Frequently Asked Questions
About Marine Cargo Insurance
1. What is cargo?
2. What is meant by an "open" cargo
policy or cover?
3. What is an individual policy or
certificate of insurance?
4. What perils are covered? What
perils are excluded?
5. What is a "free of particular
average" (FPA) policy?
6. What is a "With Average" policy?
7. What is an "All Risk" policy?
8. Are losses caused by war and
9. Are duties on lost or damaged
10. Can "on deck" cargo be
11. Does coverage vary by cargo
12. Are goods covered throughout
13. How do underwriters set rates
14. What are the rating
15. What are the responsibilities
of the buyer and seller with respect to insurance?
16. What are the advantages of
placing marine insurance yourself?
17. What protection is available
for exporters against foreign political changes or
buyers who don't pay?
1. What is cargo?
Simply stated, cargo is defined as all goods that
are in transit, or in any stage of transportation.
2. What is meant by an "open"
policy or cover?
An open cargo policy is a contract prepared in
general terms covering specified goods on agreed
conditions. Although no sums insured are stated, limits
are applied to any one conveyance or location. It is not
uncommon for open cargo policies to be written on a very
wide basis to cover all goods and merchandise of every
description shipped anywhere in the world. These
policies require fairly prompt notification of each
Under an open cargo policy, if documentation is required
for a particular shipment, a certificate of insurance is
prepared. Otherwise, monthly or periodic declarations
are all that is needed for most companies.
Open cargo policies are suitable for most companies and
its chief advantage is that coverage is automatic. Rates
and conditions will vary from one policy to another.
However, the best way to get the policy that is most
suited to a particular company's needs is to fill in the
insurer's application as completely as possible. Include
such information as the type of goods involved, where
shipments are going to or originating, the limit
required for each shipment and any previous losses.
3. What is an individual
policy or certificate of insurance?
An individual policy is a completed certificate that
confirms marine insurance coverage is in place.
4. What perils are covered?
What perils are excluded?
The perils covered and excluded depend on which type
of coverage you choose. There are three basic forms of
coverage known as
Institute Clauses A, B and C.
5. What is a "free of particular average" (FPA) policy?
This is probably the most restrictive form of cargo
insurance available although policies are issued
occasionally for Total Loss of Vessel Only in the case
of particularly hazardous undertakings. An FPA policy
covers goods against total loss by marine perils.
Partial losses, other than General Average losses, are
recoverable only in certain cases.
There are two FPA clauses in use:
- FPA American Conditions: partial losses are
recoverable only if caused by fire, stranding,
sinking or collision
- FPA English Conditions: partial losses are
recoverable if caused by a peril of the sea if the
vessel has stranded, sunk, burned, been on fire, or
in collision during the voyage. It is not necessary
for losses to have been caused by these occurrences
Under London Institute FPA clauses, partial losses
are payable if the vessel has stranded, sunk, burned or
if the loss has been caused by fire, collision, contact
of the conveyance with any external substance (including
ice) other than water or by discharge of cargo at a port
of distress. The total loss of any package during
loading, transshipment or discharge is a further
important addition to the coverage under such clauses,
which also pay any landing, warehousing, forwarding and
6. What is a "With
This type of policy offers slightly broader
coverage than FPA and covers partial losses caused by
perils of the sea when they reach a certain percentage
of the insured value. This is called a "franchise" and
is usually about 3 percent. The franchise, which is not
a deductible, is not applicable if the vessel has been
stranded, sunk or burned or if the loss has been caused
by fire, explosion, collision or contact with an
external substance other than water.
A common variation of the With Average policy is
the "With Average Irrespective of Percentage Policy"
which, as the name implies, covers partial losses
without the application of any percentage or franchise.
It should be noted that the partial losses under
these policies are not General Average losses that are
recoverable regardless of the FPA warranty or average
7. What is an "All Risk"
This policy offers even broader coverage than
the With Average policy. As the name suggests, this
policy covers all transportation risks. An All Risk
policy will not, however, cover loss of market or loss
or damage caused by delay, inherent vice of the goods,
war, strikes, riots and civil commotions, unless
specifically included. However, these clauses have been
replaced by the
A Clauses previously mentioned.
8. Are losses caused by
war and strikes covered?
Marine cargo policies always contain a FC&S
(Free of Capture & Seizure) clause that excludes war
risks and strikes, riots and civil commotions, and
similar risks. A specific agreement must be made for an
additional premium to be paid if these perils are to be
insured. In 1938, marine underwriters agreed that they
would not cover war risks on land, except under certain
circumstances. There are three Institute War Clauses
covering cargo, air cargo and postal shipments:
- Institute War Clauses - Cargo
These clauses cover war risks from the time
the insured cargo is loaded on board the vessel
until the cargo is unloaded at the final port of
discharge. The insurance continues for another 15
days while the cargo is at port, but ceases when the
cargo is transported over land
- Institute War Clauses - Air Cargo
These are very similar to the cargo clauses.
