Protection from financial loss is a key consideration for businesses working to safeguard their assets and future. Loss of cargo due to theft is estimated at $22.6 billion annually, according to the BSI Group’s Global Supply Chain Intelligencereport. Depending on where that freight is traveling, the risk may be higher. According to the Transportation Assets Protection Association, in November 2016 alone, 231 freight thefts occurred in the Europe, the Middle East, and African regions, with losses that topped $64,000.
Freight insurance, also known as cargo insurance, helps protect against this type of loss, covering a variety of transportation means, everything from ocean to trucking to air, depending on the policy.
If you’re shipping goods that are valuable, it’s a good idea to look into freight insurance to protect those goods during transport. Carriers provide some coverage, but that coverage is limited and does not cover all situations. The first step in understanding freight costs is knowing what type of insurance is available and what factors play into that cost.
What is Freight Insurance?
Freight insurance provides additional protection that extends beyond what is offered by most standard carriers. This type of insurance typically includes coverage during the transport of goods and is purchased from a carrier or third-party insurance company.
Businesses can ship cargo without insurance, but if an unexpected event occurs during transport, the shipper absorbs all the costs. If the carrier were at fault, you might be able to recover some of the loss, and legal action is available, but it could be complicated and time-consuming — especially when dealing with international shipments.
Additionally, some carriers limit liability when an event is out of their control. For example, flooding, hurricanes, lightning strikes, and earthquakes are considered “acts of God” and therefore may be excluded. At this point, having an insurance policy in place is the best way to recover the loss.
Understanding Freight Insurance Categories
The potential cost of insurance is tied to the type of insurance that you purchase. There are two major categories: open coverage and single coverage.
Do you import and export items frequently? If so, open coverage might be a good option. With this option, you pay premiums annually, and the coverage extends to several shipments traveling at one time, depending on the policy details. Open coverage policies provide coverage until the plan is terminated, with most companies reviewing them annually. This is a good option for large-volume shippers that find purchasing single-coverage policies inefficient and need a more cost-effective option.
Do you ship freight infrequently? If so, single coverage might be the best option. For example, if you’re a small-business owner who ships occasionally and needs coverage from departure to arrival, single coverage is a good choice.
Once you understand the two general categories of freight insurance, you can take a deeper dive into the various types of insurance and what to expect in terms of premium costs.
The Cost of Freight Insurance: What to Expect
Freight insurance costs take into account a variety of factors, including the value of goods, origin and destination points, and even the carrier’s loss history. The mode of transportation is also a factor. For example, insurance on ocean shipments may be more expensive than on air shipments, since goods are exposed to various risks for an extended amount of time.
Items that are considered “high risk for theft” are more expensive to insure. For example, let’s say that you’re shipping electronics — mobile phones or laptops. These items are high-risk due to the potential for loss and theft. On the flip side, if you’re shipping plastic tables or inexpensive toys, the theft risk is low, which drives down insurance premiums.
The way in which goods are packed also affects pricing. For example, items that are packed in crates or containers may be priced more reasonably than goods that are shrink-wrapped and thus more vulnerable to both damage and theft.
Calculating the cost of insurance requires knowing all the variables involved, but to give you a sense of potential pricing, let’s look at an example. First, here are the most common variables that you’ll need to consider to better understand freight insurance pricing:
- Value of goods
- The insurance rate (provided by the insurer)
- Freight (the shipping cost)
For example, let’s say that the commercial value of the goods is $5,000 and the insurance rate is 0.6%. Multiply these numbers and you’ll get $30. Let’s assume that the freight (which is the shipping cost) is $1,200. Add these numbers together and you get $6,230 ($5,000 + $30 + $1,200). This gives you the “total insured value,” which you multiply by 110 percent (the extra 10 percent goes to unexpected costs) — which gives you $6,853. Multiply that number by 0.06, which gives you $41.12, the cost of insurance.
This is just one example, and the cost will vary based on the factors above, but the important thing to remember is that the cost will vary based on the value of goods; potential risk, which affects the insurance rate; and the shipping costs. You can also elect to purchase insurance that does not include the shipping cost, and we’ll discuss this in greater depth shortly. But first, where should you purchase freight insurance?
