Recession is not the time to skimp on cargo insurance

By: | at 08:00 PM | Channel(s): Logistics  

But don’t expect great deals from insurersBy Peter A. Buxbaum, AJOTIn the current economic climate, businesses of all kinds are struggling to survive by cutting costs. Some shippers may be tempted to forego paying for cargo insurance in an effort to slash their overhead.
This is precisely the wrong time to make that sort of calculation, according to Mike Brown, executive vice president of Avalon Risk Management, Inc. in Salem, Mass. “When the economy is down, the last thing you want to save on is insurance,” he said. “This is when you can least afford to deal with an uncovered loss.”
Brown uses the mathematics of risk management to make his case. As most businesses know, profit margins are generally depressed during an economic downturn. “A cargo owner may earn a profit of 10% on a shipment during good times,” said Brown. “The same cargo owner may be lucky if he’s making five% in difficult economic times.”
What are the implications for cargo insurance, or the lack thereof? “At a 10% profit margin, you have to deliver 10 shipments for free in order to make up for one uncovered loss,” Brown explained. “At five%, you have to deliver 20 shipments if one of your containers washes overboard. As margins decrease, you have to work that much harder to make up for an uncovered loss.”
Unfortunately, unlike other sectors of the economy, the recession doesn’t allow cargo insurance carriers to offer any great “deals” to those seeking to purchase insurance. “The reality is that losses have been increasing and that puts upward pressure on rates,” said Brown. “In particular, we are seeing increases in theft and pilferage claims. When the economy declines, and people are earning less, some of them will look to supplement their income when the opportunity arises.”
The recent heightening in the United States of the profile of piracy on the high seas might be another good reason to carry cargo insurance. But that phenomenon is not contributing to rate increases at this time according to Brown.
“The US public doesn’t understand that piracy has been ongoing for many years, especially in the Gulf of Adena and the Straits of Malacca,” said Brown. “Anytime a US-flag vessel is captured you have increased visibility in the US media. But other countries’ ships have been taken for a long time. The fact is that this has been an ongoing problem.”
Cargo insurance will generally cover losses resulting from piracy. A claim might be denied if the piracy is considered to be an act of terrorism, but Brown said he has not seen this issue arise.
Why don’t cargo owners insure their cargo? “Some ocean shippers mistakenly believe they will be fully compensated in the event of a loss in international transportation,” said Brown. “That is not the case.”
On the contrary, carrier liability is limited under international treaty and US law. In order to recover from a carrier, a shipper must prove that the loss occurred while the shipment was consigned to the carrier under a bill of lading and that the carrier was responsible for the loss as well as the amount of the loss. Under the Hague Convention and the US Carriage of Goods by Sea Act (COGSA), the carrier is free from liability if the loss was due to any one of 17 causes, including navigation error, fire, acts of God, war, public enemies or civil unrest, labor stoppages, defects in the goods themselves, insufficiency of packaging, or the negligence of the shipper.
Even if all these impediments are overcome, the carrier’s liability is still limited: only $500 per package or the value of the cargo, whichever is less. “For example, in the case of a one-million dollar shipment in five pieces, the most the carrier would have to pay is $2,500,” Brown explained. “That’s pennies on the dollar.”
Another good reason to buy cargo insurance is to protect against assessment of a loss known as a “general average.” This old maritime concept holds that if the master of the vessel takes action and incurs additional costs for the benefit of the voyage, those

Peter Buxbaum's avatar

American Journal of Transportation

More on Peter Buxbaum
Peter Buxbaum has been writing about international trade and transportation, as well as security, defense, technology, and foreign policy, for over 20 years. Besides contributing to the AJOT, Buxbaum's work has appeared in such leading publications as [em]Fortune, Forbes, Chief Executive, Computerworld, and Jane's Defence Weekly[/em]. He was educated at Columbia University.