What does the tease picture for the article have to do with cargo insurance? Nothing at all, it is a picture of my grandson in the belly of a World War II bomber at a vintage aircraft show put on by the Air Museum Network www.airmuseumnetwork.com. I shamelessly use my grandson as an excuse to do things I would like to do and go places I would like to visit. It allows me to be self-serving and noble at the same time. I thought you would appreciate a picture other than port cranes, ocean vessels, or some other picture scalped from the internet for a change. Okay, back to business…
Insurance is a fact of life. Insurance can be a wise risk mitigation tool. In addition, some of the time purchasing insurance is required by law. In business it’s no different. In the case of transportation there are required coverages, as well as optional coverages, for transportation professionals to mitigate their risk of doing business. Today I am going to talk about the freight forwarder’s cargo insurance policy. It never ceases to amaze me how many transportation professionals don’t understand forwarders policies.
01. What is the purpose of a forwarders cargo insurance policy?
In the event of physical loss or damage to cargo there is most often a financial loss. The primary purpose of cargo insurance, regardless of who provides it, is to reimburse the loss payee for the financial loss covered by the insurance. Cargo insurance is not intended to cover any liquidated damages losses or general liability whatsoever. For instance, a 40 foot container full of auto parts valued at $75,000USD is being transported via ocean from one country to another. While in route to the port the container falls off the truck and the auto parts are destroyed. In most cases if there is cargo insurance the freight owner would be reimbursed by the insurer as outlined in the policy for their financial loss up to the limit of the insurance. For the sake of the example, let us say another byproduct of the container falling off the truck is the loaded 40 foot container hits a tour bus carrying forty litigation attorneys on a field trip, all of which got whiplash. The container then continues to slide into the lobby of a daycare, hurting no one, scaring the bejeezus out of a pile of little kids, and destroying the lobby. Even though the loaded container was related to those later incidents, cargo insurance will not address those liabilities in any way. That is what general and transport liability insurance is for. Cargo insurance is intended to cover the physical loss or damage of the cargo only.
02. Who can get a freight forwarders policy and how can they use it?
The term ‘transportation professional’ is not limited to just freight forwarders. Transportation professionals can be Customs brokers, freight brokers, shipping agents, and various transportation professionals who handle or route cargo on their customer’s behalf. After securing a forwarders policy transportation professionals can offer their customers cargo insurance for their land, sea, or air shipments. The process is fairly simple and is typically done on a per shipment basis. The transportation professional issues a cargo insurance certificate for the shipment naming the person or business at risk during transit, likely the freight owner, the loss payee. The issuing is most often done on an online platform which ties the transportation professional to the insurer using prearranged rates, limits, and conditions.
03. Does a transportation professional need and special licensing to issue cargo insurance certificates?
In the United States of America and many parts of the world there is no special licensing required. The reasoning behind allowing transportation professionals to directly handle cargo insurance is time and to assist trade. Freight moves fast. In many circumstances inventory can be ordered, loaded, and shipped starting its transit within 24 hours of the initial order, in rush situations quite often in the same day. Not being built for speed, insurance companies and insurance brokers just can’t react quickly enough to keep up with the pace of the shipping industry. Leaving the cargo insurance to the transportation professionals who have all the information related to a shipment allows cargo insurance to keep up with the speed of the shipping world. It should be noted that transportation professionals should have an errors and omissions policy as best practice coverage for the industry. The speed of process of the shipping industry I mentioned also raises risk of errors. Errors typically cost money and big errors can cost big money. If for some reason the freight you booked ends up bound for Paris France instead of Paris Texas, there is going to be heck to pay. Whether for freight forwarding or for cargo insurance, having errors and omissions coverage will help protect against the financial risk.
04. Is making a profit margin allowable when issuing cargo insurance certificates on your customer’s behalf?
The short answer is yes, profit of sorts is allowed. As cargo insurance is an administrative function for the transportation professional it is quite normal to add a reasonable administrative fee or profit margin to the premium charged by the insurance company. The transportation professional can then resell the certificate to the shipper/customer. To not add a margin or fee is at the discretion of the transportation professional, but to provide a service at breakeven is to lose money on the effort. Any fee charged or added cannot be called an insurance premium as the policy holder is not an insurance company.
05. Is it terribly complex to execute cargo insurance on your customer’s behalf?
Most insurers do their best to set up their online system to operate within agreed parameters to keep their customers from inadvertently taking missteps. Two examples would be setting a dollar limit that can be insured or blocking out embargo countries from insured to or from. If policy holder attempts to issue a certificate past their policy limit or chooses a non-approved origin or destination, the online system will not, or shouldn’t, allow the certificate to be issued. Moreover, you should have me, or someone like me, providing you with training and looking over your shoulder to help guide your efforts.
Since not every provider is the same, for further details on cargo insurance and forwarders policies you can contact me or your insurance broker. In regard to insurers, generally you should look for well rated (A or better) insurers, good financial stability, and solid experience in marine cargo. Stay away from insurers with bad ratings and headquarters in remote countries. Filing claims with an insurer with no good global presence and surveyor network can be a challenge and will result in a very unhappy customer. Moreover, along with the due diligence you would take with any potential vendor; make sure the insurance broker you choose is responsive. If they don’t respond to e-mails or return calls in a timely manner during the process of you trying to secure a quote or ask about their products, just think how they will be when you are a client looking for help or guidance. In transportation there is seldom the luxury of waiting three days for an answer.
As it is impossible to cover all subjects in detail in one post, if you have questions related to cargo insurance not covered in this article, feel free to e-mail me at tom@tjocompany.com or call me at 904-781-6531 and I will be happy to help. It will be worth your time. It’s a well-known fact people find knowledge of cargo insurance an attractive trait in others.