Cargo insurance Cargo insurance By Thomas Lutz Cargo insurance arguably may be the world's oldest form of insurance. Historical records tell us that early Chinese merchants spread their cargoes of silk and grain among several ships to avoid the calamity of a total loss should pirates or other perils of the sea befall them. While they may not have to face the peril of river pirates, your insureds face many of the same perils the early Chinese merchants faced—and even a few more—when they move cargo by hired carrier or on their own trucks, ships, or planes. In today's world, the movement of goods and products from one point to another may involve several different stops at warehouse facilities, wholesalers, etc. before those goods reach their final destination. All along their torturous journey, a wide variety of loss exposures are presented. In many cases the liability for loss can be passed on to the shipper or the purchaser, depending on how the goods are shipped and how the sales contract reads. Standard coverage Standard property policies offer only limited coverage for shipment of a company's goods. ISO's building and personal property coverage form, with the Cause of Loss—Special Form attached, provides only $1000 of protection for loss caused by fire, explosion, vandalism, wind storm, riot, vehicle collision, and theft. On the other hand, a manufacturer's output policy (MOP) may provide all the protection needed for some manufacturers. Common carriers A hired trucking firm that ships the property of another is called a common carrier or contract carrier. As a matter of law, common carriers are authorized by state or federal agencies to serve the public over assigned routes and are legally liable for damage to property in their possession, except when damage is caused by: 1. negligence of the shipper, e.g., improper packaging by the owner; 2. inherent vice—a condition or quality of the cargo that causes its own damage or destruction; 3. acts of God—natural disasters such as hurricanes, floods or earthquakes; 4. exercise of public authority—including seizure by authorities of illegal goods; and 5. war risks, otherwise known as acts of the public enemy. However, negligence by a common carrier could allow the owner of shipped goods to recover damages despite these exclusions. For example, a trucker who failed to use reasonable care in avoiding a flood plain could be responsible for damaged goods despite the fact that the direct cause of loss is attributed to an act of God. Bills of lading An important instrument that can also limit a common carrier's liability to a cargo owner is the bill of lading. A bill of lading serves not only as a receipt for the goods shipped but also as a contract defining the extent of the carrier's liability. Two kinds of bills of lading exist—released bills of lading, where the carrier's liability for transported cargo is limited to a fixed dollar amount, and standard bills of lading, which do not contain a capped dollar amount of protection but which are more expensive. For that reason many companies prefer the less costly released bill of lading, but such a decision should be weighed against the possibility of an uninsured partial loss. It is important to make certain that the carrier's liability is adequately coordinated with the owner's cargo insurance. When advising your insureds in this area, use caution. Contract provisions relative to carrier negligence can vary greatly from carrier to carrier. Risk transfer Transferring the responsibility for cargo damage to another is always desirable and can be accomplished via the contract of sale, which should stipulate the exact time at which title passes from seller to purchaser and who will be responsible for loss during shipment. In the unlikely absence of such wording, title is usually assigned to the shipper until the goods reach the delivery point in accordance with provisions of the Uniform Commercial Code (UCC). Risk transfer must be planned carefully, because inadequate wording of a sales contract could backfire on the seller should the purchaser's credit go bad. Free on board (FOB) Under a sales contract, buyers and sellers usually make arrangements specifying who will provide insurance on merchandise being shipped. When goods are shipped by truck, one of two arrangements is commonly used. These two arrangements, known as free on board (FOB) and FOB destination, are usually included in the sales contract. Under FOB shipments, a seller's responsibility for damage to sold goods shifts to the purchaser when the trucker picks up the merchandise. Under an FOB destination agreement, the seller remains responsible for insuring any damage to the cargo until it is delivered to the purchaser in accordance with the contract of sale. In reality it is not uncommon for both seller and buyer to independently maintain some form of cargo insurance on all shipments, because difficulties often can develop as to when a carrier takes possession or the buyer takes