When you’re shipping cargo over long distances to and from far off places, insurance is just as important as using reputable shippers and properly packing your cargo. Import/export businesses use a variety of insurance products as part of their risk management strategy to ensure their goods are protected against everything from stormy weather to lost cargo.
If you run an import/export business, there are the 3 types of insurance you need to know about.
Cargo Insurance
This might be the most obvious one but it’s quite risky to ship cargo across vast distances. While on it’s journey, your cargo can be subject to all sorts of hazards such as weather, all manner of physical losses, and in the old days - piracy. In ancient times, ocean voyages could last weeks or even months carrying very valuable cargo from far off lands. With so much value in one place and so much uncertainty, our ancestors sought ways to hedge their bets.
History of Cargo Insurance
To resolve this, they came up with the concept of insurance. Ocean marine cargo insurance is the earliest kind of insurance we know of with the first formal policy written around 1350. To help hedge their bets, our ancestors devised a very basic form of insurance: when a captain or investor would take out a loan to finance a voyage, he would pay an extra fee called a “premium” which would allow for the loan to be forgiven if the ship and/or cargo was lost at sea. To this day, we still use that word when referring to the price we pay for an insurance policy.
Modern Cargo Insurance
Most cargo these days are shipped under INCOTERMS that outline important terms and conditions such as: how far the seller is required to transport the goods and whether the buyer or the seller is responsible for insurance. Common INCOTERMS include:
- EX WORKS: the buyer is responsible for freight and insurance
- Cost Insurance Freight (CIF): the seller is responsible for freight and insurance
- Free On Board (FOB): the buyer is responsible for insurance once the cargo is onboard the vessel
Modern cargo insurance policies come in 3 types: named perils (Institute Cargo Clause C), broad-named perils (Institute Cargo Clause B) and all-risk (Institute Cargo Clause A). In addition to insuring your goods, they can also compensate you for any delays, storage costs, general average, or lost profits.
The all-risk coverage is by far the most comprehensive and insures all types of physical losses with a few important exclusions such as:
- War and Strikes (can be insured with an endorsement)
- Unseaworthiness of the vessel or container
Ocean marine cargo policies is an important form of import/export insurance and can be purchased as an individual policy for single shipments or an open policy covering all shipments that fall within the set criteria.
More often than not, your property would be covered by the carrier transporting the goods but it still pays to insure your own goods just in case as you have no control over your carrier’s insurance policy or their ability to pay. With premiums typically only 1-2% of the property value, it’s a small price to pay.
International Product Liability Insurance
We’ve written extensively about this topic before but the world is a litigious place and getting increasingly so. One myth many import/export businesses believe is that because they do not manufacture or distribute the product through retail channels, they are not responsible for the product.
Unfortunately, when a product is defective or deficient and causes loss, courts around the world have determined that anyone involved in the manufacturing, distribution, or retailing of a product can be held liable. This means that even the firm responsible for importing the product can be held liable for loss or damage to the end user!
With product safety and quality control requirements varying so widely across countries, the risk is great. Product liability insurance with global coverage can help you transfer the financial burden of legal defense and damages or settlements paid if you do get caught up in a lawsuit.
Political Risk Insurance
This type of insurance is often overlooked but very important for import or export businesses dealing with emerging economies. In certain countries, the risk of unfair government interference with business activities is high. The government may confiscate your goods, seize your business assets, cancel your trading license, unfairly discriminate against your business as a foreign entity, void contracts, or pass laws that block the normal transfer of money. Political risk insurance covers all that along with other business risks associated with political instability such as wars or riots.
This type of import and export insurance is particularly valuable because while these emerging economies are profitable, many businesses shy away from them due to the inherent risk. By transferring this risk with the right insurance program, you are well positioned to enter this fertile market.
To learn more, contact an export insurance broker at Trusted Union for a free risk assessment and quote.
