Millions of different cargo are moving daily from one place to another. Cargo can be transported by sea, air or road, depending on the distance and urgency.
However, around 80 % of all cargo is estimated to be transported by marine cargo ships. Unfortunately, according to aWorld Shipping Council (WSC)report, up to 1,382 shipping containers are lost at sea each year (on top of damages).
When such situations occur, the end consumer will demand compensation from the product owners, or the cargo owners will demand compensation from the freight forwarder. Losing cargo can be costly for the cargo sender and responsible freight forwarders. Thankfully, some insurance can help each party with their loss or liability.
These insurances are cargo and freight forwarder insurance. Although these two policies are commonly confused due to their similar coverage, they protect different policyholders.
Worry not; after this article, all confusion will be cleared, and you will understand the difference between cargo insurance and freight forwarder insurance.
What is Cargo Insurance?
There are 200 million cargo containers shipped by sea and 52 billion tonnesof cargo by air. Cargo can be anything from material, furniture, food, clothes, etc. Cargo owners typically are either manufacturers, sellers or personal owners. Transporting cargo can be expensive, especially when it’s in bulk and expected by another party.
Cargo insurance protects the valueof cargo from unpredictable situations during transportation. The insurance can be purchased to cover the cargo movement through any transport – ship,flight, truck or train.
Businesses and personal individuals can purchase cargo insurance to protect their goods or valuables. The insurance coverage begins when cargo is loaded and unloaded from point A to point B. It is the best financial protection to cover a range of unpredictable events.
Cargo Insurance Cover
Cargo insurance coverage includes various situations that lead to damage or loss of cargo. Therefore, the following are the main insurance covers:
- General Average: A ship may have to declare a general average when it faces an unrecoverable situation and must sacrifice the vessel and the cargo. The General Average is declared, and every cargo owner will be responsible and have the duty to divide the cost of damage or losses due to the unfortunate situation.
Marine cargo insurance will help settle the portion of the policyholder’s general average expense.
- Damage: the insurance will cover cargo damage caused by loading/offloading, weather damage, transport collisions or sudden fires. The cargo can be ruined due to the damage and may not be profitable.
The insurance will reimburse the cost of repair or replacement at market value.
- Loss: There is always a chance the cargo may be lost due to sudden reasons. The reasons can include rough weather (especially in the sea), handling errors (the shipment doesn’t get loaded), tracking mistakes or theft.
Cargo insurance will reimburse the cost of replacement and financial loss.
Cargo insurance Claim Example
For example, around 2,000 containers on a cargo ship were lost or damaged when it was hit by stormy weather in the Pacific Ocean. Such cases are very common due to unpredictable weather. Fortunately, cargo insurance will cover the lost or damaged cargo to the policyholder.
What is Freight Forwarder Insurance?
Many businesses hire a freight forwarder to arrange cargo transportation to the end consumer. Hence, freight forwarders are an intermediary between two companies. The freight forwarder company arranges the transport and is responsible for the cargo from when it is received until it reaches its destination, depending on the agreed incoterm.
Thus, they will always be held liable if things go wrong, so they need insurance to protect their liability.
Freight forwarder liability (FFL) insurance protects freight forwarders’ liability from various situations that lead to the loss or damage of goods. The insurance also protects their business liability regarding local customs or third-party issues.
Therefore, the insurance helps freight forwarders recover from unpredictable situations with the responsible cargo.
Freight Forwarder Insurance Covers
Freight forwarder insurance will financially cover the following to help them recover and protect their reputation.
- Carrier’s Liability: When carriers take charge of cargo, they are responsible for ensuring the cargo reaches the destination in good condition. If the cargo is damaged, lost, or stolen, the freight forwarder will have to reimburse the cost of the cargo and compensate the client.
The insurance will reimburse the freight company according to the cargo’s weight and not the cargo’s actual value.
- General Average: Freight forwarders are also liable for paying their portion of the general average (freight forwarder companies can split these costs with the cargo owner).
Much like cargo insurance, freight forwarder insurance will cover the general average for the forwarder company.
- Error and Omissions: Freight forwarders are also accountable for ensuring the handling and paperwork are up to par. Cargo can accidently be left behind; the paperwork may go missing, or cargo handling instructions may not be followed. These errors can lead to cargo loss, damage or fines.
Freight forwarder insurance will cover the costs related to fixing these errors, compensation, and customs fines.
- Third-party liability: Ships and trucks can get into accidents with third-party vehicles or public property. Third-party accidents can result in lawsuits and settlement expenses.
The insurance will help cover legal, compensation and settlement costs related to the third-party liability claim.
Freight Forwarder Claim Example
For example, a freight forwarder company releases cargo at the wrong location and loses the papers related to that cargo. The cargo may be lost or not even reach the expected date. The company will have to compensate the clients and cover their losses. The insurance will cover the costs that fit the weight of the cargo and the compensation costs.
Difference Between Cargo Insurance and Freight Forwarder Insurance
Freight forwarder insurance protects the freight forwarder company, which is contractually liable for the goods and transportation method. In the event of a claim, the value is often calculated based on weight.
Cargo insurance protects the sender of the goods (cargo owner) – the manufacturers, wholesalers and retailers. The reimbursed value of the goods is based on their commercial value.
Why Are Both Cargo and Freight Forwarder Insurance Important?
Cargo and freight forwarder insurance are crucial in the logistics industry, providing protection and peace of mind to businesses involved in the movement of goods/products.
Therefore, each insurance is designed for a different policyholder, and it’s essential to get the correct insurance before transporting any product or signing any transportation agreement. Hence, both types of insurance are necessary to reduce financial risks, gainclients’ trust, and protect against possible liability risks.
