Trade Risk Guaranty Presents WHAT IS CARGO INSURANCE? The Basics WHAT IS CARGO INSURANCE? | THE BASICS TABLE OF CONTENTS

History of Marine Cargo Insurance 3 What is Marine Cargo Insurance? 5 Types of Marine Cargo Insurance 7 All Risk – A Clauses 8 Named Perils – B/C Clauses 10 Types of Marine Cargo Insurance Premium 11 Adjustments Open (Rated) 12 Flat Annual 13 Types of Marine Cargo Insurance Risk 14 Management Options Shipment-by-Shipment 15 CIF 16 Annual 17 Carrier Limit of Liability 18 General Average 19 About Trade Risk Guaranty 21

2 HISTORY OF MARINE CARGO INSURANCE

3000 B.C.

Marine cargo insurance has existed in various forms dating back to 3000 BC. The earliest record of cargo insurance is referred to as "bottomry." Bottomry is the advance of money on the security of a vessel to protect against the loss of cargo and was usually set at 20 percent. Bottomry protected traders from debt in the event that cargo was lost.

500 A.D.

A marine insurance term that can be traced back to ancient times is General Average. Greek, Phoenician, and Indian traders said, "Let that which has been jettisoned on behalf of all be restored by the contribution of all." and "A collection of the contributions for jettison shall be made when the ship is saved." Justinian, the Eastern Roman emperor, included the following regarding General Average: "When a ship is sunk or wrecked, whatever of his property each owner may have saved, he shall keep it for himself." This concept was widely used throughout the early civilizations.

1000 A.D.

The next significant development in marine insurance took place in Europe around the 11th and 12th centuries. Danish navigators began forming guilds whose role was to reimburse its members against losses at sea. Around the same time, the first use of premiums in marine insurance occurred. Lombardy, Venice, and Florence were the centers of Mediterranean trade where written records began to emerge.

1384 A.D.

The first recorded marine policy issued was on a vessel named Santa Clara. It was dated April 24, 1384, and covered four bales of textiles being shipped from Pisa to Savona. The Lombards brought these basic concepts of marine insurance to northern Europe and England in the 13th Century.

3 HISTORY OF MARINE CARGO INSURANCE

1688 A.D.

By the 17th Century, London and the Lloyd's of London Association had developed into a leading center for marine insurance. Lloyd's of London traces its roots to a coffee shop founded by Samuel Lloyd in 1688. This coffee shop was favored as a meeting place for insurance business transactions among underwriters and merchants. By 1734, the official list of vessels and values known as the "Lloyd's List" was first published.

1769 A.D.

In 1769, underwriters took their informal arrangement and founded the organization we know today as Lloyd's of London. Ten years later, the first standard policy wording was developed for use at Lloyd's. Lloyd's of London continues to serve as the leading shipping list in the marine insurance industry. It is still acknowledged as the most significant meeting place for underwriters and shippers to facilitate marine insurance business.

1906 A.D.

In 1906, the British Parliament enacted the Marine Insurance Act. The Marine Insurance Act of 1906 was implemented to regulate marine insurance. This legislation continues to influence marine insurance policy wordings and conditions to this day. The Act applies to ship and cargo marine insurance as well as protection and indemnity insurance.

The Marine Insurance Act of 1906 was written by Sir Mackenzie Dalzell Chalmers, who created the Sale of Goods Act 1893. The Marine Insurance Act of 1906 is highly influential. This Act governs not just English Law, but it also dominates marine insurance worldwide through its wholesale adoption by other jurisdictions.

4 WHAT IS MARINE CARGO INSURANCE?

Marine cargo insurance covers the loss, damage, or theft of commodities while in transit between the point of origin and final destination.

This is also known as shipping insurance or freight insurance. This insurance is one of the most essential branches of insurance and an indispensable aid to international trade.

Marine cargo insurance is a type of property insurance that insures property while in transit against physical loss or damage arising from perils associated with the navigation of the sea, air, land, and/or inland waterways. Therefore, a marine cargo insurance policy may be written to include not only goods to be shipped via ocean but also goods to be shipped via air, truck, or rail, including international, domestic or inland transit, warehouse coverage, and more.

Air Freight Warehouse Truck

Ocean Rail

Marine Cargo Insurance covers more than ocean shipments.

