Cross-border transportation is a common mode in international trade and logistics. However, during transportation, goods may be lost or damaged due to improper loading and unloading, accidents, fire, theft, or inclement weather, causing suppliers to suffer financial losses. So, how can these risks be effectively minimized?
This is where cargo insurance and freight insurance can play an important role. Although the two are often used interchangeably, their insurance coverage differs. Therefore, choosing the right insurance is crucial.
In this article, we’ll explain the differences between cargo insurance and cargo insurance and their respective coverage to help you make a more informed decision and effectively protect your cargo.
Freight insurance and cargo insurance summary
Freight insurance
- Definition: Covers the freight forwarder’s liability for its own errors or negligence.
- Advantages:
- Protects the professional reputation of the freight forwarder and covers legal fees in the event of a lawsuit.
- The shipper is compensated, but the compensation is based on the weight of the goods rather than their actual value.
- Disadvantages:
- Does not cover dangerous goods, indirect losses, or losses due to political factors.
- Compensation to the shipper may be lower than the actual value of the goods.
- Applicable: Freight forwarders.
Cargo insurance
- Definition: Protects the shipper against financial losses due to damage to or loss of goods.
- Advantages:
- Compensation is based on the commercial value of the goods and covers the entire transport process (sea, land, etc.).
- Flexible premiums are suitable for various groups, such as SMEs and e-commerce.
- Disadvantages:
- Certain goods (such as dangerous goods) may be excluded.
- Premiums may be high, and the validity period of the insurance may be limited.
- Applicable: Shippers, importers, manufacturers, retailers, and other groups that need to ensure the safety of goods during transport.
What is Cargo Insurance?
Cargo insurance protects goods against loss or damage that may occur during transportation. It is usually purchased by the importer or exporter of the goods (i.e., the shipper) to cover the actual value of the goods. The purpose of cargo insurance is to ensure that the shipper can be compensated if the goods are damaged or lost during transportation for various reasons (such as theft, accidents, bad weather, etc.).
Specifically, cargo insurance mitigates the financial pressure that may arise by providing the shipper with financial security to ensure that the loss of goods can be compensated for even in the event of an accident. This insurance provides extensive protection for goods.
Why is cargo insurance needed?
Cargo insurance protects against damage, loss, or unforeseen risks during transportation. Whether transported by land, sea, or air, goods are exposed to various risks during transportation, such as adverse weather, traffic accidents, natural disasters, and war, which may result in damage or loss of goods. Suppliers may face significant financial losses without cargo insurance, especially when transporting high-value goods. Cargo insurance can protect shippers and suppliers by ensuring compensation for goods in case of unforeseen risks and mitigating financial losses.
What is covered by cargo insurance?
The exact scope of cargo insurance coverage varies depending on the type of policy and the coverage provided by the insurance company. Generally speaking, cargo insurance covers the following areas:
- Physical damage or loss: This includes damage or loss of goods during transport due to accidents, fires, storms, collisions, etc.
- Loss and theft: The insurance company will usually compensate if goods are stolen or lost during transport.
- General average: During sea transport, if a general average event occurs (e.g., rescue of ship equipment), all parties involved will share the loss proportionally.
- Cargo overboard: The insurance will cover the corresponding compensation if the cargo falls into the sea or other waters from the transport vehicle.
- Customs issues: Some cargo insurance policies also compensate if the goods are lost due to import rejection or confiscation.
- Accidents during transport: Such as losses caused by traffic accidents, extreme weather, etc. during transport.
How much does cargo insurance cost?
The cost of cargo insurance depends on several factors, including the value of the goods, the distance they are being transported, the mode of transport, the scope of the insurance coverage, and the associated risk. Generally speaking, the cost of cargo insurance is a percentage of the value of the goods, usually ranging from 0.5% to 2%. For high-value goods or higher-risk shipments, the insurance cost may be higher.
For example, if the value of your goods is $100,000, the insurance cost may be between $500 and $2,000, depending on the carrier’s coverage and risk assessment scope. Therefore, it is recommended to communicate with the carrier or freight forwarder to understand the most appropriate insurance plan.
How to calculate cargo insurance
To calculate the amount of insurance for your goods, please follow the steps below:
1. Determine the insured value: the commercial invoice value (CIV) + freight. For example, if CIV = USD 100,000 and freight = 10% of CIV.
Insured value: USD 100,000 + USD 10,000 = USD 110,000.
2. Calculate the premium: To do this, use the formula insured value x insurance rate (between 0.5% and 2% of the CIV). So, using the insured value and the rate of 0.5% (0.005) as above,
cargo insurance: 110,000 USD x 0.005 = 550 USD
What is Freight Insurance?
