Manufacturers & Distributors ARTICLE -

Shippers beware

Common problems with cargo insurance

Target Audience: Manufacturing and Distributing Companies, M&D Industry, Chief Financial Officers, Interest in Insurance, Shipping Departments

Manufacturers know that cargo insurance is vital when it comes to moving valuable products and machinery. But many have found, often too late, that their coverage isn’t sufficient, leaving them with lost or damaged goods and little or no compensation. The key to solving the common problems that accompany cargo insurance is to know what they are — and how to avoid them.

Giving your carrier the upper hand

One common way to insure cargo is to obtain coverage through the carrier. In this case, the carrier is considered the insured, not the shipper. So the policy will pay out to the shipper only if the carrier is considered liable for the lost or damaged cargo. This is where problems often can arise.

Most of these policies prevent the carrier from being held liable in many scenarios. Usually found in the “endorsements” section of a carrier’s policy, exclusions from liability can include certain forms of theft, as well as delivery to a party that has obtained the shipment under false pretenses. “Acts of God” are also commonly excluded. So if, for example, the truck driver gets in an accident because of a snowstorm and damages your cargo, you’re most likely out of luck.

Additional problems to consider

If you’re working with a broker, it’s important to know that, even though the broker may hold a “contingency cargo liability” policy, he or she doesn’t have an insurable interest in your cargo and cannot be issued an actual insurance policy under most state laws. If you have your broker sign a contract claiming responsibility for the shipped goods, however, the broker will be able to pay claims to you.

The financial hardships many carriers have faced in recent years have led to another problem with insurance claims. To deal with cash-flow problems, these companies may stop paying their customers’ insurance claims because of their inability to pay their insurers’ high deductibles.

Even though the cargo company itself is first held liable, a BMC-32 Endorsement — a provision added to a carrier’s contract — protects manufacturers should their trucking companies file for bankruptcy or go out of business when property loss/damage claims are pending against them. In these scenarios the BMC-32 Endorsement holds a carrier’s insurer liable for the first $5,000 of damaged goods or property loss per vehicle, or $10,000 per occurrence.

A shipper’s interest

The most reliable way to secure adequate compensation should your cargo be lost or damaged is to purchase your own “shipper’s interest” cargo insurance policy, also known as all-risk coverage. This policy type, unlike many carriers’ policies, covers all damages and losses, regardless of whether a carrier is found liable.

Before you consider purchasing this type of insurance, check your general business insurance policy to see if you’re already covered or can add shipper’s interest insurance to your coverage at a minimal cost.

Shipper’s interest coverage may not be necessary in every case, but you should consider it if your carrier’s limits of liability don’t cover the type of product you’re shipping. Liability limits can vary greatly among transportation modes, companies and locations, so it’s important to read the fine print of your carrier’s policy. If your product isn’t covered, shipper’s interest insurance can cover many types of specialty cargo, including refrigerated freight, special garments, fragile cargo and more.

You also may want to supplement your carrier’s coverage if you’re shipping expensive cargo, because many carriers’ policies cover cargo only up to a certain dollar amount. For example, if your cargo is worth $50,000, but your carrier’s policy covers $25,000 worth of cargo with a $10,000 deductible, you’ll probably want to obtain your own coverage. You can also secure a lower deductible if your carrier’s is higher than you’d like.

Rates for shipper’s interest coverage vary by company and mode of transport but are typically in the area of 0.5% to 2.5% of the total declared value of the cargo. The standard industry formula used to calculate freight value is the cost, plus insurance, plus freight, plus 10% — CIF + 10%. “Cost” is the value of the goods you’re shipping, “insurance” is the insurance premium fee and “freight” is the amount paid in shipping charges. The additional 10% covers unforeseen expenses.

Protect your cargo and your financial well-being

In the event of a loss or accident, carriers, brokers and insurers are all going to favor their own best interests, and it’s important for manufacturers to do the same. When researching carriers, pay attention to their level of liability and any exclusions from liability. You can then review your options for shipper’s interest insurance with your financial advisor and a cargo insurance specialist.

Find out how our M&D accountants can add value to your business. Email us or call us at 1 (888) 875-9770.

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