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Difference Between Freight Insurance and Cargo Insurance

sahil bajaj

Sahil Bajaj

Senior Specialist - Marketing @ Shiprocket

May 14, 2024

14 min read

Is your business involved in international trade? If so, you need to grasp the difference between freight insurance and cargo insurance. These two aspects determine the safety of your goods, and it’s technically in your hands. 

The basic difference between the two insurance types is that freight insurance protects the freight forwarder in case of any damage, theft, or loss of the consignment, while cargo insurance shields a customer from financial losses arising out of any adverse incident damaging or causing a loss of the products in transit. 

In this blog, we’ll discuss all the important terms and aspects related to cargo and freight insurance.

Difference Between Freight Insurance and Cargo Insurance

Essential Insights Before Insuring Your Goods

It’s important to understand that when you’re shipping goods via air or ocean to fulfill your cross-border orders, they are not automatically insured. You need to buy cargo insurance coverage separately for every shipment because freight insurance will not cover or protect your products against any loss or damage. 

As per the agreement you sign with your business partner, insuring your goods against any risk as a seller shipping internationally is entirely your responsibility throughout the transit. However, the timeframe of this responsibility depends on whether you’re a seller or a buyer and on the sales agreement defining the terms of the contract. 

The globally recognised rules, International Commercial Terms (Incoterms 2020), govern the rules and policies associated with the sales of goods worldwide. It also defines the responsibilities and liabilities of the parties, including shippers. 

Insurance and Incoterms: Understanding the Connection

As an international shipper, you may know about Incoterms and how they function. However, you may still need to understand the vital link between insurance and Incoterms

One of the key roles of Incoterms in international shipping is to define which party is responsible for the risk. Similarly, Incoterms also decides who pays for the insurance coverage, and when the risk is handed over to the other party. After reaching a certain point in the shipment process, one party involved in the shipping hands over the risk and cost responsibility to the other one.

Here’s how the three Incoterms generally used for international sales agreements intertwine with the responsibility of freight and cargo insurance: 

Free Carrier (FCA): Under the FCA Incoterm, which stands for “Free Carrier,” the seller is required to deliver the items to the carrier at the buyer’s designated location. The seller bears the expense of transporting the items to a specified location and must clear them for export.

Carriage and Insurance Paid (CIP): CIP, this Incoterm indicates that the seller is in charge of scheduling the delivery of the goods to the carrier and covering the cost of carriage to the specified location. This term can be applied to any kind of transportation, including air, land, and sea freight. Insurance against the risk of loss or damage during transit must also be obtained by the seller.

Delivered at Place (DAP): Delivered at Place is an Incoterm that requires the seller to cover the cost of transportation to any specified location. Additionally, the risk of loss or damage to the items until they are ready for unloading by the buyer falls on the seller. The import clearance fees are the only expenses that should be met by the seller.

You must ensure that the international sales agreement mentions one of these Incoterms to clarify the roles and responsibilities of the contract. 

Now that you have a clear idea about this link, it’s essential to know the difference between freight insurance and cargo insurance in detail to avoid any confusion as a shipper. As a bewildered shipper, you can misconstrue the meaning and role of freight insurance, which can put you under heavy losses. 

What You Need to Know About Freight Insurance?

Freight insurance, also known as freight service liability (FSL), is one of the expenses listed in your shipping invoice. It’s there to cover the cost of damage or loss of items for the freight forwarder. This insurance claim compensates the freight forwarder in case they make any mistake, and the goods suffer damage or loss due to their negligence or any other reason. 

A shipper might get a tiny share of compensation with freight insurance, but it will only cover a small fragment of the loss. So, as a shipper, you require cargo insurance to protect your cargo against any such scenarios and get a fair recompense.  

Freight Insurance: Exploring Coverage Details

Freight insurance covers the liability of a freight forwarder in case of damage, breakage, theft, or loss of the items in transit. The seller can only claim the freight insurance compensation if the goods get hampered or go missing because of the freight forwarder’s negligence.  

The forwarder receives the freight insurance claim based on the weight of the shipment, regardless of the type of goods carried in the container. For instance, the amount of compensation will remain the same for 2 Kg of gold and 2 kgs of cotton. 

However, In the event of full compensation for the insurance claim, you’ll get an iota of the total amount. 

Peeking into the calculation for a freight forwarder’s liability will help you understand the difference between freight insurance and cargo insurance even better. 