delivery. Transit and motor truck cargo insurance Companies that ship products on their own trucks purchase motor truck cargo insurance, while companies that ship by contract carrier purchase transit insurance. Both forms of insurance provide equivalent coverage, but major differences involving coverage for property of others, coverage at intransit storage facilities and coverage restrictions for certain perils when goods are shipped on the companies' own trucks make the forms dissimilar. Transit insurance Transit insurance protects the insured's goods while in the custody of a contract/common carrier. In addition to providing coverage for goods being transported by truck, rail, or air, transit coverage also provides protection while goods in transit are stored at a temporary warehouse. This coverage is important, as common carriers frequently consolidate the merchandise of several companies at a central warehouse to await delivery by one vehicle. Along these same lines, policy language provides coverage from the time property passes to the carrier, throughout transit until delivered to its destination, including risks incidental to transit, on or in docks, depots, wharves, terminals, yards, platforms, garages, receiving and/or forwarding offices. Implicit in the purchase of transit coverage is the need to protect against potential loss created by interest and title provisions of a contract of sale for property shipped free on board (FOB). Often the provisions of FOB agreements are subject to dispute in the event of loss (purchaser refuses to pay for cargo damaged in shipment). Therefore, it is important that transit policies issued to your insureds provide for extended coverage on FOB shipments. A typical extension of coverage provision reads as follows: "Subject otherwise to its terms and conditions, this policy is extended to cover the contingent interest of the insured in shipment sold under 'Free on Board' terms, providing any amount recoverable under this extension is not collectible from the purchaser or under any other insurance that would have attached if this policy had not been issued." Coverages. A transit policy can be written on either an all risk or named perils basis and generally includes coverage for incidental water transportation. Waterborne coverage is offered on a full-perils-of-the-sea basis or the more-limited-perils basis covering sinking, burning, stranding or collision of the transporting vessel. Certain waterways, for certain times of the year, may be excluded. All risk coverage. As with other forms of all risk coverage, certain exclusions apply, including damage by insects, vermin, dampness, rust, marring or scratching, contamination, inherent vice, delay or loss of market and, according to the nature of the cargo, evaporation, leakage of liquids, change in flavor, discoloration or spotting. Named perils coverage. A typically named perils policy includes: • fire, lightning, explosion; • windstorm and hail; • overturn of the transporting vehicle; • collision of the transporting vehicle with another object; • collapse of a bridge, wharf or dock; • earthquake, flood; and • theft of an entire shipping package. Property not covered. Certain types of property are not eligible for coverage under a transit policy. Property not covered includes: • jewelry; • fine art; • money and securities; • live animals; and • illegally transported property. Limits of liability. Payment is subject to a maximum limit for any single "loss, disaster or casualty" occurrence. Claims are adjusted on the basis of invoice cost (market value if there is no invoice) plus freight charges and any other legitimate costs the insured has sustained after shipment. Loss of a component part from an insured item containing several parts is adjusted on the basis of the damaged part only. Transit coverage can be written on an annual or continuous reporting form basis as well as on a shipment-by- shipment basis, known as a trip transit coverage. Motor truck cargo insurance Motor truck cargo insurance is designed to protect two groups of insureds: trucking companies, for damage to property of others while in their custody; and businesses that ship their own goods on their own trucks. Coverage. Like transit insurance, a motor truck cargo policy covers lawful merchandise sold by the insured which is loaded for shipment and transported in or on vehicles owned, leased or operated by the insured business within the United States and Canada. Coverage can be written on a named perils or all risk basis. However, unlike transit insurance, motor truck cargo insurance is not concerned with the technicalities of title or the burdens of risk transfer (no FOB provisions) as coverage simply applies to property still owned by the insured or property that is already sold but is being delivered by the insured. Because goods shipped by companies on their own trucks usually follow a direct route, the policy does not provide coverage at warehouses or terminals along the way.