Insuring Air and Sea Cargo: What You Need to Know Before You Ship
International shipping regulations are complex, so it pays to consult a professional agent or broker before making arrangements with a carrier.
If you ship anything internationally, you'll have to decide whether you should buy air and sea cargo insurance to protect your shipment.
To help you decide, we've put together this overview of air and sea cargo coverage, how it works, and what you should consider when purchasing it.
Air and Sea… And Land?
If you ship goods internationally, you can protect them with an air and sea cargo policy even if you're not actually sending items by air or sea. These insurance policies apply to any goods shipped internationally regardless of the method.
If you're shipping via truck or rail to Canada or Mexico, this is still the relevant coverage despite its misleading name (if you're shipping domestic, find out What You Know to Know About Freight Insurance).
International carriers (the companies transporting the goods) have legal limits with respect to their liability.
International waybills for airlines limit their liability to 17 SDR (roughly $20 USD) per kilogram. That amounts to about $9.10 per pound.
For international sea cargo, the legal limit is $500 per customary shipping unit, which is usually one container of 30 cubic meters (just over 1,000 cubic feet, or 10 x 10 x 10 feet).
If the value of your goods is equal to or less than the carrier's legal liability limit, you probably won't need additional insurance. In many cases, however, your goods will be worth more than these limits can cover – often much more – and you will want additional coverage. Moreover, in some cases, you will be legally obligated to obtain additional insurance (more on that below).
Shipment Methods – Incoterms
The International Chamber of Commerce divides international shipments into 13 different categories, known as Incoterms.
Delving into all of them gets complex, so we'll look at the five that you're most likely to use: CIF, CIP, FOP, LCL, and FCL.
Cost, Insurance, and Freight (CIF)
The cost, insurance, and freight (CIF) method is often used for non-containerized freight transported internationally by sea or domestically by inland waterways.
With CIF, the seller of the goods (the shipper) delivers them to the carrier and, at that point in time, the risk of loss or damage shifts from the shipper to the carrier.
Under CIF you, the shipper, are obligated to pay costs, including the cost of shipping to the buyer and customs duties. You are also responsible for obtaining insurance equal to 110% of the amount necessary to cover damage to or loss of the goods (the extra 10% covers claims administration). If the buyer you are shipping to wants more than this minimum amount of coverage, they must either buy it themselves or make arrangements for you to obtain this insurance in advance of the shipment. Once the shipment reaches the buyer’s destination port and is unloaded from the ship, the buyer becomes responsible for the goods.
As the shipper, you must obtain a document known as the Bill of Lading. This serves as your official receipt from the carrier, indicating that it has received the goods from you and that they have been loaded. It also has the terms of the shipping contract and serves as proof that you, as the shipper, own the goods.
Carriage and Insurance Paid (CIP)
Carriage and insurance paid (CIP) shipping is much the same as CIF, except that it can be used for all methods of shipment, whether by sea, air, truck, or rail.
It has the same insurance requirement: 110% of the value of the goods.
Free on Board (FOB)
Under free on board (FOB), the responsibility for the goods is transferred at a different point.
Once the goods are loaded onto the carrier’s ship, aircraft, truck, or train, the delivery of goods is completed and responsibility for any costs from that point on belong to the buyer.
Container Transportation Methods
If you're shipping containerized goods by sea, you have two methods: less than a container load (LCL) and full container load (FCL).
A standard container has just over 1,000 cubic feet of space. In general, if you can fill one at least halfway, it's cheaper to pay for FCL than LCL. FCL shipments are also usually faster than LCL and have fewer security risks and risks of damage to your goods.
Both FCL and LCL are cheaper than air freight.
Types of Marine Insurance
In general three types of insurance are available: Clause A, Clause Air, and Clauses B & C.
Clause A is commonly known as an all risks policy. It covers physical loss or damage to the goods from any external cause as well as general average and salvage charges (charges incurred when cargo must be jettisoned and when a wrecked or disabled ship is rescued).
Clause A policies commonly exclude damage:
- Attributable to willful misconduct of the insured
- Caused by insufficiency or unsuitability of packing or preparation of the cargo
- Resulting from ordinary leakage and wastage
- Arising from the insolvency or financial default of the owners, charterers, or operators of the vessel
- Caused by inherent vice of the cargo (the innate tendency of a product to deteriorate over time; for example, fruit that will eventually rot)
- Caused by delay
- Resulting from strikes or other labor disturbances
- Arising from the vessel not being seaworthy of the vessel if the insured is privy to the defects at the time of loading cargo
Clause Air policies are much the same as Clause A policies except that they cover air cargo rather then sea cargo.
Clauses B & C policies are recommended only for bulk shipments for certain commodities.
Making a Claim
When filing any kind of insurance claim, be as prompt as you can (learn more in How to File a Claim that Gets Paid Sooner).
Whoever is receiving the goods should inspect them immediately and take photographs – many of them – to document the damage.
Next, mitigate the loss. Do anything you can to reduce the damage, such as drying out wet items.
Then, contact all insurers, whether retained by you, the carrier, or the buyer, and contact officials at the carrier. Give all of these people copies of the photographs and a written description of the damage. If you have purchased insurance yourself, maintain contact with your broker or agent as they will be able to guide you through the claims process, and in some instances they might even handle it themselves (see What Is an Insurance Broker? to find out how they are qualified to help you).
Consult a Professional
While not strictly mandatory, it is highly recommended that you consult with a knowledgeable broker or agent before sending out your shipment. The rules governing international shipping are complex and you want to avoid mistakes and misunderstandings by working with someone who is familiar with them.