How marine insurance can protect your business

How marine insurance can protect your business | Insurance Business America

How marine insurance can protect your business

The high-risk nature of the shipping industry makes marine insurance an essential aspect of business dealings involving cargo shipments. In fact, because of the level of exposure, this type of coverage has been made compulsory in most trade transactions.

“Marine insurance is required in many import-export trade proceedings,” explained Palo Alto-based digital trade finance company Drip Capital in a guide on its website. “Admitting the terms, both parties are liable for the payment of goods under insurance. However, the subject matter of marine insurance goes beyond contractual obligations, and there are several valid arguments necessary for buying it before dispatching the export cargo.”

How does marine insurance work?

Despite what the name implies, marine insurance applies to all modes of freight transportation. The International Risk Management Institute (IRMI) defines it as a “type of insurance designed to provide coverage for the transportation of goods either on the ocean or by land, as well as damage to the waterborne instrument of conveyance, and to the liability for third parties arising out of the process.”

Coverage can be taken out by the forwarding agent, exporter, importer, or anyone involved in the transportation of goods.

Read more: What remains one of maritime industry's largest safety issues?

According to Drip Capital, this type of coverage works by transferring the liability of the goods from the parties and intermediaries to the insurance provider.

“The exporter, instead of bearing the sole responsibility of the goods, can buy an insurance policy and get maritime insurance coverage for the exported goods against any possible loss or damage,” the firm explained, adding that “the scope of marine insurance is necessary to meet the contractual obligations” of the goods being shipped.

“To align with agreements such as cost insurance and freight (CIF) or carriage and insurance paid (CIP), the exporter needs to take marine insurance to protect the buyer’s or their bank’s interest and honor the contractual obligation. Similarly, in the case of Delivered Duty Unpaid (DDU) and Delivered Duty Paid (DDP) terms, the seller may not be obligated to insure the goods, although in practice they generally do,” the trade finance company noted.

What does marine insurance cover?

Marine insurance has two branches – ocean marine, which covers water-based exposures, and inland marine, which protects against land-based risks.

Ocean marine insurance

According to the Insurance Information Institute (III), these types of businesses may need ocean marine coverage because of their exposure to maritime risks:

  • Marine service providers, including shipyards, builders and repairers, dealers, terminal operators, and stevedores
  • Marine transportation providers
  • Businesses dependent on overseas shipping, including commodities traders, freight forwarders, importers, exporters, and manufacturers

Ocean marine insurance typically provides these key coverages:

Coverage type

What it pays for

Cargo insurance

Damage or loss to products that are being transported, or stored in a warehouse prior to or following transport

Hull and machinery (H&M) insurance

Damage to a vessel’s hull, machinery, and equipment caused by collisions and other ocean perils

Marine liability insurance

Claims of bodily injury, personal injury, and property damage related to the service a marine business offers

Marine pollution insurance

Costs associated with pollution from fuel spills and other events

*Some pollution coverage may be added to a general marine liability policy

Protection and indemnity (P&I) insurance

Claims of bodily injury and property damage against the shipowner


Several shipyards, terminals, and other marine facilities also buy specialized coverage called “bumbershoot” policies, which provide umbrella coverage for a range of risks, including liability, collision, and salvage costs.

Read more: The tide finally turns in US marine insurance

Like other types of insurance, ocean marine coverage has exclusions. Losses resulting from the following are typically not covered but may be added through special riders or endorsements: 

  • General wear and tear
  • Marine life
  • Mold, mildew, and dampness
  • Riots or other civil strife
  • War or military action

Marine cargo coverage also ends when products continue to be transported over land, usually by train or truck. To be covered for ground transportation, businesses should purchase a separate policy called inland marine insurance, although combined coverage for all forms of transit is offered by some providers.

Inland marine insurance

Inland marine policies cover products that are transported over land or while temporarily stored in a third-party warehouse. Although a business owners’ policy (BOP) or commercial package policy (CPP) may already cover property housed at a specific location, or tools and equipment that travel with employees to job sites, these policies exclude shipments of products or materials. 

The III advised companies to consider the nature of their business and operations before taking out this type of coverage.

“Inland marine insurance isn’t just for companies that ship products to retailers and customers,” the institute explained. “For example, if you have a valuable tradeshow booth that is frequently shipped around the country and stored offsite by a vendor, you may want the protection provided by inland marine insurance. In addition, if someone else’s property is temporarily in your possession, inland marine insurance can provide coverage against the loss of this property.”

According to the III, special inland marine coverages include the following:

Coverage type

What it pays for

Bailee’s customer coverage

Clients’ property left in the care of the business; suits warehouse operators and repair shops

Builder’s risk insurance

Damage or loss to structures and materials during new construction projects or renovations

Exhibition and fine art coverage

Damage or loss to valuable items while on exhibit, in transit, or on loan

Installation floater insurance

Materials from the moment they are loaded onto a truck until they are used or installed

Motor truck cargo coverage

Clients’ goods while the business transports and delivers them

Read more: Marine insurers in line to ‘feel the pain’ from the container crisis

In terms of clauses, marine insurance has three main types. These are detailed in the table below:

Clause A

Clause B

Clause C

Comprehensive cover

Extensive cover

Basic cover

Covers losses resulting from breaking, chipping, denting, bruising, theft, non-delivery, and water damage, and Clauses B and C

Protects shipments against natural calamities, including earthquakes and volcanic eruptions, as well as damage from rain, seas, and river water, and all events covered in Clause C

Covers shipments from events such as fire, and cargo jettisoned due to crisis, accidents, and mishaps, including sinking, capsizing, collision, derailment, and explosion

How much does marine insurance cost?

Premiums prices for a marine insurance policy are based on the results of the insurance provider’s risk assessment, which typically takes into account several factors, including the level of exposure, the vessel’s type and construction, where the cargo is coming from, and the plan’s terms and conditions.

Drip Capital has provided a formula for how insurers calculate the cost of coverage:

Shipment value & freight cost

+

10% of total cost

x

Quoted premium

=

Payable premium

What are the different types of marine insurance policies available?

There also several types of marine insurance policies that businesses can avail of. These include:

Policy type

Feature

Voyage policy

Provides coverage for a specific voyage

Time policy

Covers a specified period, typically one year

Mixed policy

Combines time and voyage policies

Open policy

The value of the cargo is not put down beforehand, with reimbursement is provided only after a loss has been inspected and valued

Valued policy

The value of the cargo is state in the policy document, specifying the reimbursement amount

Port risk policy

Covers the vessel while it is stationed at the port

Wager policy

Does not provide fixed terms for reimbursements; typically payouts are given only if the insurer finds damage worth the claim

Floating policy

Only the amount of claim is specified while other details are omitted until the vessel goes on its journey

Single-vessel policy

Covers only one vessel

Fleet policy

Covers several ships belonging to a business under one time-based policy

Block policy

Protects cargo against damage or loss in all modes of transit

Blanket policy

Businesses should pay the maximum protection amount at the time of buying the policy