The importance of Cargo InsuranceAre you covered properly?

ATLANTA | BOSTON | CHARLESTON | CHICAGO | HOUSTON | LOS ANGELES | MIAMI | NEW YORK | SAN FRANCISCO | SEATTLE | TORONTO

Premier Provider of Innovative Insurance and Surety Solutions

“Avalon Risk Management is theofficially endorsed provider ofCargo Insurance for the SCTC “

-Special Pricing for Members

-Avalon partnering with Great American to provide reliable and comprehensive coverage

-All-Risk coverage

-Avalon has the authority to handle claims.

About Avalon

ChicagoBoston

New York

Atlanta

Miami

Houston

Los Angeles

San Francisco

Seattle

Charleston

Toronto

• Mid-sized insurance broker owned by founding management.• Eleven regional offices located in major North American ports.• Transportation insurance specialists.

What you will learn

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• History and Overview

• Need for Insurance• General Average

• Basics: Different coverage types

• Insuring shipments and Avalon technology

• Claims

History & Overview

• Traces of Cargo Insurance were found as early as 3000 B.C.– Piracy was also a common event.

• By the 17th Century, London was the hub of Cargo Insurance. – Edward Lloyd founded a coffee shop where underwriters and

traders discussed insurance transactions.

– Underwriters formed “Lloyd’s of London.”

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The need for cargo insurance

Why Insure?

• Rigors of shipping– Loss, damage and theft

– General Average (ocean)

• Carriers’ liability– Carriers only pay claims

when liable

– Liability is often limited

– Often have improper insurance or insufficient funds

• Usually in trucking or warehousing

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Ocean shipments

Ocean Shipments

• In the United States, the Carriage of Goods by Sea Act (COGSA) governs liability for ocean cargo. – Limits recovery to $500 per package or customary freight unit

(CFU) when the carrier/NVOCC is negligent. What is a package?• The smallest unit of packaging declared on the bill of lading. This could

be a whole container, a pallet, etc. Examples:– One 40-foot container S.T.C. 1000 packages of almonds. If the carrier is

liable, liability is limited to the lesser of the cargo’s value or 1000 x $500.

– One 40-foot container S.T.C. 1000 packages of almonds. If the carrier is liable, liability is limited to the lesser of the cargo’s value or 1 x $500

• In Canada, Hague-Visby applies. – 666.67 SDR per package or 2 SDR per kilo, higher than COGSA.

• Rotterdam Rules signed in 2009 will be the new liability convention. Needs to be ratified first.

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17 Hague-Visby Defenses

1. Neglect of carrier in the navigation or in the management of the ship

2. Fire (unless by fault of the carrier)

3. Perils, dangers, and accidents of the sea

4. Act of God

5. Act of war

6. Act of public enemies

7. Arrest, restraint, or seizure

8. Quarantine restrictions

9. Act of omissions of the shipper or owner

10. Strikes, lockouts, or labor stoppage

11. Riots and civil commotions

12. Inherent defect, quality, or vice of the goods

13. Insufficiency of packing

14. Insufficiency or inadequacy of marks

15. Latent defects not discoverable by due diligence

16. Saving life or property at sea (general average)

17. Any other cause arising without the actual fault of the carrier

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General Average

General Average

• Ocean loss. A voluntary sacrifice to save cargo/vessel/life.– Extraordinary expenses are incurred (i.e., jettison, fire).

• All cargo is seized. Amount of GA loss is determined.– Must post security deposits to release cargo.

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How General Average Works

• Assume $50 million in cargo was sacrificed.• The loss represents 20%of the contributing value.• Cargo owners must contribute 20% of their respective cargo

values, even if their cargo wasn’t damaged.

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Vessel and freight value $200 million

Saved cargo value $50 million

Contributing value (total) $250 million

General Average

• A guarantee must be posted to release the freight.

• If the cargo was insured, the insurance company provides the guarantee.

• Without Cargo Insurance, cash must be posted.

• General Average claims can take years to resolve.

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Domestic shipments: Air, Road, Rail, Warehouse

Domestic Shipments

• Domestic air, intrastate road carriers, and warehouse operators often limit liability to $0.50 per pound or $50 per shipment.– Based on bill of lading or warehouse receipt.

• Carmack Amendment applies to interstate carriers. – Dictates full value unless opted out by bill of lading, tariff or

contract.

• Some carriers may have inadequate or no liability insurance and be unable to fund a loss out of pocket.

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© Avalon Risk Management

Summary of Liability Limits

Statute Mode Customary Limit

Carriage of Goods by Sea Act (COGSA) Ocean $500 per Customary Freight Unit

Warsaw Convention (International) Air $9.07 per pound or $20 per kilo

Montreal Protocol (International) Air 19 Special Drawing Rights (SDRs)

Domestic Air (based on AWB) Air $0.50 per lb. and/or $50 per shipment

Warehouse Operators (based on receipt) Warehouse $0.50 per lb. and/or $50 per shipment

Local Carriers (based on bill of lading) Intrastate $0.50 per lb. and/or $50 per shipment

Carmack Amendment InterstateFull value, unless limited byrate/contract 

Cargo Insurance Basics

• You can insure freight by:

– Vessel

– Aircraft

– Truck/Rail

– Warehouse

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© Avalon Risk Management

Cargo Insurance Basics

If your policy is with a London Company or a company following the standard London format, your conditions will be governed by the London Institute Clauses (ICC) “A,” “B” and “C,”  which are similar to American terms “All-Risk,” “FPA” and “WA.”