Coverage begins when the cargo is loaded on the
aircraft and ceases when it is unloaded at its final
- Institute War Clauses - Post
These cover the goods from the time they
leave the sender's premises until they arrive at the
addressee's. War risks are not covered while the
goods are at the packer's premises
There are also clauses to cover strikes. The
Institute Strikes Clauses apply to cargo and air cargo
and cover losses caused by strikers, locked-out workers,
people taking part in labor disturbances, riots and
commotions, as well as acts by terrorists or any person
acting for a political motive.
9. Are duties on lost or
damaged goods covered?
As duties are levied at the point of entry, no
duty will be payable if goods are lost prior to arrival.
However, damaged goods are still subject to duty. These
charges can be covered in addition to the value of the
merchandise. Because of a reduced hazard to the insurer,
a specially worded clause and lower rate are used.
10. Can "on deck" cargo
Goods carried on the deck of a vessel are
subject to greater hazard than those carried in holds,
and it is unusual to cover deck cargo under an All Risk
policy. It is usual to cover deck cargo on an FPA basis
with the risks of jettison and washing overboard
included. The rates for deck cargo are generally much
higher than for cargo in the holds.
11. Does coverage vary
by cargo type?
In addition to the common alternative coverages
for cargo, some goods are susceptible to particular
hazards and require special treatment. For example,
cement shipped in paper bags is often subject to a
deductible for shortage, while liquids in barrels are
insured with a deductible for leakage. Insurance for
chocolate and confectionery usually exclude the risks of
heating, freezing and sweating while coverage for eggs
and other fragile items exclude breakage. There are also
special sets of clauses that have been drawn up through
consultation between underwriters and various trade
associations such as Timber Trade Federation Clauses,
Corn Trade FPA Clauses, Jute Clauses and Flour "All
12. Are goods covered
throughout the journey?
Most cargo policies contain Warehouse to
Warehouse and Extended Cover Clauses which insure goods
from the time they leave the warehouse at the point of
shipment, through the ordinary course of transportation
by rail, truck, lighters, steamers, aircraft or other
conveyance, until they are delivered to the warehouse at
the final destination. The point of shipment and of
final delivery may be placed within a country. The goods
are also covered during any delays or deviations during
the journey that are beyond the control of the insured,
although a time limit is sometimes imposed in such
13. How do underwriters
set rates and costs?
Due to the international scope of marine
insurance, there are no tariff scales of rates. As a
rule, rating depends on the individual underwriter's
appreciation of each risk. There is one scale that has
almost worldwide acceptance: rates applying to war and
strikes risks tend not to vary widely among the world's
marine insurance markets.
- Rating and Cost Factors:
An underwriter with few facts is a
pessimist. The more information one is able to
provide about one's insurance needs, the more
optimistic the underwriter is likely to be
14. What are the rating
To enable an underwriter to assess the risk and
give a competitive set of rates, it is essential that
information details are made available prior to
determining a rate.
The main points are:
- Past experiences of both the insurer and the
- Destinations, port facilities
- Inland Transit before loading and after
discharge, particularly if of long duration and
transport facilities are poor
Questions that the underwriter should automatically
access are the susceptibility of the goods to:
- Damage through breakage, leakage, sweating,
spontaneous combustion, rapid deterioration due to
wetting, climatic conditions, etc.
- Theft and pilferage
- Age, tonnage and ownership of the vessel. In
recent years, one of the main concerns has been in
respect to sub-standard vessels, bad management and
flag of convenience vessels
- Packing and method of transit (i.e., full
- Length of voyage and time of year
- Moral hazard of buyer and seller
The value of a marine insurance policy is the amount
stated by the insured that is, in the absence of fraud,
accepted by insurers. The valuation may include a
percentage to cover the insured's profit and an open
policy will contain a Valuation Clause setting out the
formula to be followed. For example:
- "Valued at the amount of invoice, including
freight, all charges plus 10 percent (or whatever
percentage is required)"
- On import shipments, duty and taxes should also
be insured for the amount payable. This sum should
also be declared separate, the rate of the premium
being one third of the normal cargo rate
15. What are the
responsibilities of the buyer and seller with respect to
Only the owner of the goods can insure them, but
they can appoint an agent to deal with this on their
behalf. Any other party that might be a potential owner
(because they are hoping to reach agreement on the
purchase of the goods) may arrange insurance. However,
at the time of an incident that might give rise to a
claim, they must be able to establish a legal insurable
In any sale of goods, the ownership will pass
from the seller to the buyer. The contract or sale will
state the responsibilities of each party.