Understanding Freight Insurance Calculations

The premium for freight insurance is charged by taking out a percentage of the freight forwarder’s fee. The forwarder is liable to pay this amount and they accordingly bill the shipper by adding this expense to the shipper’s quote.

Different conventions determine a freight forwarder’s liability terms depending on the mode of transportation chosen. These conventions cap the amount due to the shipper in freight insurance, which further becomes a part of the terms of freight insurance.

Here’s how the conventions work out for different modes of transport:

Air freight Insurance 

The convention applied in air freight insurance is called the ‘Montreal and Warsaw Convention’. 

The unit used for defining the maximum liability is SDR, which means Special Drawing Rights. The International Monetary Fund facilitates this system, representing a claim for different currencies. 

The maximum liability for air freight insurance is SDR 19 per kilo. 

Sea freight Insurance

The convention used for sea freight insurance is ‘Hague Rules or Rotterdam Rules’, and the maximum liability for the insurance of this transportation mode is SDR 2 per kilo, or SDR 666.67 per package, whichever of the two values is more.

International Road Freight Insurance

The convention for this is known as ‘The Convention on the Contract (CMR)’ for the international carriage of goods via road, and the maximum liability for it is SDR 8.33 per kilo.

Exploring Cargo Insurance: Key Concepts and Coverage

Although procuring cargo insurance for shipping goods is not mandatory, it’s a wise move at the shipper’s end to buy one. It helps the shipper secure the full value of goods in transit. The Incoterms are valid for the cross-border sale or purchase transaction, and the final shipment destination decides if the buyer or the shipper will bear the total risk of loss or damage to the inventory. Depending on the Incoterms, the relevant party needs to buy the cargo insurance.

The value of goods being shipped determines the level of cargo insurance you need. So, it’s essential to buy an insurance plan that covers the entire value of your goods to get a full reimbursement later when needed. 

About Marine Cargo Insurance

Marine Cargo Insurance is procured to cover the goods being transferred through the sea route. It serves two purposes: first, it safeguards you against any risk of loss or damage to the items during the maritime transit. Second, it also offers cover while the goods are moving via rail or road towards the port of loading or discharge. 

The point where the liability of the goods is on the seller or buyer depends on the agreement and Incoterms. However, the insurance claim does not bank upon the fact that who holds the risk responsibility for the shipment or what caused it. However, the loss or damage should not be the insurance holder’s fault. 

Air Cargo Insurance Coverage for Shipments

Air cargo insurance is a means to insure the shipment carried via aircraft. This insurance covers the goods in air transit as well as the overland transfer of freight moving towards the airport for loading or discharge. It’s very similar to how marine cargo insurance works. 

Calculating Cargo Insurance: Factors and Formulas

The insurance premium charged for cargo insurance is a percentage of the cargo’s value, including these other factors: 

  • The type of freight being shipped, like hazardous or other materials
  • The measurements of the freight, including its weight, size, and dimensions 
  • The departure and arrival destination of the freight
  • The route selected by the carrier from the origin port to the arrival port

Cargo Insurance: How It Works in Practice?

The insurer will lay down the detailed terms and claim procedure in the insurance policy. You can claim the reimbursement irrespective of what or who caused the loss or damage as long as the policyholder is not responsible for the mishap. However, it’s a good idea to check and revise the policy terms for accuracy or identification of to catch any discrepancies. 

Assessing the Need for Cargo Insurance

You’re handing over your precious shipments to carriers and freight forwarders when you ship goods via air or sea. This means you’re trusting them to dispatch and transport your goods safely to your desired destination and handle everything in between the transit.  

The freight is at a certain level of risk during transit. The probability of damage or loss in air or sea transfers may be low, but it’s still there. With such heavy investment in inventory and other operations, you will want to play safe because the loss can be huge. 

Your inventory could catch fire, get stolen, or be damaged. Therefore, purchasing cargo insurance is a sure-shot way to protect yourself against all these hazards and potential risks. It brings you peace of mind and covers your lost money, too. 

The insurer, after a thorough assessment, grants the claim in the event of damage or loss of shipment items. The carrier is liable for informing the customer about the mishap on time. This is because there are specific timeframes to claim reimbursements for cargo insurance:

Cargo damaged during sea transit: You must process the claim regarding visible damage upon receiving the damaged goods and put in a claim for the hidden damage within three days of the shipment being discharged.