5 WHAT IS MARINE CARGO INSURANCE?

Approximate amount of containers lost at sea each year The primary purpose of (not counting catastrophic events) marine cargo insurance is to protect companies from suffering lost revenue. 350 Since loss or damage to a shipment can ruin a company's bottom line, Approximate amount of purchasing additional containers lost at sea each year freight coverage can mean (counting catastrophic events) the difference between growing a company and shutting its doors. 675 Protecting business investments with Marine Cargo Insurance will help a The number of containers lost in a company move forward. catastrophic event can vary greatly from 50 to several hundred.

Marine cargo insurance covers maritime perils, which can differ coverage-wise from policy to policy. Maritime perils are perils consequent on or incidental to the carriage of property by the sea. This includes sinking, stranding, collisions, fire, war perils, pirates, thieves, capture, jettison, washing overboard, and other similar perils designated by the policy.

There are different types of marine cargo insurance coverage and policies for businesses to consider. Marine cargo policies are customizable to fit the needs of any company, and we will discuss the specifics of each kind.

6 WHAT IS CARGO INSURANCE? | THE BASICS TYPES OF MARINE CARGO INSURANCE COVERAGE

There is a wide variety of marine cargo insurance coverage options available. Importers should be familiar with the two primary types that exist in order to decide what kind of coverage is right for them. The two main types of cargo insurance coverage an importer can purchase to protect their goods while in transit are All-Risk and Named Perils. If an importer does not purchase cargo insurance, they are only covered by carrier limit of liability.

7 ALL-RISK COVERAGE INSTITUTE CARGO CLAUSE A

All-risk policies provide the broadest and most comprehensive coverage available. Rather than only covering certain situations, all-risk coverage will cover all physical loss or damage due to a fortuity which is chance or happenstance unless the cause of loss or damage is expressly excluded from the policy. All Risk coverage is an Institute Cargo Clause A. Trade Risk Guaranty aims to offer all-risk terms since it provides the most comprehensive coverage.

Benefits of an annual all-risk cargo insurance policy include: While goods are in transit, an importer's maximum financial loss is limited to their deductible. Asset protection General Average guarantee Control over claims Customized coverage & pricing Local representation Automatic & continuous coverage It's cost-effective

8 ALL-RISK COVERAGE INSTITUTE CARGO CLAUSE A

An all-risk policy will list any exclusions that are not covered, but coverage for certain exclusions can sometimes be added as an additional clause. The following are some standard exclusions for All-Risk Marine Insurance coverage:

Inherent This refers to the deterioration of physical objects because of the fundamental instability of the Vice components of which they are made, as opposed to deterioration caused by external forces. For example, fruits and chemicals naturally deteriorate without the influence of detrimental outside forces.

Negligence Negligence is the failure to use reasonable care resulting in damage or injury to the imported commodities. For example, shipping time-sensitive goods into a known congested port.

WSRCC This stands for 'War, strikes, riots, and civil commotions.' An ordinary marine insurance policy does not cover loss due to these conditions, but is almost always added back to the policy by insurers

Loss of Use/ If the cargo is damaged and this results in the loss of profits from those goods, insurance will only Market cover the cost of the goods and not the potential profits. If the importer ordered goods for a specific event or customer and delay causes the goods to no longer be wanted, they can’t claim the lost sale.

Failure to Pay/ If the client fails to pay during any point in the supply chain resulting in any loss of goods, the marine Collect insurance will not cover the loss.

Loss Over If a loss exceeds the maximum per conveyance limit, it will not be covered. Marine insurance policies Policy Limit will only cover up to the limit. An insufficient limit can also lead to a penalty on the claim.

Policyholder This refers to any loss, damage, or expense attributable to willful misconduct of the insured. For Misconduct example, the importer could purposefully ship goods set to expire before arrival for the purpose of seeking a claim.

Wear and Tear Ordinary leakage, ordinary loss in weight or volume, or ordinary wear and tear are generally excluded from all-risk policies.

Insufficient This refers to any loss, damage, or expense caused by insufficient or unsuitable packing only when Packaging packed by the insured.

Delay Loss, damage, or expense proximately caused by delay is generally excluded from an all-risk policy.

