Sunday 4 July 2010

GUIDE: Marine Cargo Insurance

Marine Cargo Insurance basically insures the owners of cargo for loss of, or damage to, it during a voyage either wholly or partly over water.

Because these insurance policies are relatively complicated and need to offer different levels of cover to different assureds, but they often need to be generated and agreed quickly for urgent shipments, sets of 'standard wordings' are often used by underwriters writing this kind of business.

The most common wordings are those of the 'Institute of London Underwriters'*, known as:
1) Institute Cargo Clauses A (provides the broadest cover, but also the most expensive)
2) Institute Cargo Clauses B (less cover, less expensive)
3) Institute Cargo Clauses C (least cover, least expensive)

There are also standard wordings for these additional risks:
1) War Clauses

2) Strike Clauses

Incoterms (International Commercial Terms)

Incoterms basically give legal clarity of the meaning of terms frequently used in iternational commercial conrtracts. The full descriptions are available here, but essentially they describe who is responsible for cargo and insuring it at varisou stages of transit. There used to be many categories, but now only three remain D, E and F.

Many exporters sell their cargo on a CIF (Cost, Insurance and Freight) basis, so the seller promises to arrange the cargo insurance. If a seller sells goods on an FOB, Ex Works or similar basis, then the buyer arranges his own cargo insurance. This can be risky, because usually the goods are not paid for until after delivery. If the goods arrive in a damaged condition, or an allegedly damaged condition, the buyer may simply refuse to pay for them. In this case, as the exporter has not taken out the cargo insurance, they have no one to appeal to for compensation. Special, relatively cheap, cargo cover has developed to cover only this situation, it is known as 'Contingency (seller's interest)' insurance. 

Common Types of Cargo Cover

Open Cover – This is the most common type. It covers a type of movement for either a set number of movements or over a set period of time. Each individual movement need not be notified to the insurer (for example, if you owned a factory in China exporting rubber ducks to the USA, and sent 10 shipments of one container each a month you could take out open cover for moving rubber ducks from China to the US by container and all your shipments would be automatically  insured).

Specific ('Voyage') Policy – This is cover for an individual shipment, usually high value or an unusual one for the exporter (sending a set of generators to Iraq, where you usually only ship to Europe and the USA for example).

Contingency (Seller's Interest) Policy – As described above, this is the cheapest insurance available. It specifically covers the situation where a seller is sending cargo overseas and the buyer arranges the cargo insurance. If the cargo arrives damaged the buyer may not pay for it and fail to make a cargo insurance claim, or make such a claim but fail to then compensate the seller or pay for the goods. 

Export Credit / Trade Credit - This type of insurance covers sellers exporting goods to customers in a new market. It repays the seller for the cost of the goods where they are shipped to a foreign country and then not paid for due to a fraud or because the buyer has gone bankrupt.


Cargo premium is generally calculated on the following basis:
1)  The value of goods insured (possibly with an increase to insured value to account for lost profit)
2) The type of goods (highly valuable, dangerous, toxic etc.)
3) The dangers faced by the goods (modes of transit, area, length of journey etc.)

Related Terms

General Average – All cargo must pay a portion of the damaged cargo on the basis that it was sacrificed to save the remaining cargo. Good examples include: cargo wet damaged when sprayed with water in a fire fighting action onboard. Generally the carrier will not release safe-landed cargo in a GA situation until a contribution to the damaged cargo is paid. If insured the insurer will pay this or post a bond for it to allow the cargo to be released.

Particular Average – A situation where the loss or damage to a cargo is borne only by the owner of that cargo, usually the shipper. 

Both-to-Blame Collision Clause – In the event of two ships colliding at sea where both are at fault, all vessels and cargo (by way of their hull or cargo policies) shall proportionately pay their share of the total losses based on the value of their cargo.

Sue and Labour Clause - A standard clause in a maritime insurance policy which allows the insured to recover from the insurer any reasonable expenses incurred by the insured in order to minimise or avert a loss to the insured property, for which loss the insurer would have been liable under the policy.

Facts to Note

Cargo which is insured against "All Risks" is not insured against "all losses", only losses caused by a "fortuity" in transit.

* The Institute of London Underwriters (ILU) recently merged with a re-insurers organisation (LIRMA) to create the International Underwriting Association of London (IUA).


scm 5 September 2011 at 19:27  

I would like to point out one common mistake for incoterms. People always use CIF and assume that insurance will be "clause A". In contrast, CIF only covers "clause C". I made this mistake myself and I really want to share.

Editor 19 February 2012 at 14:16  


Thanks for your sage advice. I believe that incoterms are one of the most commonly misunderstood elements of cargo claims as people know about shipping and they know about the freight contract and relevant law but unless you step into the buyer or seller's shoes it's hard to envisage the workings of all the incoterms and their affect on other elements of the claim (i.e. which party has a practical interest in pursuing the claim etc.).

Homer 25 September 2013 at 20:02  

Need guidance on an issue. Recently a shipment faced a disaster at sea which was under lc cnf basis. Voyage was to india. Marine insurancewas done by importer through a local insurance company of india. Shipment advice was required to be faxed or dispatched as per lc term as well as insurance clause. No proof of fax or dispatch is available in import documents.Although shipment advice came as a part of import documents which was also required as per lc clause. Can the insurance compsny decline the case on this pretext.

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edunote 14 December 2017 at 14:41  

Cargo Insurance covers loss and/or damage of cargo while it is in transit between the points of origin and final destination. Goods may be transported by sea, air, or land.

Cargo Insurance is essential for businesses engaging in international trade, especially those shipping large quantities of goods by boat. Specific terms and benefits vary widely across the world and many Cargo Insurance Policies are custom tailored for specific shipments, but a few general principles apply to the entire industry.

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