Ocean Marine Cargo Coverage

OCEAN MARINE CARGO COVERAGE

(January 2020)

 

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INTRODUCTION

Purchasing  Ocean Marine Cargo Policy provides peace of mind. The main objection to buying the coverage is that the shipper or the vessel owner are typically legally liable for cargo, so cargo  coverage may be redundant. Unfortunately, some individuals attempt to go bare and learn the reality of legal liability which is dictated by the bill of lading. The bill of lading limits liability in three ways:

1)      Normally legal liability does not include acts of God or other activities that are beyond the scope or control of the person handling the goods.

2)     Bills of lading contain significant dollar limitations on the liability of the ocean carrier and if a Himalaya Clause is attached, that limitation also applies to most entities involved in transporting the goods. Bills of lading typically limit liability to $500 per package.

3)     The bill of lading provides the jurisdiction where claims must be made and adjudicated. This may be a considerable distance from the cargo owner.

The Ocean Marine Cargo Policy allows for the owner of the goods to be quickly compensated by its own carrier and then that carrier can subrogate against the handler of the goods.

There is no universal Ocean Marine Cargo Policy. The policies are built using clauses that the carrier believes are applicable to the type of cargo, for the type of vessel and type of travel. The following analysis is based on the revised cargo clauses from the American Institute of Marine Underwriters. It was selected because its last revision was made with the hopes that it could become a standard for underwriters. This revision was made in 2004.

OCEAN MARINE CARGO COVERAGE ANALYSIS

Ocean marine cargo policies may be written on an all risk or named perils basis. This analysis is based on the all risk version because it provides the broadest coverage.

 

Ocean cargo shipped "On Deck"

1. AVERAGE TERMS

These terms apply:

A. All Risks

The policy covers loss or damage from any external cause except for War, Strikes, Riots, Seizure and Detention. Other standard exclusions are under the Nuclear/Radioactive Contamination Exclusions Clause, the Free of Capture and Seizure Warranty, and the Strikes, Riots and Civil Commotions Warranty.

Some of these exclusions can be deleted and coverage provided by endorsement for an additional premium charge.

B. “On Deck” Bill Of Lading Free From Particular Average

Property shipped under an “On Deck” bill of lading is subject to significant restrictions of coverage. Property is free from particular average for most losses. This means that only total losses are covered. There are exceptions though. Partial losses are covered when the loss or damage is caused by any of the following:

This limitation is necessary because cargo on deck is more susceptible to loss. Accepting the “On Deck” bill of lading gives the shipper a lower cargo rate at the expense of exposing the cargo to a higher risk of loss or damage. The insurance company imposes this limitation to minimize its losses. The shipper must decide if it wants lower shipping rates or better insurance coverage.

Note: This limitation is only in place with "On Deck" bills of lading. It does not apply if the master or crew places cargo on deck that did not have an “On Deck” bill of lading and a loss occurs.

2. ADDITIONAL COVERAGES

The policy provides the following expenses and contributions:

A. General Average and Salvage Charges

If jettisoning equipment or cargo will lighten the load, restore vessel stability, and possibly save the rest of the cargo and the crew, the owner of any cargo jettisoned sustains a  loss for the common good. Over the years it has been decided that all parties that did not sustain a loss should contribute to the party that suffered a loss for the common good  in order to make it somewhat whole. This concept is known as general average. This section pays the insured’s part of the general average if a covered loss occurs and some cargo and equipment is jettisoned. It also pays for any salvage charges that may be due.

Note: The potential loss must be from a covered peril and not be just a loss in general.

 

Example: Fox Exporters sent cargo valued at $200,000 to Amsterdam. A storm came up and half the vessel's cargo was jettisoned in order to save the vessel and the other cargo. Although Fox's cargo was not damaged, it was charged $75,000 as its portion of the general average. Fox's insurance company responded because the general average was due to a covered loss.

B. Landing, Warehouse and Forwarding Charges

When a covered loss occurs and the trip ends at a port other than the intended port or destination, coverage applies to the expense to store and then to forward the insured cargo to the intended port or destination.

