Frequently Asked Questions

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 shipment.

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.

An individual policy is a completed certificate that confirms marine insurance coverage is in place.

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.

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 similar charges.

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 franchise.

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.

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 destination
• 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.

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.

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.

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 Risks" Clauses.

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 cases.

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

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 client
• 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 container loads)
• 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

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 interest.

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 to another.

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 is insured
• 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 countries
• 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 the risk
• 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