complete guide on types of cargo insurance in shipping.

There are many types of cargo Insurance that are tailored to specific needs of the shipper and the risks involved. Cargo insurance is broadly classified into land, marine and air cargo insurance , according to the mode of transport used.

Land cargo insurance

This insures cargo that is moved by land transportation, which includes trucks, train and small utility vehicles. It covers theft, collision damages, and other risks involved in land freight shipping. It is also typically used for domestic cargo, since its scope is only within a country’s boundaries.

Marine cargo insurance

This type insures ocean freight and it’s mainly used for international shipping. It covers damage due to loading/unloading, weather conditions, piracies and other risks faced by ships.

Air Cargo Insurance

While air transportation offers speed and convenience no other mode can offer, it also carries unique perils. Understanding these potential pitfalls reinforces the importance of having a robust air cargo insurance policy.

The marine cargo insurance is classified based on

a) structure of coverage

b) extent of risks covered

Based on structure of coverage, marine cargo insurance is classified into:

a) General average clause:

This type is a basic requirement for marine freight and only covers partial losses of your shipment. It is based on the principle where owners of all cargo onboard a ship must must share the costs of any losses that occur during the voyage. You also pay for the coverage of others even if your shipment survives the incident.

b) With Average clause covers salvage loss

Salvage Loss: This refers to a situation where the cargo has been partially damaged, but not to the extent that it is a total loss.

“With average” policies provide broader coverage. The coverage extends to partial losses by sea perils, if the partial damage amounts to 3% (or other percentage specified) or more of the value of the whole shipment or of a shipping package. If the vessel has stranded, sunk, been on fire or in collision, the percentage requirement is waived and losses from sea perils are recoverable in full.

c) Free of particular average clause covers Total loss

Total Loss: Only Total Loss Only policies are a more cost-effective form of cargo insurance. They protect you from situations where you might lose the entire shipment, but not from minor damages. 

This type only covers major damage or total loss of cargo, due to stranding, sinking, burning, or collision. The FPA, or “free of particular average,” clause excludes coverage of partial losses to the cargo or to the hull except those resulting from stranding, sinking, burning, or collision.

Under its provisions, losses below a given percentage of value, say 10 percent, are excluded. In this way the insurer does not pay for relatively small losses to cargo. The percentage deductible varies according to the type of cargo and its susceptibility to loss

Free of Particular Average (FPA) is most often used in marine insurance, a clause that eliminates an insurer’s liability for partial losses.

Based on the extent of risks covered, marine cargo insurance can be classified into:

a) All Risk Cargo Coverage: (Institute cargo clause A)

This is widest form of Cargo Insurance cover, as it cover damages to cargo from all kind of perils. All risk coverage is also called open perils coverage.

Under an All Risks policy, there is no requirement for the Assured to show exactly how the loss or damage occurred. It only needs to be shown that the loss or damage is fortuitous (happening by chance rather than intention).

All Risk insurance offers the most comprehensive coverage. so this insurance has the highest amount of premium to be paid.

Causes covered by All Risk insurance include:

• Accidental collisions
• Natural disasters such as hurricanes, hail storms
• eath quakes, volcanic eruptions
• Piracy
• Damage due to mishandling during loading and unloading
• Damage caused by improper storage
• losses due to ship wreck or breakage
• chipping, denting, bruising,
• non-delivery of cargo
• All water damage
• Jettison

Causes not covered under All Risk insurance are:

• Loss or damage due to war, strikes, riots, or civil unrest (WSRCC)
• Negligence of the importer/exporter
• Customs delays and rejections
• Unpaid goods, whether the customer fails to pay or the seller fails to collect payment

all risk insurance IS the ideal choice of coverage for shipping of:

• High value goods
• Delicate and fragile items
• Perishable goods
• Long Distance coverage
• frequent shipping
• Multimodal transportation

b) Named Perils Coverage(Institue cargo clause B)

Thispolicy has a is a wider coverage, and covers all risks unless explicitly listed. If you’re looking to manage costs and only want to pay to cover certain risks, Named Perils coverage can be a cost-effective choice.

Risks covered include:

• earthquake, volcanic eruption,
• Collision
• explosions
• Bad weather conditions
• Sinking
• Derailment
• Non-delivery of cargo
•  damage due to rainwater, seawater, river water,
• damage to package overboard
• damage to goods during loading and unloading.
• jettison

Risks not covered are:

• war risks / srcc
• Theft & pilferage
• malicous damage

c) Specific Perils Coverage: (Institute cargo clause C)

This policy has the least amount of coverage. covers specfic perils that are only listed in the policy. Hence, the amount of premium to be paid is relatively less.

