The recent grounding of the container ship Rena has highlighted the importance of having a watertight marine cargo insurance policy. There are associated lessons for everyone involved in the seafreight insurance industry. Onion exporter Guy Hilson will be looking at his marine insurance policy up close and personal. Although he has an annual marine cargo policy, the grounding of the Liberian-flagged container vessel Rena has given him some food for thought. Rena had 2,100 containers on board, some of which are empty. Some insurance companies are already paying out claims for shippers who have bought marine cargo insurance as a way of life. Hilson is among the converted – he can’t afford not to have marine cargo insurance. At any one time, during the peak onion exporting season, he has several hundred containers “floating around the world”, he says. It’s the same with Keith Mawson, owner of Egmont Seafoods, who says he exports just under $2 million worth of seafood to export markets although he has never had to make a cargo claim. Hence he has not tested the efficacy of his policy. According to published reports, there are about five or six million commercial vessels plying the planet’s tempestuous seas. Every hour, on average, one container is said to fall off, never to be seen again. And containers don’t just go missing at sea, often they go missing on the wharf or while in transit. Small exporters who are sending one-off shipments should definitely obtain cover even though their shipments may be few and far between. For exporters with regular exports to multiple destinations overseas, an annual policy (based on a company’s export turnover) should be the preferred option. A third but slightly more costly option – annual policy with declaration – allows the exporter to report exports and pay premiums on a periodic basis, says Burke Butler, NZ marine manager for Vero Marine Insurance. Always pick an insurer with a global claims network, Butler says. This will ensure that the exporter can rely on the insurer’s network in the event of a claim occurring outside of New Zealand. What constitutes a good watertight marine cargo policy? A good marine cargo policy needs to look at not only the potential of physical loss but also the consequence of the loss, adds Allen Chong, technical and sales manager at Vero Marine Insurance.
What is adequate cover? To protect a shipment against a potential loss and its consequence, consider whether there is sufficient contingency cover for extra storage charges, demurrage cost, and expediting expenses (for example, the additional costs to replace a shipment). Always check that the bottom limit of your policy per cover is sufficient to cover the risks associated with the level of shipping you are doing, Chong says. If, for instance, you have a claim of $1.5 million for a loss and the bottom limit you have in your policy per cover is $1 million, you have underinsured. Take precaution when you are sending marine cargo to war-torn destinations or those prone to frequent industrial strikes. While most insurance policies provide cover for war, this may not be available for certain countries that are fighting protracted wars. Kiwi exporters would, for instance, not be able to find insurance for goods shipped to Iran as that country is on insurers’ exclusion lists. The United Nations Security Council has imposed financial sanctions on Iran which apply equally to international insurers and prevents them issuing cargo insurance going into Iran where claim payments are to be made to Iranian nationals.
In the beginning was Incoterms The road to covering risks for both importers and exporters begins when the terms of trade and delivery are being ironed out. Even with terms being spelt out, often the claims are never quite easy to sort. “A lot of people don’t fully appreciate that claims are never quite black or white, explains Graham Forbes, principal at insurance brokerage Marsh Ltd. His advice to exporters or importers is, where possible always take ownership of your insurance rather than leave it with a foreign trade counterpart. QBE Marine’s underwriter Neil Cousins says businesses need to learn the Incoterms which, he reckons, should to those trading internationally be something that comes as naturally as “pressing the buttons on your calculator”. Forbes advises exporters to always have clarity about the terms of delivery, which should be settled at the beginning. Importers, for instance, should close deals based on ex-works (EXW in Incoterms) or CFR (cost and freight) as this gives the buyer latitude to arrange his own insurance with a New Zealand-domiciled insurer. If a buyer imports on a CIF basis (cost, freight and insurance), this means the seller is responsible for arranging the insurance. Forbes says people forget that when you sell on CIF terms, the risks transfer to the buyer once the goods are on the ship. This scenario is being experienced by many buyers of New Zealand products which are stranded or have fallen off Rena, and have to deal with insurers in New Zealand, says Cousins.
He adds that the Rena experience has shown that exporters are still selling on CIF terms, often thinking they are doing the best terms for their buyers. The fact is, as shown with Rena, offshore buyers have to deal with a company based in New Zealand for claims. For an exporter selling on FOB (free on board) terms, there are also potential exposures to liabilities unless contracts are specific on where the exporter’s responsibility ends. To get around such situations, inserting a “seller’s interest” clause would help manage the potential risk. Another option – which would add to the insurance cost – is to gain additional cover by purchasing a broad-form policy that would help an exporter cover liabilities not provided by a normal marine cargo policy, Forbes says.
Protecting against loss of profit It is always important to consider what value to attach to the goods as this valuation will determine the costs associated with replacing the goods in the future. “Think about how you want to be paid, eventually,” is Cousin’s advice. Insurers normally provide insurance based on the invoice value, the costs associated with transportation, and a portion of the buyers’ expected profits. Always value your shipment for when it arrives at the ultimate destination, Forbes says. When shipping machinery or capital goods, it is important to consider not only currency movements (devaluation or appreciation), lead times needed to replace shipments, and the potential loss of profits associated in the event the shipment is damaged or lost. An Advanced Loss of Capital Profits policy will cover these risks, Forbes says. Groundwork is everything when it comes to preparing a shipment. One way to mitigate potential risks is to have pre-shipment surveillance. Engage a surveyor to certify that the goods being shipped are packed and secured properly prior to shipping. “Pre-shipment surveys are becoming very important in the process,” Forbes says. Exporters should take note that delay is a difficult word for underwriters of marine risk. The consequences of delay are not measurable and what underwriters can’t measure, they won’t provide cover for. If your cargo is damaged during the course of its transit, you can recoup your loss if the investigation shows your goods actually were damaged. But if your shipment is delayed because the container vessel happens to run aground, and the produce you are shipping goes beyond the use-by-date because of the delay caused by the vessel’s grounding, the standard marine policy won’t cover the claims made against the deteriorated produce. Providing full information is one way to get the best pricing for your premiums, Chong says. “Two companies with the same business, shipping abroad, can have different premiums – based on their historical risk profiles. For instance, a company that tells us he uses packaging that is way better than industry norm, presents a better risk profile, hence better pricing.”
by Yoke Har Lee, contributor Exporter Magazine Nov/Dec 2011 issue 21 Exporter Magazine, NZ
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