Carrier This refers to loss, damage, or expense arising from insolvency or financial default of the owners, Insolvency managers, charterers, or operators of the vessel. This means that the carrier is facing a financial shortage. Weapons of Mass This refers to loss, damage, or expense arising from the use of any weapon of war employing, atomic or Destruction nuclear fission and/or fusion, or other like reaction or radioactive force or matter.

9 NAMED PERILS COVERAGE INSTITUTE CARGO CLAUSES B & C

Named perils coverage refers to Institute Cargo Clauses B and C, which are more restrictive types of marine cargo insurance. This includes various degrees of narrower coverage that will only cover the loss if it is caused by specific, named perils such as sinking, stranding, or burning. Any peril not named in these policy types is not covered by the insurance.

Typically, named perils Since all policies cover sinking, asking an insurer if named perils coverage coverage covers the will cover if the ship sinks is not a following types of loss: good gauge for whether a policy is a Burning good fit. However, theft, which is covered under an All-Risk policy, is not Sinking covered by named perils cargo Fire clauses B or C policy. In order to have Stranding that covered, importers would need to add that as an enhancement on a Collisions named perils policy.

Additional perils are covered under the Inchmaree clause, which was created when the need for coverage for non-sea-related perils was recognized. The Inchmaree clause provides coverage for loss or damage due to the bursting of boilers; the breakage of shafts; any latent defect in the machinery, hull or appurtenances; faults or errors in the navigation or management of the vessel by the master, mariners, mates, engineers, and pilots. 10 WHAT IS CARGO INSURANCE? | THE BASICS TYPES OF MARINE CARGO INSURANCE PREMIUM ADJUSTMENTS

Importers need to know the difference between premium adjustments available to them to find the best fit. Marine cargo insurance premiums are generally implemented using an open policy or a flat annual policy, which dictates how an importer's premium will be evaluated and paid.

11 OPEN (RATED) POLICIES

Open policies, also known as rated policies, consist of annual coverage based on the price of goods shipped so that importers will not be charged extra. Importers using an open policy will pay an upfront deposit based on a locked-in rate, keep track of all insured values, and complete an audit to pay the difference if they owe more than the deposit payment after the policy expires. The deposit is generally between 90-100% of the estimated actual earned premium depending on the insurer and risk profile.

This insurance covers an Insurance premiums importer's shipments for a Cost & Freight Value × 1.1 are calculated using specified period, usually = Total Insured Value a cost and freight 12 months. On an open value + 10% basis of ( Total Insured Value × policy, premium rates are valuation. 0.xx ) ÷ 100 = Total Earned fixed based on a Premium (xx is equal to predetermined rate, which At the end of the the locked-in rate) decreases as the value of period, excess goods increases. All premium is Total Earned Premium – shipments that fall within calculated and the Premium Deposit = Excess the policy terms are insured pays the Premium Due automatically covered excess premium due. without having to report each one as it occurs.

All open policies are subject to a cancellation clause, which gives either party the option of canceling cover rather than waiting for coverage to expire. Even with cancellation, the deposit premium is usually considered fully earned and non refundable. Either party must give 30 days' notice of cancellation. 12 FLAT ANNUAL POLICIES

A flat annual cargo insurance policy consists of a fixed premium that remains in place for an entire year. These policies are usually reserved for small-volume importers because it would take more time than it is worth to complete an audit after the policy expires. However, it is essential to note that sometimes these policies may be audited.

In a flat annual policy, insurers will charge the entire fixed premium required to institute the policy upfront. If these small-volume importers ship more than estimated, there is no penalty. Still, importers are expected to advise insurers if there is a significant change in underwriting information throughout the year.

Payments for an annual policy only occur once a year, remain on file for that entire year, and are exceptionally easy for importers to manage.

Examples of significant It is important for importers to notify their insurer of significant changes in changes that require their business. It is for the benefit of the notifying your cargo importer to let the insurer know of these insurance provider: changes so that there is no gap in New contracts information and the insurer is able to Change in shipping properly check for consistent compliance. It is also important for the volume importer to do this to avoid New products/cargo unanticipated changes in coverage. New trade routes

13 WHAT IS CARGO INSURANCE? | THE BASICS TYPES OF MARINE CARGO INSURANCE RISK MANAGEMENT OPTIONS Importers must choose if they want to insure their goods shipment-by-shipment or to use an annual policy. For a company to choose what is right for them, they must carefully evaluate how much they ship. However, most companies can financially and efficiently benefit from an annual policy.

