Most Shippers assume if a carrier's negligence causes damage to your freight while in transit, they're liable to cover up to a set dollar amount per pound of freight. When the freight is more valuable than what's covered under liability, cargo insurance covers the difference.
It's logical to assume this is true whether you're shipping over land, air or ocean.
But it's not. Overseas shipping is different.
There are strict legal limits to an ocean carrier’s liability coverage when cargoes are being shipped over the ocean, and many shippers don't realize this. In fact, ocean carrier liability is limited even when they're clearly responsible for damaging or losing your freight.
In this post, we'll explain why this is a reality and how to protect your overseas freight with marine cargo insurance.
The Carriage of Goods by Sea Act (COGSA)
The answer to why an ocean carrier's cargo damage liability is limited is simple: COGSA, or the Carriage of Goods by Sea Act.
COGSA is a 1936 U.S. statute that, among other things, sets the limit of liability for ocean carriers. And that limit is strict. It's typically set at $500 per "package" (i.e., container) of cargo shipped.
That's right. It doesn't matter whether you have $5,000 worth of cargo in a container or $5 million. If something happens to that container, the carrier is only required to pay you $500.
So, if you don't have marine cargo insurance, you have no way to reclaim the value of your lost cargo.
It should come as no surprise that this limitation has been repeatedly contested in court. Some courts have ruled in favor of ocean carriers (saying one shipping container equals one package), and others have ruled in favor of shippers (saying that one piece equals one package).
Ocean carriers believe the limit is fair because insurance coverage depends on the specific commodity being shipped, and shippers understand the value of their products better than anyone. Additionally, when commodities are intermixed with hundreds of pieces of freight — and much of the freight is "packaged" together in containers that look virtually the same — it's impossible to tell whether a container is worth thousands of dollars or millions. Shipowners also argue the "packaging" of freight entitles them to their limited liability.
COGSA Applies to Freight Under the Care and Custody of Ocean Carriers
This may seem obvious, but it's important to understand this distinction, as the transference of care and custody can happen at different times.
In some cases, the transfer happens at the port. The inland carrier drops off the cargo and the port acts on behalf of the ocean carrier, so COGSA applies at port drop-off. The ocean carrier retains care and custody until the cargo is picked up at the port of destination. At the point of pickup, COGSA no longer applies.
In other cases, ocean carriers provide door-to-door service. They pick the cargo up at your facility and deliver it to the consignee. This means the freight is under an ocean bill of lading, and subject to the limited carrier liability of COGSA, at pickup. The carrier owes you only $500 per package for any damage occurring in transit. In these cases, having marine cargo insurance is even more critical because it protects your freight throughout its entire journey.
How to Protect Your Freight With Marine Cargo Insurance
First, it's important to understand the basics:
- What is marine cargo insurance?
- What does marine cargo insurance cover?
- How much does marine cargo insurance cost?
- Where can shippers secure marine cargo insurance?
Marine cargo insurance is a relatively inexpensive way for shippers to protect their goods from loss, damage or theft when it's under the care and custody of an ocean carrier.
The most common policies are very cargo and shipment-specific. What is covered and what a shipper is insured for is entirely dependent on the value of the cargo, where it's traveling to and from and what's required to ship it from point A to point B. There are also different types of policies available that provide better coverage for specific shipments and situations (more on this below).
As the risk of shipping a commodity increases, so does the cost of insurance and the extent of the coverage. Marine cargo insurance underwriters will ask more in-depth questions if a shipment seems risky and they'll base the cost of the insurance on what risks they perceive.
But marine cargo insurance is generally pretty inexpensive because major incidents are rare. And policies covering the lower-risk shipments of easily transported goods are extremely inexpensive. For example, you may only pay $10 for a policy that would reimburse you entirely should something happen to your $60,000 worth of coiled steel shipping from Florida to Puerto Rico.
There are also many ways you can secure marine cargo insurance and how much you pay for it doesn't vary much based on provider. Some of the standard providers include:
- The insurance carrier that provides your other cargo insurance
- The ocean carrier shipping your goods
- A freight forwarding company like ATS International
However, regardless of insurance provider, destination, cargo type or any other factor, shippers who are new to international or overseas shipping should always keep one important fact in mind: Marine cargo insurance isn't automatically offered or included. You need to request it.
The Types of Marine Cargo Insurance Policies Available
Just like when shopping for auto insurance, you can buy a variety of different types of policies to protect your commodities shipping overseas. All of these policies come in high- or low-deductible options.
There are three main types of policies to choose from.
1. Open Cover Policies
These policies are the most expensive because they're the most comprehensive. They can cover all cargo shipped during a policy period and cover all risks (they can also only apply to one shipment). You would want an open cover cargo policy if you were shipping a perishable commodity or cargo that's sensitive and timely.
For example, when shipping perishable goods, you care about more than just physical damage. You also care about spoilage caused by shipment delays and environmental factors like inappropriate temperature control. Open cover policies will protect you against more risks than just the physical damage of your commodity.
As another example, your cargo could be very sensitive to shock or acceleration. It may have shock sensors attached to measure how it's handled. This is another risk an open cover cargo policy can insure.
It's important to note there are some types of cargo that underwriters will not insure because there's just too much risk involved. These types of shipments could include expensive artwork, sensitive equipment like MRI machines, live animals and gold bullion. To insure the highest-risk overseas cargo, you may need to work with a highly specialized insurance broker who knows how to monetize the risk.
2. Specific Cargo Policies
These policies, which are also called voyage policies, cover single shipments only. The most common type will simply reimburse you for the value of the merchandise being shipped if it's damaged in transit. You can purchase these policies for any type of commodity.
3. Contingency Policies
These policies are unregulated, so they vary quite a bit from provider to provider. They're never a primary form of coverage, but, instead, add an extra layer of protection should the primary policy contain exclusions.
A contingency policy could kick in, for example, if your freight doesn't arrive on time because it's dropped off at the wrong port. Or, if your primary policy covers dents but not rust caused by salty sea air. The rust damage would be covered under your contingency policy.
Making the Complex Seem Simple
There are many moving parts involved in shipping freight overseas, and marine cargo insurance is only one of them.
At ATS International, we help both novice and expert international shippers navigate the complexities of overseas shipping every day. Part of that is helping ensure you have the right coverage for your freight that travels over open waters.