The Difference Between Freight Insurance and Cargo Insurance: What you need to know
If your business is engaged in shipping goods abroad, you need to be very much aware that there is a difference between cargo insurance and freight insurance. Many people assume that the two things are the same, but nothing could be further from the truth.
When you ship goods abroad, either by sea or by air, they are not automatically insured against loss or damage. In order to be fully covered, your shipment needs to have both forms of insurance. Freight insurance in the UK alone will not cover the value of your goods. You need to have cargo insurance for your goods because freight insurance only covers the freight forwarder.
The rules for the sale of goods around the world, including shippers’ liabilities and responsibilities, are governed by the International Commercial Terms of 2020, commonly called incoterms®. The following are the three incoterms® that generally apply to international sales agreements:
EXW (Ex Works): Under this incoterm, the buyer bears the risk and insurance costs from the export customs clearance stage through to receipt of goods.
FOB (Free On Board): Here the seller is responsible for risk and cost until the goods are loaded onto the cargo vessel or aircraft. At that point, the risk and cost transfer to the buyer.
CIF (Cost, Insurance, and Freight): In a sale transacted under the CIF incoterm, the seller accepts risk up to arrival at destination and insurers the same
It is essential that the sales agreement states which of the incoterms® applies so that both buyer and seller know which one is respnsible for cargo insurance.
Freight insurance in the UK, which is also known as freight service liability insurance, only covers the freight forwarder or logistics provider against any claim arising from their negligence. The problem is that, when you are shipping goods, even if the loss or damage is the result of that negligence, the amount of compensation is only likely to be a fraction of the value of the goods.
Now the freight insurance covers the freight forwarder’s liability for loss or damage to the goods, but it is calculated by the weight of the goods. What that means is that the amount of compensation paid out for the loss of 1lb of diamonds would be the same amount as that paid for the loss of 1lb of feathers, and has nothing to do with the value! You can begin to see why you need cargo insurance.
The freight insurance is worked out as a percentage of the freight forwarder’s charges and these are payable by the freight forwarder but passed on to the shipper, as they are included in the freight forwarder’s quote. The terms of the freight forwarder’s liability are set out under conventions which vary according to the mode of transport – road, sea, or air. Those conventions place ceilings on the amount of compensation to be paid to the shipper.
If you want to be fully covered, then you must have cargo insurance as well, and this will be calculated not only on the value of the cargo, but other criteria including size and weight, where the cargo is being shipped from and to, the route the carrier is taking, and the type of freight.
There is a lot more to understand about freight and cargo insurance, but at The Insurance Broker we can help you to choose the right insurance for your needs.