Note: This clause does not include general average or salvage charges because they are included in the clause above. It also does not include any charges related to the insured’s insolvency or any financial default.

 

Example: The vessel carrying Fox Exporters’ cargo was damaged in a storm, forcing it to pull into Portsmouth, England as a port of distress. This unexpected stop required that all cargo be warehoused for three weeks. The insurance company paid the warehouse charges.

 

Related Court Case: Open Cargo Policy Warehouse Endorsement Held Applicable Only To Covered Import Shipments

C. Brands and Trademarks

If a loss occurs and the insurance company takes the salvage, it pays to remove the brands and trademarks from the salvage. The loss adjustment section explains exactly how this is handled.

D. “Both to Blame”

This clause applies only if the shipper agrees to include a “both to blame” clause in its bill of lading. This is a fairly common addition to the bill of lading so this clause is needed by most shippers.

A “both to blame” situation arises when two vessels collide and both are at fault. Each vessel can request and receive 50% of the value of the damage of their vessel and cargo from the other vessel. Any shipper that has cargo on the vessel and has agreed to a both to blame clause in its bill of lading, must pay its proportional share of this payment.

Under this coverage clause, the insurance company agrees to pay the “both to blame” amount of loss and all defense costs associated with it but it does limit the payment to no more than the value of the shipment.

 

Example: Periwinkle ships goods on Ship A with a “both to blame” clause in its bill of lading. Ship A and Ship B collide. Ship B demands Ship A to pay its 50% share of its loss. Because Periwinkle's bill of lading includes a “both to blame” clause, Ship A expects Periwinkle to pay a portion of the payment it  makes to Ship B. Because this coverage clause is attached Periwinkle is covered for such payment but limited to the value of the shipment.

 

E. Sue and Labor Charges

After a loss, the insured has the duty to take reasonable measures to reduce the loss and to secure rights against third parties who might be responsible for it. Whatever expenses the insured incurs to do so are covered even if the combined expense and loss amount exceed the limit of insurance.

F. Craft/Lighter Charges

When goods must be removed from the vessel using crafts, lighters or rafts, the expenses incurred to do so are covered. If the insured must agree to exempt lighterman from liability, this insurance continues to apply.

3. EXCLUSIONS

There is no coverage for:

Note: These losses are excluded because they are inevitable and should be expected.

Note: This is comparable to the intentional acts exclusions in other property coverage forms and policies. Coverage does not apply to the insured's property that it damages or destroys.

Related Court Case: Deterioration Or Decay Coverage Of Perishable Goods Does Not Cover Human Error

Note: This is important because it forces the insured to select reputable and financially stable carriers.

Note: The insured is expected to be familiar with the cargo and how to pack it properly. There is no coverage if it fails to do so.

 

Example: Marilyn’s Gallery had an item of art packed for her and then shipped to a customer in the Caribbean. When it arrived at the warehouse, the crate was broken and the artwork destroyed. It was later determined that the crating was appropriate for inland shipments but inadequate for ocean shipping. It was also determined that the packer had never packaged an item for ocean travel. Coverage was denied.

4. PARAMOUNT WARRANTIES

These warranties are actually exclusions. Each applies without exception unless the policy is endorsed to modify or delete them.

A. F.C. & S. (Free Of Capture and Seizure) Warranty

This warranty excludes consequences. Consequences are losses that result from other events that take place during the voyage. Loss or damage because of any of the following is not covered:

Note: It does not matter when such losses occur or even if their occurrence is lawful.

 

Example: While the One Star was docked, a governmental official notified its master that all goods on board were being confiscated for the greater good. He pointed out the armed forces he had to back up his demand. There was no coverage for the lost cargo because of this warranty.

 

 

Example: Phillips Manufacturing shipped cargo through the Suez Canal to the Middle East. The vessel struck a mine left after a recent conflict in the area. The vessel sustained extensive damage and some of Phillips' property was also damaged. This loss was not covered because of this warranty.

 

B. S.R. & C.C. (Free Of Strikes, Riots and Civil Commotion) Warranty

There is no coverage for damage or expense due to strikers or others engaged in labor disputes, riots or civil commotion, or due to terrorists or others operating with political motives.

