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The Importance of Cargo Insurance Are You Covered Properly?

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The Importance of Cargo Insurance Are You Covered Properly? Premier Provider of Innovative Insurance and Surety Solutions The importance of Cargo Insurance Are you covered properly? ATLANTA | BOSTON | CHARLESTON | CHICAGO | HOUSTON | LOS ANGELES | MIAMI | NEW YORK | SAN FRANCISCO | SEATTLE | TORONTO “Avalon Risk Management is the officially endorsed provider of Cargo Insurance for the SCTC “ -Special Pricing for Members -Avalon partnering with Great American to provide reliable and comprehensive coverage -All-Risk coverage -Avalon has the authority to handle claims. About Avalon Seattle Toronto Boston Chicago San Francisco New York Los Angeles Atlanta Charleston Houston Miami • Mid-sized insurance broker owned by founding management. • Eleven regional offices located in major North American ports. • Transportation insurance specialists. What you will learn • History and Overview • Need for Insurance • General Average • Basics: Different coverage types • Insuring shipments and Avalon technology • Claims © Avalon Risk Management History & Overview • Traces of Cargo Insurance were found as early as 3000 B.C. – Piracy was also a common event. • By the 17th Century, London was the hub of Cargo Insurance. – Edward Lloyd founded a coffee shop where underwriters and traders discussed insurance transactions. – Underwriters formed “Lloyd’s of London.” © Avalon Risk Management The need for cargo insurance Why Insure? • Rigors of shipping – Loss, damage and theft – General Average (ocean) • Carriers’ liability – Carriers only pay claims when liable – Liability is often limited – Often have improper insurance or insufficient funds • Usually in trucking or warehousing © Avalon Risk Management Ocean shipments Ocean Shipments • In the United States, the Carriage of Goods by Sea Act (COGSA) governs liability for ocean cargo. – Limits recovery to $500 per package or customary freight unit (CFU) when the carrier/NVOCC is negligent. What is a package? • The smallest unit of packaging declared on the bill of lading. This could be a whole container, a pallet, etc. Examples: – One 40-foot container S.T.C. 1000 packages of almonds. If the carrier is liable, liability is limited to the lesser of the cargo’s value or 1000 x $500. – One 40-foot container S.T.C. 1000 packages of almonds. If the carrier is liable, liability is limited to the lesser of the cargo’s value or 1 x $500 • In Canada, Hague-Visby applies. – 666.67 SDR per package or 2 SDR per kilo, higher than COGSA. • Rotterdam Rules signed in 2009 will be the new liability convention. Needs to be ratified first. © Avalon Risk Management 17 Hague-Visby Defenses 1. Neglect of carrier in the navigation or in the management of the ship 2. Fire (unless by fault of the carrier) 3. Perils, dangers, and accidents of the sea 4. Act of God 5. Act of war 6. Act of public enemies 7. Arrest, restraint, or seizure 8. Quarantine restrictions 9. Act of omissions of the shipper or owner 10. Strikes, lockouts, or labor stoppage 11. Riots and civil commotions 12. Inherent defect, quality, or vice of the goods 13. Insufficiency of packing 14. Insufficiency or inadequacy of marks 15. Latent defects not discoverable by due diligence 16. Saving life or property at sea (general average) 17. Any other cause arising without the actual fault of the carrier © Avalon Risk Management General Average General Average • Ocean loss. A voluntary sacrifice to save cargo/vessel/life. – Extraordinary expenses are incurred (i.e., jettison, fire). • All cargo is seized. Amount of GA loss is determined. – Must post security deposits to release cargo. © Avalon Risk Management How General Average Works Vessel and freight value $200 million Saved cargo value $50 million Contributing value (total) $250 million • Assume $50 million in cargo was sacrificed. • The loss represents 20%of the contributing value. • Cargo owners must contribute 20% of their respective cargo values, even if their cargo wasn’t damaged. © Avalon Risk Management General Average • A guarantee must be posted to release the freight. • If the cargo was insured, the insurance company provides the guarantee. • Without Cargo Insurance, cash must be posted. • General Average claims can take years to resolve. © Avalon Risk Management Domestic shipments: Air, Road, Rail, Warehouse Domestic Shipments • Domestic air, intrastate road carriers, and warehouse operators often limit liability to $0.50 per pound or $50 per shipment. – Based on bill of lading or warehouse receipt. • Carmack Amendment applies to interstate carriers. – Dictates full value unless opted out by bill of lading, tariff or contract. • Some carriers may have inadequate or no liability insurance and be unable to fund a loss out of pocket. © Avalon Risk Management Summary of Liability Limits Statute Mode Customary Limit Carriage of Goods by Sea Act (COGSA) Ocean $500 per Customary Freight Unit Warsaw Convention (International) Air $9.07 per pound or $20 per kilo Montreal Protocol (International) Air 19 Special Drawing Rights (SDRs) Domestic Air (based on AWB) Air $0.50 per lb. and/or $50 per shipment Warehouse Operators (based on receipt) Warehouse $0.50 per lb. and/or $50 per shipment Local Carriers (based on bill of lading) Intrastate $0.50 per lb. and/or $50 per shipment Full value, unless limited by Carmack Amendment Interstate rate/contract © Avalon Risk Management Cargo Insurance Basics • You can insure freight by: – Vessel – Aircraft – Truck/Rail – Warehouse © Avalon Risk Management Cargo Insurance Basics Coverage Type What’s covered? “All-Risk” Everything but what’s excluded Free of Particular Average (FPA) Named perils only With Average (WA) Adds “heavy weather” peril to FPA If your policy is with a London Company or a company following the standard London format, your conditions will be governed by the London Institute Clauses (ICC) “A,” “B” and “C,” which are similar to American terms “All-Risk,” “FPA” and “WA.” Please refer to your cargo policy and our manual for a comparison. © Avalon Risk Management Cargo Insurance Basics • “All-Risk” coverage – “All risks” except exclusions – Typical exclusions: (consult manual/policy) • Improper packing • Abandonment of cargo • Rejection/delay by Customs • Inherent vice © Avalon Risk Management Insuring Shipments Variations in Value • Must insure 100% of value, freight, duty and 10% margin to fully collect in the event of a claim. – Failure to insure 100% of cargo can result in a co-insurance penalty. Sample calculation: Invoice value: $100,000 Freight charges: + $ 20,000 Sum $120,000 + 10 percent + $ 12,000 Insured Value $132,000 Duty: $ 6,000 * can typically be insured for 1/3 of the marine rate © Avalon Risk Management Co-Insurance Penalty • Sample co-insurance penalty calculation: – Insured value: $132,000 • As determined on previous slide – Insured amount: $ 52,800 • To save money, you insure the shipment for 40% of the value, or $52,800) – Claim amount: $ 40,000 • Heavy weather caused damage to the goods – Amount received: $ 16,000 • Since the goods were only insured for 40% of the value, the client will only receive 40% of the claim amount. © Avalon Risk Management Web Merlin™ • Avalon streamlines the cargo insurance process with Web Merlin, an Internet-based certificate issuance program. • Web Merlin verifies that: – The commodity is approved – The origin/destination countries are approved – The shipment’s value is within the policy limits – The marine rate and premium is correct – Insuring conditions are on certificate © Avalon Risk Management Web Merlin™ © Avalon Risk Management Cargo insurance claims © Avalon Risk Management Actual claims • Typhoon Vicente created rough waters and capsized this ship carrying a shipment of walnuts valued at $96,000 off the coast of China. – What is the carrier liable for? • $0 • Carriers are not liable for “Acts of God” • If uninsured, you would receive $0 • If insured, $FULL CLAIM PAID © Avalon Risk Management Actual claims • A trucker picked up a shipment of almonds at the shipper’s warehouse to be transported to be transported to a distribution center. Total loss valued at $68,000 • The driver caused an accident on the freeway by colliding with another truck. • What would you do if the shipment was uninsured? – Local truckers limit liability to $.50 per pound or as little as $50 maximum per shipment. – You would have to pay nearly the full value out-of-pocket. © Avalon Risk Management Actual claims • Two separate truck loads of walnuts a week apart were stolen in Tehama County valued at over $300K • Thief got a hold of the correct purchase order from an online load board and impersonated a real trucking company. • 3 times day in America cargo theft occurs, in the state of California it happens 2X as much as thee rest of the country. • Because it was a theft , it is very difficult to receive any compensation, cargo insurance pays immediately. © Avalon Risk Management Actual claims • Exports of pistachios valued at 100,000 from Los Angeles to China were on this ship. Luckily, our client’s shipment was on the other end of this ship and was safe and was not affected by the fire. • But, a General Average was declared. Would you know what to do? – You didn’t purchase Cargo Insurance. Your shipment wasn’t damaged, but you must post cash for its release. – If the shipment was insured, the insurance company would handle the General Average guarantee. © Avalon Risk Management Actual claims -Pistachios contracted mold on it’s voyage to Germany -Surveyor was hired to examine the cargo -Claim was filed on behalf of my client -Claim was paid in less than 30 days © Avalon Risk Management Timeframes to File Claims Damage (Hidden/Concealed) 7 (Warsaw) or 14 (Montreal) days from delivery Delay 14 (Warsaw) or 21 days (Montreal) from delivery Air shipments Non-delivery 120 days from date of issuance Statute of Limitations Suit filed within 2 years of arrival date Visible Loss/Damage Immediately Ocean Shipments Non-visible Loss/Damage 3 days from discharge/delivery Per COGSA, suit filed within 1 year from date of delivery.
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