What You Need To Understand About Insurance When Shipping Goods Abroad

If you are a buyer or seller of goods that are being shipped internationally, whether by air or by sea, it is critical to understand all of the various points concerning insurance of the goods, and who is responsible for what and when.

There is a big difference between freight insurance and cargo insurance. In a nutshell, freight insurance protects the freight forwarder, while cargo insurance protects you as the buyer or seller.

It would be nice to think that as soon as the goods leave your factory or warehouse, they are covered by the freight insurance that the freight forwarder has in place, and indeed they are. But freight insurance will not cover the value of your goods. It only protects the freight forwarder and is very limited. If you think about this logically, it actually makes a lot of sense because a freight forwarder has no idea from one minute to the next what it is that he might be shipping tomorrow. Today, he might be shipping goods that are valued at £40 each. Tomorrow he might have to move something that is worth £250,000. He cannot possibly carry cover for every conceivable set of circumstances, and this is why his cover is limited.

Freight insurance covers the freight forwarder for damage or loss to the goods while in his care, and in order for a claim to be successful any loss must be shown to have been due to the negligence of the freight forwarder.

All freight insurance is calculated by weight. What that means is that the same amount would be paid out for 1 kg of oak timber as for 1 kg of diamonds. Without going into too much detail, the amounts that are to be paid out to you as the shipper, or to the buyer, are extremely limited as they are covered by international convention. They also vary according to the mode of transport at the time, whether by road, sea, or air. They are calculated according to a system devised by the International Monetary Fund known as SDR, or Special Drawing Rights.

These payments are limited to SDR2 per kilo or SDR666.67 per package, whichever is greater, when covered by sea freight insurance. Air freight insurance is SDR19 per kilo, and road freight is SDR8.33 per kilo. All of which is not very much. Not only that, but you pay for the insurance anyway! It is calculated as a percentage of the freight forwarder’s fees and is included in his quote to you!

All of which is why you must have transit insurance coverage to cover the value of your goods when being shipped. This insurance comes under Incoterms, which are rules regarding transportation determined by the International Chamber of Commerce in 2020. They determine who is responsible for insurance and when.

The most commonly used Incoterms are, first, FOB – Free On Board. The seller is responsible until the goods are loaded on to the ship or aircraft, at which point the responsibility transfers to the buyer. EXW is Ex Works and in this case the buyer bears the risk and insurance costs from the export customs clearance stage through to receipt of goods.

CIF is Cost, Insurance, Freight, and here the seller is responsible to the point that the goods are loaded on to the ship or aircraft, and also to the port of discharge. At that point, the buyer shares the cost and is entirely responsible for risk and cost from then onwards.

As you can see, transit insurance coverage is by no means straightforward, but at The Insurance Broker we can help you and make certain that you have the cover that you need.