 

Example: Aruba Flowers shipped flowers to the West Coast to be distributed in California. One shipment arrived just as the Longshore and Harbor Workers dock strike began. As a result, the flowers remained on the ship and were all dead when the strike ended a short time later. This loss was not covered because of this warranty.

 

C. Delay Warranty

There is no coverage for any claim due to a delivery delay, even if caused by a covered peril. This means that loss of income or market, expenses or deterioration of the goods is excluded.

 

Example: Mary shipped a number of holiday items intended for sale before the Chinese New Year. The transporting vessel was damaged in a storm, deviated from its route, and had to undergo repairs. The delay caused Mary’s cargo to arrive after the New Year celebration and forced her to sell it for less than half its original sales price. Mary could not collect damages for loss of market because of this warranty.

 

D. Nuclear/Radioactive Contamination Exclusion Warranty

Loss or damage due to nuclear reaction, radiation or radioactive contamination is excluded, regardless of the circumstances surrounding the loss. The one exception is that property within the United States, one of its territories, or Puerto Rico is covered for any resulting fire damage as long as the fire was not due to any parts of the F. C. & S. Warranty. Loss or damage arising from nuclear reaction, radiation or radioactive contamination caused by the fire is also excluded.

5. ADDITIONAL CONDTIONS

These conditions also apply:

A. Seaworthiness

If the insured knows that the vessel is not seaworthy, any loss that occurs because the vessel is not seaworthy is excluded. On the other hand, if the insured is unaware of any problems with the vessel, this condition does not apply. Loss or damage is covered even if the insured signed a bill of lading containing a negligence clause or a latent defect clause.

B. Carrier Clause

This insurance is only for the insured's benefit. It does not benefit any carrier or bailee.

C. Economic & Trade Sanctions

This policy is null and void if any United States economic or trade sanction prohibits coverage.

6. DURATION OF RISK

A. Transit Clause

This clause describes the times when coverage for a particular shipment begins and ends.

Coverage starts at the warehouse or storage facility where the voyage begins. However, property in the warehouse is not covered because this coverage does not begin until the goods leave the warehouse or storage facility.

Coverage ends at the earliest of when the goods are delivered to the final destination; they are delivered to another warehouse the insured selected for storage, allocation or distribution; or 60 days after the goods were discharged at the end of the voyage. If activities beyond the insured’s control result in the insured needing continuing coverage beyond the 60 days, the time period can be extended. The insurance company must be notified and a premium charge accepted. The extension can be for as many as 30 days. After the goods are unloaded from the vessel at the final destination, but before coverage ends, if the insured forwards the goods to a destination not listed in the bill of lading, coverage ends when transit to the new destination begins.

Note: If the insured knows of the change in destination and notifies the insurance company, coverage continues but the insurance company may change the conditions and make an additional premium charge.

 

Example: The vessel owner notified Jonny’s Pet Food that the shipment was being diverted from its original route because of a contagious disease that broke out at two ports of call along the way. Jonny notified the insurance company of the change and it continued coverage without a change in premium.

 

Problems beyond the shipper's control can and do occur. Coverage continues in cases of deviations in travel routes or if cargo must be removed from the vessel and then reloaded and shipped on a different vessel using a different route that the vessel owner arranges. However, coverage does not apply if transit is suspended or interrupted by circumstances within the insured's control. In cases beyond the shipper's control, the insurance company expects the insured to act with dispatch to gain control.

Related Court Case: Cargo Shipment Held Not Covered By Virtue Of “Suspension of Transit Condition”

B. Shipments Returned or Refused

If a delivery is rejected for any reason, coverage remains in effect until there is an acceptable disposition. However, coverage extends only if the insured notifies the insurance company, explains the circumstances, and agrees to pay additional premium.

C. Consolidation/Deconsolidation

If the insured cargo shipment is interrupted in order to consolidate it into an overseas container or to deconsolidate it from a container, coverage continues for up to 30 days, regardless of who controls the delay. The number of days can be extended with the insurance company's written agreement and by the insured paying additional premium.