14 SHIPMENT-BY-SHIPMENT POLICIES

Shipment-by-shipment cargo insurance policies only cover a single shipment at a time. For each shipment, importers must buy a different policy that may have a different rate each time they ship. Shipment-by-shipment cargo insurance is likely to be more expensive than other types of cargo insurance. However, those who ship infrequently may see savings when insuring shipment by shipment.

This coverage is generally available through the Freight Forwarder shipping the goods. Customs brokers may offer this coverage as well. Freight Forwarders and brokers have an open policy that they can add shippers to for a single shipment. These insurance rates are higher than usual because a freight forwarder or broker purchases their insurance and then marks the price upon the importer's invoice, which generally results in higher rates than an annual policy.

Importers that ship goods frequently and purchase shipment-by-shipment insurance are most likely overpaying. They are typically paying between $0.30 & $0.60 per $100.00 of cargo. This is because importers are buying the Freight Forwarder or Custom broker's policy rather than their own.

There are also specific exclusions on the policy when using shipment-by-shipment coverage. Most broker or freight forwarder policies have limited insurance terms rather than all-risk coverage. Their policy is not designed for your specific shipping insurance needs.

Those insuring their goods shipment-by-shipment are most likely not covered for the following: Acts of God (heavy weather, earthquake, lightning, etc.) Acts of war (strikes, riots or civil commotions) Latent defects in the hull or machinery Criminal acts or negligence by the master or crew Unseaworthiness of the vessel

15 CIF COVERAGE

CIF coverage, also known as Cost, Insurance, and Freight, is a type of shipment-by-shipment coverage obtained through terms of sale. This means that the seller buys the policy rather than the importer. The seller is required to obtain insurance for the goods while they are in transit to the named port of destination. Under CIF terms, the policy must be for the benefit of the buyer, so it must name them.

This usually only requires the seller to purchase Cargo Clause C, which consists of the least coverage available. Once the goods arrive at the port of destination, the responsibility for the goods transfers over to the importer, and CIF coverage no longer applies.

One of the issues with buying on CIF terms is that the importer has to deal with an overseas insurance company when a cargo insurance claim occurs. Chances are the importer is not a valued client of that insurance company. This means importers will have a hard time getting that insurance company's attention.

Learn more about the drawbacks of While it is convenient to have the CIF coverage in this TRG webinar: seller of your goods handle purchasing insurance for those goods, purchasing Marine Cargo Insurance on CIF Terms could be hurting your business and costing you more. There are usually mark ups associated with buying goods on CIF terms and you simply don't know the specifics of your insurance policy.

16 ANNUAL COVERAGE

Annual marine cargo insurance policies consist of a locked- in contract for coverage lasting one year. Sometimes these contracts can last for a more extended time period. These contracts cover all shipments within that time period that are within the policy's terms and conditions. Either party could cancel their annual policy with notice, but the premium is typically non-refundable. Annual policies can be updated to reflect changes in coverage needs if the importer is communicative with their insurer in advance.

Annual coverage is likely to be the most cost-effective for the majority of Benefits of an annual policy with Trade Risk importers. Rather than securing one policy Guaranty include: per shipment, importers can get an annual Asset protection cargo insurance policy that automatically General Average guarantee covers all their shipments within the year. Control over claims An annual open cargo policy automatically Local representation insures shipments on set terms, conditions, and rates without the need to Automatic & continuous coverage contact an insurance broker or company No monthly reporting! each time an importer has a shipment. Many deductible options Point of origin to final destination coverage These policies generally have lower Aggressive claims handling premiums and less paperwork, which makes the claims process more Premier Policy Enhancement Clauses manageable. Costs only occur once a year, unless adjustable Lower premiums CClliicckk HHeerree ttoo LLeeaarrnn MMoorree Less Paperwork AAbboouutt TTRRGG's's CCllaaiimmss PPrroocceessss Comprehensive coverage

17 CARRIER LIMIT OF LIABILITY

Carrier limit of liability determines the maximum amount of money that carriers can be held liable for in the event of damage, loss, or delay of cargo. However, limits of liability vary between carriers and situations.