Risks not covered include:

sPECIFIC pERILS COVERAGE is the ideal choice in shipping of :

• Low-Value Goods: If your cargo is of relatively low value, covering the total loss would be more sensible than insuring against minor damages.
• Resilient Commodities: Some goods are hard and unlikely to suffer from minor damage during transit. Things like metal parts, certain machinery etc. 
• Low-Risk Routes: If your cargo travels along well-established, safe routes, this coverage might be all you need.

d) Contingency coverage

A contingent insurance policy offers coverage when the primary policy does not respond or is not in place. They act as a safety net in situations where coverage gaps might occur. 

situations where contingent coverage could be an ideal choice:

• International Shipping: For businesses involved in global shipping, where laws and regulations can vary greatly from one country to another, a contingent policy provides extra protection.
• Unreliable Carriers: If you’re dealing with new or unreliable carriers and doubt their insurance coverage adequacy, having a contingent policy could safeguard you against unforeseen losses.
• High-Risk Cargo: If your cargo is particularly valuable or susceptible to damage, a contingent policy provides an extra layer of security beyond the primary coverage.
• Complex Supply Chains: If your goods are passing through multiple handlers or transport modes, the risk of miscommunication or misunderstanding about who is responsible for insurance at each stage is higher. Contingent insurance can cover these gaps.

A contingent insurance policy is preffered for shipments with higher risk or complexity, it provides valuable peace of mind.

e) Specific Cargo insurance :

It is tailored for specific cargo types

• Hazardous Materials Insurance: For dangerous goods like chemicals or flammable materials.
• Perishable Goods Insurance: Covers goods that can spoil, like food or flowers.
• High-Value Goods Insurance: Designed for expensive items like electronics or jewellery.

other commonly used cargo clauses include:

a)Warehouse-to-Warehouse Clause:

A warehouse-to-warehouse clause provide protection in the case of losses incurred while goods are being shipped from one warehouse(seller) to another warehouse(buyer). The clause protects the policy holder from the risks of loss of goods that may occur while in transit.

Separate coverage is necessary to insure goods before and after the transit process. This coverage does not provide protection when losses are incurred when goods suffer damages at a storage warehouse or a destination warehouse. so a separate protection plan is needed for such risks.

b)) Warehouse Cargo clause:

Safeguards goods stored in warehouses before and after shipment, commonly used by businesses storing goods. This coverage provides protection when losses are incurred when goods suffer damages at a storage warehouse or a destination warehouse.

c) Marine Extension Clause:

This clause extends the insurance coverage to inland transit once the cargo has arrived at the port of discharge.

d) RDC clause

The RDC, or “running down” clause, provides coverage for claims arising out of collisions. The RDC clause covers negligence of the carrier or shipper that results in damage to the Property of others.  In RDC clause either the shipper or the common carrier take the legal liability of the damages caused due to collision.

e) Protection and Indemnity clause (P & I insurance)

P & I clause covers the liability of carrier or shipper for negligence that cause bodily injury to life, property and environment.

Protection and indemnity insurance, commonly known as P&I insurance, is a form of mutual maritime insurance provided by a P&I club. P&I club members typically include shipowners, ship operators or demise charterers, but more recently freight forwarders and warehouse operators have been able to join.

Protection: covers risks connected with crew related claims such as, Health insurance, crew injuries and death.
Indemnity: covers risks related to Cargo, hull damage, environmental damage, third party vessel or property damage, and injury or death of other parties.

• P&I club provides cover for open-ended risks that traditional insurers don,t cover. It covers loss of life, illness or injury to crew member and passengers.
• P&I cover includes carrier’s third-party risks that causes environmental damage during carriage of cargo that leads to oil spills and pollution into the sea.
• They are exposed to a range of unique third party liabilities that could result in expensive lawsuits. Settling them can pinch finances hard.
• Recently collision of Dali ship with Baltimore bridge caused damages to environment and killed the construction workers on site. Therefore, ship owners need to have P & I coverage for comprehensive protection.

How does P& I club Work?

• A P&I club is a mutual insurance association that provides risk pooling, information and representation for its members. a P&I club reports only to its members.

• under a marine insurance company, the assured pays a premium for cover which lasts for a particular time ( a year, or a voyage).

• under P&I club membership- the member pays a “call”. This is a sum of money that is put into the club’s pool, a kind of “kitty”. If, at the end of the year, there are still funds in the pool, each member will pay a reduced call the following year; but if the club has made a major payout (say, after an oil spillage) club members will immediately have to pay a further call to replenish the pool.

Summary :

Understanding tne cargo insurance coverage depth, risk assessment and policy options help businesses choose the right coverage for their unique cargo and shipping needs.

Also read: Complete guide on types of marine insurance in shipping