Cargo damaged during air transfer: You must claim within 14 days after getting hold of the damaged goods.

Loss of Cargo:  This claim initiates upon notification in the event of a total loss or upon acknowledgment of the physical loss after receiving the damaged items when it’s a partial loss.

The process of claiming insurance involves a structured approach to ensure that the reimbursement for lost, damaged, or stolen goods is properly executed and paid out. 

This is how the deal is sealed in a step-by-step procedure:

Notification of Loss: You must immediately inform the insurance provider about your loss or damage of items, ensuring you’re doing this within the time frame specified in the insurance policy.

Document Submission: After intimating the insurance company, start collecting all the necessary documents to claim the insurance. You’ll need the original insurance policy or certificate, shipping documents (like the bill of lading), invoices, a detailed list of the items lost or damaged, and any other relevant correspondence with the carrier.

Survey and Assessment: A surveyor from the insurance company may land at your door to inspect the damage or loss. So, fully cooperate with the appointee by giving access to the goods and required documents.

Claim Form: You’ll need to fill out a claim form provided by the insurance company, and give details such as the circumstances of the loss, and the claim amount.

Review and Investigation: Then, the insurance company will review the claim and investigate it to verify the circumstances of the loss, the value of your goods, and compliance with policy terms.

Adjustment: The insurance company may adjust the claim amount depending on deductibles, depreciation, or limits of your policy.

Resolution and Payment: If the insurance company approves your claim, it will process the reimbursement amount. But, in case the company denies your claim, it will give you the appropriate reasons for this decision.

Understanding Cargo Insurance Payouts

Cargo insurance usually hands over the full compensation for your loss or damage, up to 110% of the commercial invoice’s value, and any other expenses incurred. Thus, the  exact amount payable will depend on three things: 

  • Your cargo’s value
  • Related shipping costs as declared by the shipper 
  • The cost charged in the insurance premium by the insurer.

Choosing an Insurer: Options for Protecting Your Shipment

You have multiple options when it comes to selecting an insurer for your cargo:

  1. The buyer of the products can pay for cargo insurance in advance to the seller as a part of the purchase order.
  2. Whoever, the buyer or shipper, is accountable for the shipment cost can pay the freight forwarder to insure the cargo’s value on their behalf.
  3. The shipper or buyer responsible for the cargo can also pay the cargo insurance broker or firm directly.

Arranging Cargo Insurance: Options with Freight Forwarders and Brokers

You can either fix up a freight forwarder or an insurance company or broker to insure your cargo. Let’s go deeper into the details of making these arrangements.

With Freight Forwarder

If you’re choosing a freight forwarder to handle all your shipping procedures, let the forwarder deal with the cargo insurance part, too. It will save you extra effort and some time. However, allowing the freight forwarder to insure your goods will not pass the ownership of the insurance to the forwarder. You will remain the legitimate insurer of your cargo. 

Rather, the forwarder will tie up with a cargo insurance firm on your behalf, put in a written request, pay the premium, and receive the insurance policy.

The forwarder will include the charges for this service in your final shipping quote. If there’s a need to claim the insurance at any given time, the freight forwarder will file it with the insurance provider on your behalf and will take care of everything related to it until you get a settlement.

With a Broker or Insurance Firm

The other option is to arrange and manage cargo insurance yourself. You’ll have to go through a few steps to execute this, like contacting several insurers and providing details of your shipment to each one of them before you get the quotes and compare them. 

The responsibility of claiming the insurance money is on your shoulders, too, then. You’ll need to register the claim, sign a waiver letter nd discharge receipt, and cooperate with the insurer till settlement.

Avoiding Pitfalls: Common Mistakes in Freight Insurance

The most common mistake shippers make is assuming that freight insurance covers their loss too, and that they don’t require separate insurance to safeguard the full value of their cargo. 

As you very well understand the difference between freight insurance and cargo insurance, you must exercise this knowledge to smartly secure yourself against any such risk by investing in cargo insurance. 

Conclusion

Understanding the difference between freight insurance and cargo insurance keeps you at the top of your international trade game. It allows you to draw a protective wall around all your international shipments by purchasing cargo insurance. Freight insurance only shields the freight forwarder against damage or loss of shipment. You must take calculated risks and factor in the damage, theft, and loss possibilities during this long shipping journey where your inventory is involved. Securing your products keeps your mind at peace and also saves your business from the impact of heavy losses. 

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