MONDAY EXPORT CLASS
With
DR GODWIN OYEFESO (SUCCESSEDGE EXPORTERS NETWORK)
Topic: Cargo Insurance (Part 1)
NEED FOR CARGO INSURANCE
Exporter may suffer financial loss if goods are damaged during transportation from the port of dispatch to the point of destination. To protect from loss, exporter may have to take insurance policy to protect him from physical damage to the goods. This is known as ‘Cargo Insurance’. In case, goods are shipped by sea, the insurance is known as ‘Marine Insurance’. The term ‘Cargo Insurance’ is used in case of air shipment. However, in practice, both the terms are interchangeably used and their regulations are also common.
The need for insurance is for two reasons, Legal and Commercial. Legal liability of the intermediaries is limited. Intermediaries include clearing and forwarding agents, carriers, port and customs authorities etc. that handle the goods at various stages. They do not incur any liability, if the damage is due to circumstances beyond their control or if the loss is caused despite their reasonable care taken by them. In case of sea shipments, their legal liability is limited to 100 pounds per package and in case of air shipment, the liability of the airlines is limited to $16 per kg. It is quite normal such amount of compensation does not cover the loss totally sustained by the exporter.
As and when post-shipment finance is made, banks also insist for insurance coverage to protect their financial interests.
Insurance is required even on commercial considerations. Once goods are damaged, importer may not accept the bill of exchange, in case of D/A bill. He may not make payment in case of D/P bill. When loss occurs, loss may not be just shipment of goods, but also loss of profits too.
MEANING OF CARGO (MARINE) INSURANCE
According to Marine Insurance Act, cargo insurance is an insurance cover for marine goods, air cargo and post parcels. The purpose of cargo insurance is to protect goods against physical loss or damage, during transit.
All export consignments should preferably be insured even if the terms of contract do not provide for it. Exporter should insure the goods sent on consignment.
Contract of Indemnity
Cargo insurance is a contract of indemnity whereby the insurance company (Insurer) undertakes to indemnify the owner (Insured) of a ship or goods, against risks that are incidental to Marine insurance (Section 3 of the Marine Insurance Act, 1963). The underwriter insures the goods against loss and damages caused by perils specified in the contract for a stipulated consideration, known as ‘Premium’.
Parties to Insurance
There are two parties:
- The insurance company is also known as underwriter who assumes the liability as and when loss
- The insured is the one who procures the policy or becomes the beneficiary through the insurance
Principles governing insurance are
- Principle of Utmost Good Faith: The insured must disclose all the facts known to him or ought to be known to him, in the ordinary course of
- Principle of Insurable Interest: Any person who has ‘insurable interest’ in the cargo only can insure. Exporter is said to have insurable interest in the safe arrival of cargo as he is the owner of the
- Principle of Indemnity: The underwriter indemnifies the loss arising from the risks covered under a policy. In a contract of indemnity, only loss is made good. However, a marine insurance is commercial indemnity, so even the reasonable anticipated profit is also made
- Causa Proxima: The insurer indemnifies if the loss arises only from the nearest If goods are stolen due to faulty packing, the insurer does not indemnify the loss.
Types of Insurance Documents
There are three types of insurance documents:
- Insurance Policy: The insurance policy sets out all the terms and conditions of the contract between the insurer and
- Certificate of Insurance: It is an evidence of insurance but does not set out the terms and conditions of It is also known as ‘Cover Note’.
