If you are entering into an international sale of goods, it is likely that you or your counterparty wants to insure the goods that are going to be shipped.
If you are familiar with Incoterms, you will know that under certain clauses, i.e. CIF Cost, Insurance and Freight and CIP Carriage and Insurance Paid To, insurance is specifically regulated in terms of who has to provide insurance and what minimum coverage must be provided.
Apart from the Incoterms that specifically mandate insurance, it is always advisable that the party that bears the risk of loss or damage while the goods are being shipped buys protection.
Since most of the global trade occurs by ship on cargo, we will discuss the most important types of marine cargo insurance.
As a general principle, there are six types of insurance coverage: voyage policy, time policy, valued policy, unvalued policy, floating policy, open cover.
These kinds of policies are incorporated into the Institute Cargo Clauses, that are common standards for marine cargo insurance (for a detailed analysis of each Institute Cargo Clause (A), (B) and (C) you can refer to our article about insurance clauses).
Voyage policy and time policy
A voyage policy is an insurance that covers a particular voyage only. If the shipment is set to leave Instanbul with destination Rotterdam, a voyage policy would cover that specific journey.
A time policy is a policy that insures the subject matter for a fixed time. A ship may be insured for two years starting at a certain date.
It is also possible to adopt a mixed policy, whereby the insurance covers a particular voyage and runs for a specified period, for example, if a ship is insured for a voyage from Dubai to Genoa, and then for 30 days after the arrival in Genoa.
A common practice is to cover for both pre- and post-shipment risks, as provided by all the Institute Cargo Clauses: cover from the moment the cargo leaves the warehouse or storage depot at the place named in the policy for the commencement of the transit until they are delivered to the consignee or final warehouse or place of storage at the port of destination, or the warehouse or storage place at the port of destination or prior to port of destination.
Where delivery has not taken place, cover continues for a period of 60 days from the time the goods are discharged from the vessel at the final port of discharge.
Valued policy and unvalued policy
A valued policy is an insurance coverage whereby the value of the goods insured is agreed by the parties. The agreed value does not necessarily have to reflect the actual value of the merchandise. What that means is that the buyer may push for a higher insured value in order to take into account the profits that he expects to derive from the goods.
Therefore, if the buyer purchases merchandise for USD 100,000 on which he expects a 10% profit, he might agree to insure the goods for USD 110,000.
While effective in protecting the buyer not only from the loss of the goods but also from the damage of not receiving the goods to the business, a valued policy must be communicated and agreed by the insurer, especially whenever the difference between the actual value and the agreed value is meaningful.
In an unvalued policy, the value of the goods is calculated according to statutory law; in the case of English law, these rules are dictated by the Marine Insurance Act and essentially provide that the insured value of the goods is their commercial value, plus transportation expenses.
As a result, an unvalued insurance policy will not allow for the inclusion of the profit margin in the value of the goods insured.
Therefore, a valued policy is the preferred kind of insurance in an international sale.
Floating policy and open cover
A floating policy is an insurance policy whereby the details about the shipment and the goods are not known completely at the time when the insurance policy is taken out.
That could be the case where the parties agree that the goods be delivered in different batches, and it is not known in advance the name of the vessels that will perform the shipment, the dates, etc.
Of particular importance is the value at which the goods are insured when the policy is issued. Suppose that the parties agree that USD 100,000 of merchansise be shipped in five different batches worth USD 20,000 each at five different times.
Every time a batch is delivered, the insurer will exhaust the value of the goods from the total amount insured, so that, after the first batch is delivered, the remaining amount at disposal will be USD 80,000.
The problem is that, if for any reason, for example the parties amend the contract to include an additional shipment or raise the value of the goods, the total insurable amount of the floating policy is still what was agreed when the policy was taken out, minus the sums that have been exhausted.
For example, the fifth shipment is worth USD 30,000 instead of USD 20,000, but the amount left in the policy is only USD 20,000, the insurance will cover the full amount of the goods, and a new policy would have to be underwritten.
To avoid this inconvenience, it is extremely popular in the insurance market nowadays to use a so-called open cover.
The open cover is not a policy, but simply an arrangement where the insurer undertakes to issue policies, floating or specific, when required by the assured.
In our previous example, had the parties agreed with the insurer an open cover, they could have requested a specific policy for any amount required, without having to negotiate a different policy underwriting each time, with the risk of letting the goods being shipped uncovered.
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