7. LOSS ADJUSTMENT CLAUSES

A. Constructive Total Loss Clause

A constructive total loss is when the cost to get a cargo shipment to its final destination in an acceptable condition exceeds its value. The costs could arise from recovery operations, renovating, repairing or shipping.

 

Example: Barry’s Forest Products were being shipped East when a collision with a bridge abutment breached the hull, allowed water into the timber shipping area, and warped it. There were other ways to use the wood but because its salvage value was less than the cost of recovery and shipping, it was considered a constructive total loss.

 

B. Partial Loss

In case of a partial loss, damaged property must be separated from undamaged property. Loss payment on damaged property is based on its depreciated value. However, if the insurance company and the insured cannot agree on the property's value, it is sold and the insured receives the difference between the proceeds of the sale and the property's insured value.

C. General Average and Salvage Charges

United States Law, the York Antwerp Rules, and any other laws that apply as stated in the contract of affreightment (charter of a ship to carry cargo) determine these charges.

D. Machinery Clause

If a machine being shipped consists of several parts, and some of the parts are damaged, the loss paid is limited to the proportional value of the part or parts to the value of the entire machine. The insurance company has the option of paying the expense of repairing or replacing the part(s). The expense includes labor, forwarding charges and any extra duty, if sustained. However, the insurance company does not pay more than the insured value of the machine.

E. Labels Clause

If labels, wrappers, or containers in which the insured property is shipped are damaged, the insurance company does not pay more than the amount to replace them and recondition the property. However, it never pays more than the property's insured value.

F. Brands and Trademarks

Under Additional Coverages, the expense to remove brands and trademarks is covered. This section explains how damage to such de-branded items is paid. The damage value is based on the de-branded value. If the brand or trademark cannot be removed, the insured can destroy the damaged goods but only if it pays the insurance company the property's estimated salvage value.

 

Example: Myheart Blue Jeans sell for $300 a pair and are known for the embroidered heart on the back pockets and the trademark brand on the left leg panel. When a covered loss damaged some of them, the branding could not be removed without destroying the jeans. The insurance company paid Myheart the value of the branded jeans. Myheart then paid the insurance company to purchase the salvage value (what it would have been worth without the branding) and destroy the jeans so they would not enter the marketplace.

 

G. Subrogation

The insurance company acquires the insured’s rights of subrogation when it pays a loss. If the insured impairs those rights in any way, the insurance company may deduct the subrogation value from the value of the claim.

H. Notice of Loss

The insured must report any condition that could become a loss to an office near the property or its destination.

I. Payment of Loss

The insured must submit a satisfactory proof of loss to the insurance company. The company then has 30 days to pay the loss. If the amount of loss is not determined when the proof of loss is submitted, the insurance company can advance an agreed-on amount to the insured, subject to a final adjustment.

Note: The insured may have to return part of the advance if the amount determined in the final adjustment is less than the advance.

J. Notice of Suit

The insured cannot sue the insurance company until all policy terms have been met. Suits must be brought within 12 months following the loss or in the shortest time allowed by law in the state where the policy was issued.

K. Choice of Law

This policy is interpreted according to United States maritime common law. New York State Law applies if such law does not apply.

8. OPERATING CLAUSES

A. Reports of Shipments

Most cargo policies are written on an open basis and are subject to reporting. The insured must report the details of every shipment made in a certain month within 30 days after the month ends. The policy is void if the insured intentionally does not report all shipments but unintentional errors in reporting do not void the policy as long as the insured reports them as soon as it realizes that an error has been made. The premium charged is based on the values reported.

B. Inspection of Records

The insurance company has the right to inspect the insured's books and records that relate to insured cargo shipments any time during the policy period and up to 12 months after the expiration date.

C. Special Cargo Policies

The insurance company may provide the insured with Special Cargo Policies or Certificates. This gives the insured permission to issue them to a third party as proof that the cargo insurance exists. The permission is granted only if the information provided on the policies or certificate accurately reflects the coverage provided under this policy. The insured agrees to reimburse the insurance company if a policy or certificate is issued incorrectly and the insurance company pays for a loss that is not actually covered under this policy.

