International trade can be immensely profitable, but it carries many risks. One of those risks is the potential for loss or damage to your cargo. This can happen in many ways. For example, a fierce winter storm may blow a container with your cargo off the deck of a ship, leaving you with a sinking feel when you learn that your freight has gone down to the bottom of the sea. Or a forklift may gash a hole in a container, ruining your cargo if it’s exposed to rain or snow.
Theft is another huge risk. Sophisticated thieves can easily break the container seal and steal some or all of the contents. Estimates of global cargo theft range as high as $50 billion.
Trying to prove responsibility can be very difficult because it’s often impossible to determine how, when, why and where the damage or loss occurred. A piece of freight that’s not big enough to fill a single trailer and that’s shipped between the East Coast and West Coast may be placed on four different trucks through a hub network, pushed around two or more terminals, loaded and unloaded eight times, said Rick Bridges, vice president of Roanoke Trade Services, an insurance broker specializing in trade and logistics. He noted that truckers make their money by filling a trailer so freight is often loaded with other cargo on top.
So how do you protect yourself? Cargo insurance is the obvious answer. It’s also cheap — generally no more than 0.25 percent of the value of the goods, Bridges says. Cargo insurance is unregulated, so you don’t have to buy a cookie-cutter policy. The cost depends on such factors as volume, the type and value of the commodity, the loss experience of the parties in the transaction, deductibles and the type of coverage, he says.
Frank Reynolds, an international trade consultant, says it’s best to buy coverage that includes both the cost of the goods themselves and the freight costs, plus an additional 10 percent. That will cover additional costs you may incur if, for example, the goods are lost or damaged very close to the point of delivery.
If you’re an importer, you may want insurance based on the expected selling price of the goods. That’s especially important if you’re a small importer specializing in seasonal merchandise. If you lose that cargo, you may not be able to replace it in time, and you lose your whole season. Importers and exporters who look to their carrier for compensation may be sorely disappointed. Under the Carriage of Goods by Sea Act, a law passed in 1936, the ocean carrier’s liability is limited to just $500 per piece. Moreover, it does not specify what is meant by piece. It could be an individual package or a pallet containing multiple pieces. So you could end up in court, and the court costs might be so high that it isn’t worth the bother.
In addition, the ocean carrier has no liability if the loss or damage occurs during a storm because that is considered an act of God, and the carrier can declare “force majeure,” greater force. The liability of international air carriers and airfreight forwarders is capped at $9.07 per pound under a treaty referred to as the Warsaw Convention. Most truckers’ stated liability is only 50 cents per pound — provided the shipper can pinpoint the cause of the loss, Bridges says.
The bottom line is that the best way to cover your assets — and your backside — is with cargo insurance.