Understanding Where to Purchase Freight Insurance
When shipping freight, some businesses use “freight forwarders” that offer insurance packages from an insurance broker. This is an easy method for securing insurance, since they can complete the transaction quickly. Also, when filing a claim, resolution may be more streamlined, since the freight forwarder has an established relationship with insurance brokers.
The second option is to work directly with a broker, which is a good option if you frequently ship high volumes and need a long-term solution for insurance. Gather pricing for both options to determine which is more cost-effective for your business.
Additional Cost Considerations
There are a few more factors that affect cost when determining pricing. For example, let’s say that you want to insure your goods. One option is that you can use the carrier’s insurance, which is very limited and may not cover you fully. A second option is that you insure the cost of goods only. If a loss occurs, you will be reimbursed for the cost of goods but not the freight charges you paid. And the last option is that you insure the cost of goods and the money you spent shipping them. Below we walk through each of these options:
Legal liability coverage is what most carriers offer. With this option, the goods are automatically covered under the liability standard for the transportation industry. You don’t pay for this option, and the coverage is very limited. For example, domestic shipments may extend coverage equal to 50 cents per pound with a $100 minimum. This insurance is typically available if the carrier is found responsible for the event that damaged or lost the cargo.
Insurance of Cost of Goods Only
This type of insurance covers situations of a total or partial loss of the damaged items, and it pays the replacement value of the goods. For example, let’s say that the commercial invoice value is $10,000 and the insurance company charges 60 cents per $100 of insured value. The total cost for insurance would be $60. If a loss occurs, you would be covered for the cost of goods but not for any additional costs, such as freight.
Insurance of Goods and Shipping Charges
If you want the cost of shipping the goods to be covered, this option is your best choice. It will cover the cost of goods and the cost of shipping those goods. The calculation for this example was used above, and it is typically more expensive than the other two options.
Reading the Fine Print
Freight policies have limitations, and fully understanding those limitations before purchasing a policy helps protect you from unexpected losses. For example, some insurers may require that fragile goods — such as glass, marble or tiles — must be professionally packed in order to qualify for coverage. What’s more, you’ll need to keep receipts to prove that you complied with this rule in case loss or damage occurs.
Additionally, some items may not be insurable at all, depending on what type of products you ship, so keep this in mind. For example, cellphones or other specific items might not be insurable with some policies, so ask questions about the types of products you plan to ship.
Insurers also have rules about packing guidelines for cargo. For example, if the items arrive damaged, one of the first questions that may be asked is about the packing of the items. If cargo is damaged due to poor or improper packing, the cargo insurance is unlikely to pay a claim for these damages.
Weighing Cost with the Risk of Under- or Over-Insuring
Weighing the cost of insurance with potential loss is a difficult balance to strike. Consistently over-insuring items results in wasted resources. On the flip side, under-insuring can result in serious financial losses if an unexpected event occurs.
Find the right balance by studying your risk over time. As you ship more items and purchase insurance, you will start to see patterns. How many losses do you see annually? What’s more, how much are you paying annually for insurance? Does it make sense to pay extra premiums to cover shipping costs, or could you pay to insure the freight only and put the money saved in reserve to cover extra shipping in case a loss occurs? Weigh the potential risk with savings, and figure out the right strategy for your company.
Additionally, put together a process for keeping documents in the event of loss. For example, keep current paid premium bills that show you’re up-to-date on payment and copies of all insurance contracts. If you’re required to have fragile items professionally packed, keep receipts organized so you can quickly furnish those in the event of a loss. Also, read the fine print about how much time you have to file a claim. For example, if damage is noted on the bill of lading at the time of delivery, you might need to submit the claim within a specified number of days.
Moving Forward with Greater Safety
Protection from unexpected loss is an important safeguard for businesses. One important factor in calculating that risk isprice. How much will you pay for insurance, and what is the right amount of insurance for your company? Does coverage extend to all items in a shipment, and if so, what does that coverage include?
Answering these questions during the shopping phase is important in selecting the right option for your freight. Reading the fine print and understanding exclusions and how much a policy will pay will help ensure that you’re buying the right amount of coverage, neither too much nor too little. As a result, you’ll have greater peace of mind when shipping freight, and you can be certain that your goods are covered in the event of an unexpected loss.
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