The insured is required to must submit copies of all special cargo policies it issues or that are spoiled and voided to the insurance company.

D. Other Insurance

This insurance is void on a particular shipment or insured interest, if insurance from a carrier or other bailee is available to the insured. If any other type of insurance is available, this insurance pays its proportional share of any loss that would be covered under multiple policies. If the insurance company is relieved of its liability, it does not return the premium it received.

OTHER POLICIES

The American Institute of Marine Underwriters produced three additional coverage forms in its 2004 revision.

The Cargo Clauses 2004 with Average

This basic perils form allows the insured to select the deductible percentage. Loss amounts below the deductible percentage are not paid. If the loss exceeds the deductible percentage, the insurance company pays the entire loss, including the amount below the deductible percentage. Many of the clauses described above also apply. The following clauses 1, 2 and 3 below replace section 1 in the “all risk” clauses.

1. With Average Terms

An average percentage appears on the declarations. Nothing is paid on losses that are less than that percentage. If the loss exceeds the percentage, the insurance company pays the entire loss, including the amount below the percentage.

The average percentage does not apply when the loss or damage is caused by any of the following:

2. Causes of Loss

The basic perils are perils of the seas, fire, assailing thieves, jettisons, loss overboard of overseas containers stowed on deck, barratry of the master and mariners, and similar situations that damage the insured’s property.

3. Additional Perils

There are three additional perils:

A. Shore Perils

While the property is ashore, this policy covers collision, derailment, overturn and similar accidents to conveyances such as trucks, trains or cars. It also covers fire, lightning, sprinkler leakage, cyclones, hurricanes, earthquakes, floods, and collapse or subsidence of docks or wharves.

B. Package Totally Lost

Coverage applies to packages lost during loading, transshipment, or discharge. This applies only if the entire package is lost.

C. Inchmaree, Explosion, Pollution Damage/Deliberate Damage

Damage caused by boilers bursting, shafts breaking, or latent defect in machinery, hulls or attachments, or from errors in either navigating or managing the vessel is covered. Explosions are also covered. In addition, damage to property ordered by a governmental entity in order to prevent or mitigate pollution is covered if the event that triggered the pollution was caused by a covered peril and the insured property was on a waterborne conveyance.

The Cargo Clauses 2004 Free Of Particular Average-American Conditions (FPAAC) And The Cargo Clauses 2004 Free Of Particular Average-English Conditions (FPAEC)

These are similar to the Cargo Clauses 2004 with Average except Clause With Average Terms is replaced with FPA Average Terms as follows:

FPA AVERAGE TERMS

A. Vessel

If the loss is less than total (Warranted Free of Particular Average) the policy will pay nothing. If total, it will pay the entire loss. This limitation is not applicable if the loss is caused by:

B. “On Deck” Bill of Lading Free from Particular Average

Property is free from particular average for most losses this means that partial losses are not covered and coverage applies only to total losses.

This limitation is not applicable if the loss is caused by:

Note: This limitation is necessary because cargo on deck is more susceptible to loss. It does not apply if the master or crew places cargo on deck that did not have an “On Deck” bill of lading and a loss occurs. In addition, property jettisoned, washed overboard, or overseas containers that are washed overboard are not subject to this limitation, whether subject to the “On Deck” bill of lading or not.

CHANGES

The cargo policies analyzed above are the unendorsed versions. Many of the clauses can be changed or deleted for an additional premium charge.

VARIATIONS

Ocean marine forms are not the same as Insurance Services Office (ISO) or American Association of Insurance Services (AAIS) coverage forms and are not subject to filing and approval in the various states. The insurance company selects the clauses and forms it uses in a given policy and expects the insurance agent or broker to know enough to help the insured understand the applicable policy’s  terms and conditions. An agent or broker who understands the form and the market is essential in arranging the proper coverage and placing it correctly. Please refer to the Insurance Marketplace from the Rough Notes Company for help in finding a broker.