Freight insurance is a type of insurance that protects the things being shipped and the company shipping them if something goes wrong during transport. It covers the goods, the carrier, damage to the carrier’s vehicles, and other risks during transport. The transport company or freight forwarder usually takes it out. Freight insurance is also called freight forwarder liability (FFL) or freight service liability (FSL). Freight insurance focuses more on protecting service providers if they make mistakes or are careless during transport.
What is covered by freight insurance?
The exact content of freight insurance varies depending on the type of policy and the scope of cover provided by the insurer. In general, freight insurance covers the following areas
- Physical damage caused by accidents, rough handling, or extreme weather events
- Theft, pilferage, and non-delivery of goods
- General average sacrifices in the event of a maritime accident
- Loss overboard at sea
- Customs refusal or delay
However, it is also essential to be aware of the standard exclusions. These may include
- Wear and tear or gradual deterioration
- Improper packaging or labeling of goods
- employee dishonesty or vandalism
- losses related to delay, unless specifically included
- war, strikes, or civil unrest, unless specifically included
It is essential to double-check your policy documents to understand what is and isn’t covered.
How much does freight insurance cost?
Freight insurance costs vary depending on several factors, usually influenced by the following:
- Value of goods: Insurance rates are generally calculated as a percentage of the total value of the goods, usually between 0.1% and 2%. For example, insurance for goods worth $100,000 could cost between $100 and $2,000.
- Mode of transport: Different modes of transport (sea, air, land, etc.) involve different risks, and insurance costs vary accordingly.
- Destination: Transport across borders may involve higher insurance costs, especially if the destination is a country with poor security.
- Coverage: Insurance can be classified as total loss (only compensating for total loss) or all risks (covering most risks). The wider the coverage, the higher the cost.
- Carrier history: If your shipping company has a record of getting involved in insurance claims, the cost of supplementary freight insurance will be higher.
How to Calculate Freight Insurance
Here’s a step-by-step guide on calculating freight insurance:
Step 1: Calculate the Total Insured Value (TIV). To do this, add the commercial invoice value of your cargo to the freight cost.
For instance, let’s say the commercial invoice value of your cargo = $100,000. Freight cost = 10,000 at 10% of freight value.
So, the total insured value is: $100,000 + $10,000 = $110,000
Step 2: Find the insurance rate. This is usually between 0.3% and 0.5% of the shipment’s commercial invoice value.
Step 3: Calculate the premium. To do this, multiply the insured value by the insurance rate.
In this case, if the insurance rate is 0.5%, the freight insurance would be: $110,000 x 0.005 = $550
Common exclusions in freight insurance:
- Normal wear and tear or gradual damage – for example, natural wear and tear over time, corrosion, mold, etc.
- Inadequate packaging or labeling – if the goods are damaged due to poor packaging, the insurance may not cover the damage.
- Intentional damage – for example, employee dishonesty or vandalism.
- Entire loss – unless otherwise specified in the policy, indirect losses caused by the complete loss of goods in transit are generally not covered.
- War, strikes, and civil unrest – these are usually covered by additional war risk insurance.
Cargo Insurance vs Freight Insurance: Understanding The Difference
Cargo insurance and freight insurance are both related to the transport of goods, but they differ significantly in terms of the objects they cover, the value of claims, and the method of payment. The main differences are as follows:
Objects covered
- Cargo insurance: protects the sender of goods (e.g., wholesaler, manufacturer, retailer) against loss or damage to the goods during transport due to accidents, bad weather, fire, theft, natural disasters, or loading/unloading errors. No proof of the forwarding agent’s fault is required to obtain compensation.
- Freight insurance: protects the freight forwarder or carrier and compensates the sender for losses if the damage or loss of goods is due to their error or negligence.
Value of the claim
- Goods insurance: the amount claimed is based on the commercial value of the goods. If the goods are lost or damaged, the sender will be compensated the full value of the goods.
- Freight insurance: The amount claimed is usually based on the weight of the goods, not their commercial value. For example, if 10 kg of gold is lost, the compensation may be equivalent to the value of just 10 kg of packaging material, not the actual value of the gold.
Who pays?
- Cargo insurance: It is up to the sender to decide whether to take out insurance. The sender can take out insurance directly or arrange it through the freight forwarder. The policy will take into account details such as the origin and destination of the goods, their nature (e.g., fragile, dangerous goods), the route of the journey, and the size and weight of the goods.
- Freight insurance: paid by the freight forwarder and the cost is usually included in the shipper’s freight quote. The premium depends on the length of the journey, natural risks, freight volume, and other terms.
Transport method
- Both can be used to insure domestic and international shipments, covering various transport methods such as land, air, and sea.
Applicable to
- Cargo insurance: Anyone who wishes to protect the value of their goods during transport. The sender needs to provide the insurer with an estimated value of the goods.
- Freight insurance: For freight forwarders or shippers who transport large quantities of goods, to protect against liability due to negligence or error.