- Insurance Broker’s Note: It indicates insurance has been made pending issuance of policy or certificate. However, it is not considered to be evidence of contract of
WHEN AND WHY TO INSURE
Before shipment of goods, exporter has to insure the goods. Date of coverage in insurance policy should always be earlier to the date of shipment of goods, then only insurance covers totally. Banks insist the date of insurance to be earlier to the date of shipment of goods, at the time of negotiation of documents. Any person who has ‘insurable interest’ in the goods only can insure. Exporter is said to have insurable interest in the safe arrival of goods. Equally, its loss, damage or detention will prejudice exporter. When the cargo is sent on CIF basis, exporter invariably takes marine insurance, as it is his duty to cover the risk. Till ownership in goods is transferred, in his own interest, exporter has to take the coverage. There is no obligation to the exporter to take insurance, after transfer of ownership. Still, it will be wise for the exporter to take adequate insurance policy till the goods reach the end of voyage. Here are the reasons:
- Importer’s insurance may be
- In case of insolvency of the importer, claim amount may go to the benefit of the importers’ creditors and exporter would not receive the
- Foreign exchange problems could complicate the remittance of insurance claim amount to the
HOW TO INSURE
There are two ways to insure. First, take insurance policy as and when shipment is made. Those exporters, who make shipment now and then, do this. The second and common mode is to take open policy. Under open policy, the exporter does not have to take insurance contract, every time, as and when shipment is made. He pays insurance premium, in advance, and the policy is issued for the amount paid. The policy is, generally, issued for a period of one year. The insurance company undertakes to indemnify the insured up to the amount of the policy. Shipment of goods to the extent of the policy amount is covered. A brief declaration by the exporter about the basic facts of shipment would do. A great volume in exports business prefers this method for the following obvious advantages:
- Exporter enjoys automatic and continuous Even if there is delay in declaration or exporter has overlooked to submit declaration, the shipment is covered provided the delay and oversight are not intentional.
- Trouble of taking insurance policy, each time, is
- Exporter will have prior knowledge of the premium amount and so exporter can quote competitive rate for his
- Better relationship between the exporter and insurance company will be developed, so better advice would be As the insurance company understands the requirements in a better way, the insurance company can develop tailor-made protection to the exporter.
SCOPE OF CARGO INSURANCE POLICY
The scope of the insurance policy depends on the risks it covers. Here, risks are termed as perils. Perils are referred as causes of events. The various kinds of perils are:
- Maritime Perils: These are the events which are created by God or man made. Events created by God are earthquake, collision, storm, lightning, and entry of sea water into the vessel, volcanic eruption, rain water damage and washing overboard of The man made events are fire, smoke, water used to extinguish fire, piracy, barratry (fraud, gross criminal negligence of the crew to prejudice ship owner), sabotage, vandalism etc.
- Extraneous Perils: These are incidental perils. These perils are caused due to faults in loading, carrying and unloading. Examples are rough handling, leakage, breakage, pilferage and non-delivery
- War Perils: These perils relate to losses due to war including civil war, revolution, rebellion and detainment of the carrier If the goods are confiscated by the customs on charges of smuggling, then insurance does not cover.
- Strike Perils: This means damage or loss due to lockouts, strikes, labour disturbances, riots, and civil commotion and by any terrorist acting from political
TYPES OF MARINE INSURANCE POLICIES
The shipper or insured covers the risks depending on the terms of letter of credit/export order. The Institute of London Underwriters has drawn up the different clauses in marine insurance policy in respect of risk coverage. The risk coverage is done in terms of various institute cargo clauses. Different marine insurance policies with different risk coverage are:
- Institute Cargo Clause A: This policy covers all the risks of loss or damage to goods. This is the widest
- Institute Cargo Clause B: This policy covers risks less than under clause ‘A’.
- Institute Cargo Clause C: This policy covers lowest
War and Strikes, Riots and Civil Commotion (SRCC) clause is excluded in all the above policies. These risks can be covered by specifically asking for, paying additional premium.
RISKS NOT COVERED BY MARINE INSURANCE
- Under Normal Conditions: Due to nature, certain goods carry inherent vice such as easy Damage to fragile glassware is not covered, if inadequately packed. Damages caused during original packing are excluded, no matter when the damage occurs, for instance, damages caused by a nail driven by careless packers into the contents of packages.
- Insurance Contract Specifically Excluded: Losses due to leakage or hook losses in case of goods packed in bags may be excluded by the insurance contract itself. Solidification of palm and coconut oil may be excluded, unless heated storage is
- Delayed Arrival: Loss of profit, market loss due to delayed arrival or deterioration arising due to delay is
- Ordinary and Unavoidable Trade Losses: Shrinkage and evaporation in bulk shipment or infestation in case of copra are excluded, unless specifically
- Violence: Certain perils such as wars, strikes, riot and civil wars are excluded, unless specifically
- Dangerous Drugs Clause: Insurance policy stipulates losses connected with shipment of opium and other dangerous drugs are not paid unless specified conditions are
TO BE CONTINUED……
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