What is Covered What is Not Covered

Carrier limit of liability covers damage or loss that Carriers are not held responsible for damage or loss occurred due to carrier negligence. When settling a that occurs due to: claim, the responsibility is typically on the importers An act of God, like inclement weather or a to prove that the damage was the carrier's fault. natural disaster There is no official deadline to settle a claim, so the Fire process could drag on for months. Interference by a public enemy of the U.S. Act of war, like strikes, riots or civil commotions For a carrier to be liable for loss or damage, importers Improper packaging of cargo by the shipper must prove that their cargo was in good condition when Government action, like road closures, given to the carrier, but was delivered damaged, or not quarantines, or trade embargoes delivered, and they must prove the amount of the damage Goods prone to spoil or become defective over they are claiming. However, the importer's reimbursement time, like produce, tobacco, or medical supplies will most likely not equal the value of the lost or damaged Latent defects to the hull or machinery goods. Reimbursement will also differ between modes of transport. Seaworthiness of the vessel Criminal acts or negligence by master or crew Ocean Carrier - $500 per package or freight unit International Air Carrier - $9.07 per pound or $20 Importers depending on carrier limit of liability to per kilo protect their lost or damaged goods are vulnerable to Domestic Air Carrier - $0.50 per pound a significant loss and should consider purchasing a cargo insurance policy. Carriers have 30 days to acknowledge a claim has been made and must respond to the shipper within 120 days.

18 GENERAL AVERAGE

General Average occurs when something happens to the method of transport, creating a need for the sacrifice of some cargo for the voyage to continue successfully.

This can happen if a vessel is grounded or if a fire breaks out on board. Tugboats may need to be utilized, or the vessel may need to be taken to another port for repairs and inspection. When this happens, the carrier will declare General Average to assign risk-sharing to all cargo interests aboard the vessel.

After declaring General Average, vessel operators would typically ask each cargo owner for a deposit based on their cargo's allocated value to the venture, to cover the cost of any other cargo damaged or expenses incurred by the operator while saving the voyage. For any case of General Average, an average adjuster will handle payments and adjustments for an average of about ten years until all payments have been discharged.

General Average could prove very costly and time-consuming for the uninsured, but not so for an importer covered by an annual all-risk policy. They would have their insurer attend to these matters on their behalf.

These videos will help to answer the following questions: What is General Average? How can General Average be Declared? Who is Held Responsible for General Average? How does the General Average Claim process work? For more educational videos, subscribe to Trade Risk Guaranty’s YouTube channel.

19 GENERAL AVERAGE

There are several ways an importer can suffer a loss with a general average event:

A General Average event (like a fire or boiler explosion) could damage an importer's goods. In that case, importers need an annual policy to protect themselves. They could claim liability against the carrier depending on the cause of damage. General Average contributions will not pay this person back.

Goods may have been sacrificed or damaged in the effort to save the voyage. In this event, payments made towards the General Average guarantee are paid to the importer after the settlement is finalized, which could take 10 years. If the importer has an annual policy, the insurer will pay the importer for the damage they suffered.

Some Importers' goods could be perfectly sound, but they will have to make a contribution to those whose goods were damaged or sacrificed to save the rest of the cargo. If no policy is in place, the importer must make a cash bond to receive their goods. If the importer has a policy, the insurers pay it.

This is a promise to pay general average contributions in the form of a cash bond. In most cases, the carrier requires this before agreeing to unload the ship and has the right to take part of the cargo as a payment of the cargo owners' contribution if the bond is not received.

If the cargo owner has cargo insurance that includes coverage for general average, the insurance provider will pay their contribution and a cash bond will not be required.

20 ABOUT TRADE RISK GUARANTY

Trade Risk Guaranty (TRG) is an international surety agency providing Customs bonds, marine cargo insurance, and other trade-related products direct to companies that import into the United States. TRG was founded in 1991 when the founder realized that certain products and services that were traditionally provided by Customs brokers could be provided directly from the insurance agency, resulting in lower prices and higher levels of expert customer service.

Marine Cargo Insurance From TRG

Trade Risk Guaranty believes that Connect With Us: cargo coverage should be tailored to 211 East Main Street, Suite C your business. That's why every Bozeman, MT 59715-4878 policy we write starts with an in- traderiskguaranty.com depth application to gather every P: 1.800.685.6082 | F: 406.922.6501 detail about your shipments. Get the [email protected] best coverage for your business. We are the all-risk insurance expertsspecializing in imports, exports, and domestic policies.

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