It is important in any transaction that both the
buyer and seller are fully aware of their
responsibilities under the terms of sale in the
contract. Specifically, one must know the point in
transit at which the seller has fulfilled its obligation
so that title (and, therefore, the risk of loss) has
passed to the buyer. It is also crucial to understand
which party is responsible for carriage from one point
As a rule, one should always attempt to control
the insurance, as well as placing the insurance locally.
This means imports should be purchased on an FOB or C&F
basis, and exports should be sold on a CIF basis.
Importers and exporters are often willing to
leave the placement of insurance to their vendor/buyer.
There are two reasons for this:
- It is not widely known that the North American
market is viable and competitive
- They are unaware of the benefits when
controlling the insurance
The benefits to the importer of buying FOB or to the
exporter for selling CIF are as follows:
- They know the insurance is in place. If they
have an open policy, every shipment they buy or make
- They know the right kind of insurance is in
place. Having received expert advice from their
broker, they are covered from warehouse to
warehouse. Often, an exporter is unprotected when
selling "FOB vessel" from the exporter's place in,
say, Omaha to the port in Seattle
- The importer, when buying CIF does not always
know what insurance has been provided for them, and
there may be shortcomings as to the amount and
coverage. The shipper is required only to provide
minimum coverages under a CIF contract, and the
importer may be surprised to learn that their loss
is not covered by the overseas policy. In some
cases, even if the insurance is "All Risk," the
meaning of this coverage can vary in some foreign
- They can control the premium cost. Insurance at
the other end may be based on a loss experience that
is not as good as theirs and, therefore, attracts
higher rates. It may be charged for on an inflexible
market tariff or a tariff imposed by law. In
negotiating with a domestic underwriter, they have
the advantage of their own loss experience and also
volume of business
- The exporter knows their product best and is
able to provide all the facts about the risk, giving
the domestic underwriter an optimistic viewpoint of
- They know that when they make arrangements for
insurance, their interest is protected at all times.
With the advice of their broker, the importer can be
sure their interests are protected with the
appropriate type and duration of coverage. The
importer would not have to rely on their customer to
protect their interest, only to find out too late
that they are not adequately insured
- Some exporters may think that if they sell
"ex-works" (i.e., the customer arranges insurance)
that once the goods leave their premises, they can
relax. This is not the case, as there is a real
danger that the buyer will reject the goods for any
number of reasons, and the exporter may find himself
in possession of goods that are sitting in some
unprotected place, at risk and totally uninsured
- Often the exporter has sold his goods on
extended payment terms, meaning he is financially at
risk while the goods are in transit. When people are
financially at risk, they want the security that
comes with knowing they have insurance protection
arranged through their own broker
- They know the insurance is in their own
currency, thus avoiding foreign currency problems,
such as devaluation or inflation. Under some foreign
exchange controls of other countries, dollars may
not be available to them if the shipment is damaged
before clearing customs
- An exporter is interested in the solvency of his
customer (a potential repeat buyer). When the
importer must pay dollars for his goods, the
exporter wants to protect that purchasing power.
Should there be a loss and the importer is only able
to collect from the foreign insurance company in a
frozen currency, then their continued trading may be
impaired and the exporter's chances of making
another sale is reduced
16. What are the
advantages of placing marine insurance yourself?
- "Warehouse to warehouse" protection is provided
with terms of insurance specifically designed for
the insured's goods and method of shipment. Such
insurance provides coverage for the full exposure at
proper values and adequate limits
- With an Open policy, the insured is
automatically covered for each shipment
- Claims are payable in your currency
- Local currency insurance reduces the probability
of misunderstandings, correspondence and elapsed
time in connection with handling of claims. This
practice facilitates prompt replacement of goods and
contributes to generally improved trading relations
- Rates will be competitive and reflect the
insured's loss experience
- Insurance placed in North America helps overcome
your countries balance of payments deficit, since
marine insurance placed in North America on overseas
shipments (imports or exports) is an "invisible
- Insurance in local funds avoids foreign currency
problems such as devaluation and fluctuation
- Insurance is based on the individual's loss
experience, not someone else's, and will not attract
- Our underwriters have agents in nearly every
city in the world to assist in the event of a loss
- One can deal directly with the insurer to settle
claims promptly and equitably
- Our underwriters are able to place unusual
insurance covers and will be responsive to new
conditions and ideas
- We know the industry and can help clients design
the coverage they need
17. What protection is
available for exporters against foreign political
changes or buyers who don't pay?
Political Risk and Credit Insurance are
available to exporters and can help protect against a
variety of risks including:
- Non-payment by buyers for political or
- Contract cancellation, or frustration for
- Embargos, import/export license cancellation
- Nationalization or seizure of business
- Inconvertibility of currency
- War risks, riots, strikes, civil commotion,