FPA)
Offers less protection than “All-Risk” coverage but is a good option for commodities like used goods, waste materials, and scrap metal. A good way to remember FPA coverage is “the only covered losses are specifically named.” Perils covered under FPA include sinking, collision, General Average, fire, and washing overboard, to name a few.
With Average (WA)
Extends FPA to cover heavy weather. Many shippers choose to add theft, pilferage, and non-delivery to WA and FPA.
In a nod to the season, we wanted to end on a “ghoul” note. If you or your business have fallen into one of the perilous pitfalls mentioned above—or simply avoid them all together—consider “trick-or-trading” in your Cargo Insurance provider for Shapiro!
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