Please refer to your cargo policy and our manual for a comparison.

Coverage Type What’s covered?

“All-Risk” Everything but what’s excluded

Free of Particular Average (FPA) Named perils only

With Average (WA) Adds “heavy weather” peril to FPA

Cargo Insurance Basics

• “All-Risk” coverage– “All risks” except exclusions

– Typical exclusions: (consult manual/policy)• Improper packing• Abandonment of cargo• Rejection/delay by Customs• Inherent vice

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Insuring Shipments

Variations in Value

• Must insure 100% of value, freight, duty and 10% margin to fully collect in the event of a claim.– Failure to insure 100% of cargo can result in a co-insurance penalty.

Sample calculation:Invoice value: $100,000

Freight charges: + $ 20,000

Sum $120,000

+ 10 percent + $ 12,000

Insured Value $132,000

Duty: $ 6,000

* can typically be insured for 1/3 of the marine rate

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Co-Insurance Penalty

• Sample co-insurance penalty calculation:– Insured value: $132,000

• As determined on previous slide

– Insured amount: $ 52,800• To save money, you insure the shipment for 40% of the value, or

$52,800)

– Claim amount: $ 40,000• Heavy weather caused damage to the goods

– Amount received: $ 16,000• Since the goods were only insured for 40% of the value, the client will

only receive 40% of the claim amount.

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Web Merlin™

• Avalon streamlines the cargo insurance process with Web Merlin, an Internet-based certificate issuance program.

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• Web Merlin verifies that:– The commodity is approved

– The origin/destination countries are approved

– The shipment’s value is within the policy limits

– The marine rate and premium is correct

– Insuring conditions are on certificate

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Web Merlin™

Cargo insurance claims

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Actual claims

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• Typhoon Vicente created rough waters and capsized this ship carrying a shipment of walnuts valued at $96,000 off the coast of China. – What is the carrier liable for?

• $0• Carriers are not liable for

“Acts of God”

• If uninsured, you would receive $0

• If insured, $FULL CLAIM PAID

Actual claims

• A trucker picked up a shipment of almonds at the shipper’s warehouse to be transported to be transported to a distribution center. Total loss valued at $68,000

• The driver caused an accident on the freeway by colliding with another truck.

• What would you do if the shipment was uninsured?– Local truckers limit liability to

$.50 per pound or as little as $50 maximum per shipment.

– You would have to pay nearly the full value out-of-pocket.

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Actual claims

• Two separate truck loads of walnuts a week apart were stolen in Tehama County valued at over $300K

• Thief got a hold of the correct purchase order from an online load board and impersonated a real trucking company.

• 3 times day in America cargo theft occurs, in the state of California it happens 2X as much as thee rest of the country.

• Because it was a theft , it is very difficult to receive any compensation, cargo insurance pays immediately.

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Actual claims

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• Exports of pistachios valued at 100,000 from Los Angeles to China were on this ship. Luckily, our client’s shipment was on the other end of this ship and was safe and was not affected by the fire.

• But, a General Average was declared. Would you know what to do?

– You didn’t purchase Cargo Insurance. Your shipment wasn’t damaged, but you must post cash for its release.

– If the shipment was insured, the insurance company would handle the General Average guarantee.

Actual claims

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-Pistachios contracted mold on it’s voyage to Germany-Surveyor was hired to examine the cargo-Claim was filed on behalf of my client-Claim was paid in less than 30 days

Timeframes to File Claims

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Air shipments

Damage (Hidden/Concealed) 7 (Warsaw) or 14 (Montreal) days from delivery

Delay 14 (Warsaw) or 21 days (Montreal) from delivery

Non-delivery 120 days from date of issuance

Statute of Limitations Suit filed within 2 years of arrival date

Ocean Shipments

Visible Loss/Damage Immediately

Non-visible Loss/Damage 3 days from discharge/delivery

Statute of LimitationsPer COGSA, suit filed within 1 year from date of delivery. Hague-Visby /FIATA bill of lading limit suit to 9 months

Domestic

Loss/Damage Immediately or 7 days from delivery

Statute of Limitations

Varies by carrier per bill of lading, freight receipt or tariff. On interstate trucking, the Carmack Amendment limits action to 9 months after date of delivery. In Canada, varies by province. Ontario: 2 years.

Warehouse

Loss/Damage60 days after delivery of goods or 60 days after the warehouse receipt holder is notified of the loss, whichever is shorter

Statue of Limitations9 months after delivery goods or 9 months after the warehouse receipt holder is notified of the loss, whichever is shorter

NCBFAA Terms & Conditions of Service

Loss/Damage/NegligencePer time frames for ocean or air above on entries, 75 days from liquidation

Statute of Limitations 2 years from date of loss or damage

CIFFA Trading Conditions

Loss/Damage 7 days from the completion of transit

Non-delivery/any other event 45 days from when the goods should’ve been delivered

Statute of Limitations 9 months

Questions?

• Any questions?

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For more informationKevin Ricciotti

310-258-2428 Direct lineKricciotti@avalonrisk.com

ATLANTA | BOSTON | CHARLESTON | CHICAGO | HOUSTON | LOS ANGELES | MIAMI | NEW YORK | SAN FRANCISCO | SEATTLE | TORONTO

Premier Provider of Innovative Insurance and Surety Solutions