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Why Is Cargo Insurance Important?

Posted on Friday, April 29th by

Cargo theft is one of the main risks encountered in today’s shipping industry, shipments worth hundreds of thousands of dollars tending to disappear mysteriously all the time. Some shipments simply get lost, others are hijacked by illegitimate drivers… Whichever the scenario, the conclusion is always the same: the increasingly numerous cargo theft incidents are indicative of a massively flawed supply chain, particularly in the United States and now Eastern Europe, as it seems. However, despite this context, cargo insurance providers tend to have difficulties convincing people to insure their belongings as they travel or any cargo they might want shipped and therefore prevent any risks of damage, loss, theft or pilferage. This is even more surprising in a context where people do not refuse to pay for life insurance, travel insurance, car insurance or health insurance, for instance. However, many of them tend to change their minds about cargo insurance and its benefits once they have experienced the risks directly.

It is important to note that when it comes to cargo shipping, the risks include much more than just cargo theft. A package may get damaged upon loading or unloading, upon coming into direct contact with seawater, upon being shipped at a wrong temperature… As far as cargo theft and deception schemes are concerned, many shippers are unaware of the risks being the highest whenever their cargo is at rest. Once a package enters the transit stream, the manufacturer no longer has any control over it. That is where the insurers and cargo insurance come in. As agreed upon by many shipping experts, hoping for cargoes to not be stolen when at rest is not enough.

According to the statistics, the incidence of cargo theft incidents is the highest in the US states of Illinois, New Jersey, Georgia, Florida, Texas and, at the top of the list, California. Indeed, as confirmed by many, the incidence of full cargo theft incidents at their ports has dropped over the last decade. However, solutions to ensure the integrity and safety of cargoes outside of these ports are yet to found in a context where trucking companies set up staging operations all the time. As per the law, truck drivers must show a Transportation Worker Identification Card (TWIC) upon entering a port to prove they have been subject to a federal background check. However, many of them fail to do so because that background check has never been completed for various reasons that may have to do with the authorities or their employers. Therefore, many of them have no access to the ports, yet they get to handle cargoes every day. In this context, they will stage cargoes outside of the port area to be picked up and shipped to the end destination, which creates lots of opportunities for cargo theft.

Of course, some cargoes are more likely to get stolen than others. Perhaps surprisingly for some people, the most commonly targeted ones consist of foods and beverages rather than high-end electronic or technological equipment. As confirmed by shipping experts, the explanation lies in foods and beverages not having any serial numbers and therefore being harder to trace than electronics, for instance.

In this context, the aim of insurance companies is to provide solutions to ensure the safety of cargoes during transportation. Generally, a cargo incident of any kind will be followed by an inquiry to result in the recovery of the cargo and its being returned to the insured. However, these solutions also include various precautions one can take to prevent their cargo from getting stolen. Therefore, they get more insight into the way their business partners work and then make recommendations on an operational or technological level. In the end, the job of insurance companies is to cover all their clients’ needs in terms of cargo safety. As a result of that, cargo insurance policies tend to be rather lengthy and therefore quite intimidating. The fact is nobody takes the time to go through all the clauses stipulated in their insurance contracts unless they work in the field. Most of time, they only want to learn the answer to various specific questions.

As already mentioned, the causes of cargo loss can be varied and although clients tend to address liability issues, it may have nothing to do with freight forwarders or carriers and their cargo handling operations. Natural disasters, for instance, make for a good example. So all the more reason for companies to invest in insuring their products before having them shipped. Unfortunately, some consider insurance contracts to be an additional expense rather than an investment. Going back to the issue of liability, it is very important to differentiate between a shipping company’s general average and limited liability. In the former case, all parties involved in the insurance contract share the costs involved with a potential accident resulting in cargo loss equally. However, this only applies to a specific range of risks. In this case, whether the cargo is damaged or not, the client must pay a certain amount in cash to the carrier in order for it to be released. As for the insurance company, its role is to facilitate matters for the customer. If not insured, clients can expect the resolution of such events to stretch over several years.

Finally, it should be noted that companies may decline coverage in some cases, which only makes sense upon considering a company’s profit margin. In the end, it would be rather impossible for a company to survive on the market if manufacturers were to receive full compensation for their losses. After all, a profit margin of 5 per cent, for instance, would have the company forced to earn the value of a damaged shipment twenty times in order for the manufacturer to be fully compensated. Unfortunately, some manufacturers fail to understand this concept of limited liability and as a result refuse to insure their shipments. However, as they make this choice, they are putting their business at risk for cargo insurance can prove to be of critical importance in a shipping industry where the risks are indeed many.

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