Understanding Goods in Transit Insurance

Goods in transit insurance covers inventory or other merchandise shipped by the seller, but not yet received and accepted by the purchaser. It is intended to protect buyers and sellers who are exposed to financial loss if this property is lost, damaged, or destroyed while off premises and in transit.

In some cases, a bond or cash deposit may even be required to obtain the release of cargo following a general average (a scenario in which goods are lost during sea transit in an emergency.)

The sales contract may obligate a seller to provide insurance to protect the buyer's interest or its bank's interest. Noncompliance with the contract can result in legal problems and loss of sales if the goods in transit are lost or damaged.

Understanding the terms and conditions of the insurance coverage ensures that the worst does not come to pass in a worst-case scenario.

For example, it is the terms of sale agreed to between the buyer and seller that dictates who is responsible for loss or damage to goods in transit, and when they are responsible. You may be legally obligated to provide insurance, but even if you are not legally obligated to do so, you may want to purchase insurance to protect your firm if it has a financial interest in the goods.

Choosing an Amount

Deciding on the amount of insurance is an important first step. Generally, the policy limit should reflect the maximum value being shipped in any one conveyance. When choosing the amount, keep the following in mind:

• Cargo policies typically value goods at the invoice cost, plus freight charges, plus an advance of between 10 and 20 percent to cover expenses incurred during shipping that are unknown at the time of shipping.
• If you are an exporter, your profit is generally already included in the invoice cost. An importer may want to select an advance valuation that includes a profit margin, and may also want to include coverage for duty and taxes. Some importers and exporters may want to insure their goods based on sale price.

Insurance Types

In some cases, relying solely on one of the buyer's or seller's insurance is a viable option, but you must be satisfied that the insurance has in fact been effected on each shipment, and that the terms, conditions, valuation, and limits are adequate for each shipment.

Relying on the insurance of common carriers (professional shipping companies) for reimbursement may or may not be a viable option. Typically, the carrier is not responsible for your portion of a general average, and it is exempt from liability for certain causes of loss under international conventions. A carrier is responsible only for loss or damage when it is due to its own negligence whilethe goods are in its care. The carrier's liability can be very limited, sometimes as little as $2 per pound, unless a specific valuation is indicated on the bill of lading.

Purchasing insurance from the freight forwarder may be an option, particularly if you have infrequent shipments. Considerations include the adequacy of the coverage relative to your specific needs, the cost, and the financial strength of the proposed insurer.

Self-insurance is another choice if you have the financial resources to absorb a catastrophic loss, and if you have the expertise and resources to investigate the cause of a loss, mitigate loss, expedite the release of cargo following a general average, and implement loss control and risk management practices.

Warehouse-to-warehouse insurance is important, but this type of coverage does not necessarily cover all shipments on a warehouse-to-warehouse basis. Coverage on each shipment begins when your responsibility for loss or damage starts, and it ends when that responsibility ends. If your sales contract requires you to insure the goods on a warehouse-to-warehouse basis, the policy needs to includethis clause.

Shipping Clauses

Goods that are in temporary storage probably are not covered by an ocean cargo policy. These policies are designed to cover goods in transit, including customary delays in transit and beyond the control of the insured or its assignee. Coverage for goods in storage because of other interruptions must be specifically arranged to ensure it is adequate.

Domestic Shipments

Typically, in North America, FOB, or free on board, has a meaning that is inconsistent with INCOTERMS® standards.

FOB is used to indicate who pays loading and unloading costs and/or the point at which responsibility for the goods transfers from the shipper to the buyer. Both Canada and the U.S. often use FOB destination clauses, which stipulate that the seller will pay shipping costs and remain responsible for the goods until the buyer takes possession.

FOB shipping costs or FOB origin clauses require the buyer to pay the shipping costs and become responsible for the goods when they leave the seller's premises.

A related term, CAP, or customer arranged pickup, denotes that the buyer will arrange a carrier of its choice to pick up the goods at the seller's premises, and the liability for any damage belongs to the buyer.

Another domestic clause, transportation floater – motor truck cargo, is designed to cover transit risks related to domestic overland shipments, and coverage is typically restricted to Canada and the U.S. The scope of coverage provided can range from named perils to "all risks" except as excluded.

What Are INCOTERMS?

INCOTERMS are internationally recognized trade terms published by the International Chamber of Commerce that apply primarily to international trade, not domestic trade. They define the obligations and responsibilities of the seller and buyer and are used to determine the extent of insurable interest in each shipment. Responsibility for loss or damage to goods in transit is assigned to theseller, the buyer, or both for a portion or all of the transit.

Two of the 13 INCOTERMS (CIP and CIF) stipulate an obligation to provide insurance, and that obligation is placed on the seller and not the buyer. If you sell goods on CIP or CIF terms, you are required to provide insurance for the benefit of the buyer.

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