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Cargo Insurance Basics — Open Policies, Single-Shipment Cover and Incoterms
An overview of marine cargo insurance for goods in international trade: open policies versus single-shipment cover, the scope of the Institute Cargo Clauses (A), (B) and (C), the period of cover, how Incoterms decide who arranges insurance, and what to do when a loss occurs, based on public material from JETRO, the ICC and insurers.
Marine cargo insurance covers loss of or damage to goods while they are carried by sea, air or land. For a company that trades internationally, the basics are the type of policy, the scope of cover, whether the seller or the buyer arranges the insurance, and what to do when a loss occurs. This article sets these out based on public material from JETRO, the International Chamber of Commerce (ICC) and insurers.
Why cargo insurance is needed
If goods are damaged in transit, you cannot always recover the loss from the carrier (the shipping line or airline). In international transport, conventions, laws and the carrier's terms define cases where the carrier is not liable and cap the amount of compensation. Because the full value of the goods often cannot be recovered, shippers usually arrange their own cargo insurance.
Open policies and single-shipment cover
An open policy sets out in advance which goods are insured and on what terms, and every shipment that falls within it is insured. Its main advantage is stability: unless there is wilful misconduct or gross negligence, it covers losses that occur after shipment but before the shipment is declared, and losses that occur on a holiday. On the other hand, if a shipment was not declared because of an administrative error, it must still be declared later and the premium paid, even if the goods arrived safely.
Single-shipment cover is arranged separately for each shipment. It is simple when shipments are few, but if you forget to arrange it, the goods may not be covered. If you import or export regularly, an open policy is worth considering.
| Item | Open policy | Single-shipment cover |
|---|---|---|
| Arrangement | A standing contract; each shipment is declared | Arranged for each shipment |
| Risk of a missed declaration | Covered unless there is wilful misconduct or gross negligence | Not covered if not arranged |
| Terms | Terms and rates agreed in advance apply | Decided each time |
| Suited to | Regular imports or exports | Few or one-off shipments |
Scope of cover: Institute Cargo Clauses (A), (B) and (C)
The scope of cargo insurance is usually set by the Institute Cargo Clauses (A), (B) or (C). Clause (A) covers "all risks" apart from the exclusions; (B) and (C) cover only the named perils.
| Example of loss | (A) | (B) | (C) |
|---|---|---|---|
| Fire, explosion | ○ | ○ | ○ |
| Stranding, sinking or capsizing of the vessel; collision of the conveyance | ○ | ○ | ○ |
| General average, jettison | ○ | ○ | ○ |
| Earthquake, volcanic eruption, lightning | ○ | ○ | × |
| Washing overboard; entry of sea water, etc. | ○ | ○ | × |
| Total loss of a package dropped during loading or unloading | ○ | ○ | × |
| Wetting by rain or snow | ○ | × | × |
| Theft, non-delivery | ○ | × | × |
| Breakage, bending, denting | ○ | × | × |
* A summary of typical losses. The exact scope must be checked in the clauses and the policy.
The choice of clause matters most for goods prone to rust or water damage, or at risk of theft.
Losses not covered under any clause
Even under clause (A), the following are not covered:
- Loss caused by wilful misconduct of the insured
- Ordinary leakage, ordinary loss in weight or volume, and ordinary wear and tear
- Loss caused by insufficient or unsuitable packing
- Loss caused by inherent vice or the nature of the goods
- Loss caused by delay
War and strikes risks are excluded under all of clauses (A), (B) and (C), and are covered by adding separate clauses (the Institute War Clauses and Institute Strikes Clauses). They are normally arranged together with the main cover.
Sum insured and period of cover
The sum insured is usually set at 110% of the CIF value. A letter of credit (L/C) may require a different amount, so this should be checked.
Under the Institute Cargo Clauses, cover in principle starts when the goods are first moved in the warehouse or place of storage for transit and ends when unloading is completed at the destination warehouse (the warehouse-to-warehouse clause). There are limits, however, such as cover ending a set number of days after discharge from the vessel at the port of discharge. Whose interest the insurance actually protects depends on when the risk in the goods passes from the seller to the buyer. This is why the relationship with Incoterms, below, matters.
Who arranges insurance: Incoterms
Under Incoterms® 2020, the seller must arrange insurance under only two terms: CIF and CIP. Under the other terms there is no obligation to insure, so each party needs to arrange the cover it needs according to when the risk passes.
| Term | Who insures | Minimum cover (default) |
|---|---|---|
| CIF (sea and inland waterway only) | Seller | Institute Cargo Clauses (C) |
| CIP (any mode of transport) | Seller | Institute Cargo Clauses (A) |
| FOB, CFR, FCA, CPT, etc. | No obligation (the party bearing the risk arranges it) | — |
In the 2020 edition the default cover under CIP was raised from (C) to (A), while CIF stayed at (C). Under either term the parties can agree a different level. If you buy on CIF terms, check whether clause (C) cover arranged by the seller is enough. If necessary, specify clause (A) in the sales contract or arrange top-up cover on the buyer's side.
What to do when a loss occurs
When you find damage to goods, act promptly as follows. Delay can affect the insurance claim and any claim against the carrier.
- Notify the insurer or its agent: contact them as soon as you find the damage. A survey may be arranged.
- Preserve and record: keep the goods and packing as they are, and take photographs.
- Prevent further loss: dry wet goods, separate undamaged goods, and so on.
- Give notice to the carrier: notify the carrier of the damage in writing. Visible damage must be noted on delivery; damage that is not visible must be notified within a short period after delivery. The deadline depends on the mode of transport and the applicable rules.
- Prepare documents: the policy, invoice, bill of lading (B/L) or air waybill, packing list, details of the loss, and so on.
Notice to the carrier is also needed to preserve the insurer's right, once it has paid the claim, to recover from the carrier. Make sure the staff who receive the goods know this procedure.
When general average is declared
When a vessel meets a peril such as stranding or fire, and costs or sacrifices are incurred for the common safety of the ship and cargo, the shipowner and all cargo owners share them. This is general average. Even if your own goods are undamaged, you may be asked to pay a contribution or provide security before you can take delivery. With cargo insurance, general average contributions are covered under any of clauses (A), (B) and (C), and the insurer usually issues the guarantee.
Frequently asked questions
Q. If we export on FOB terms, do we not need insurance?
A. FOB carries no obligation to insure. Under FOB, however, the risk passes to the buyer when the goods are loaded on board at the port of shipment, so the seller bears the risk until then. You need to decide how to cover that leg.
Q. We shipped over a weekend and could not arrange cover.
A. Under an open policy the shipment is covered unless there is wilful misconduct or gross negligence. Single-shipment cover must in principle be arranged before transit starts, so please check with the insurer.
Q. Does cargo insurance cover a buyer who does not pay?
A. No. Cargo insurance covers physical loss of or damage to the goods in transit. Non-payment caused by a buyer's insolvency or late payment is covered by trade credit insurance.
How Credit Hills can help
Credit Hills is an insurance broker specializing in trade credit insurance. For clients that trade internationally, we also advise on arranging corporate insurance, including cargo insurance, alongside the risk of non-payment.
If a loss occurs under cargo insurance we have brokered, we help clients notify the insurer, follow up on the survey, give notice to the carrier and prepare claim documents. Our team includes an average adviser who has handled average and cargo claims at a non-life insurer and an average adjuster, and we can also advise on the procedure when general average is declared.
See our corporate insurance services →