By protecting shippers from financial loss due to lost or damaged cargo, cargo insurance has always been an important consideration for companies managing both international and domestic shipments. In light of the current supply chain disruptions and numerous high-profile transportation challenges, more shippers are using cargo insurance to help reduce risk and address these uncertainties.
Disruption is Everywhere
One of the most publicized, pandemic-era transportation problems involved the Ever Given, a huge container ship that blocked the Suez Canal last year. The blockage not only created delays for the cargo aboard the ship and those that it kept from moving through the waterway, but the aftermath forced shippers to stop and think about how well they were actually covered on the insurance front.
That’s because the Ever Given’s owners declared a general average following the work to refloat the ship in the Suez Canal. This maritime law principle requires both the ship’s owner and its customers to pay a proportionate amount of the costs associated with saving a vessel. For shippers that didn’t have cargo insurance, the bill was likely a hefty one.
Those companies that made a small, upfront investment in cargo insurance probably had peace of mind knowing that their obligations were covered. The same goes for any company whose freight is impacted by weather, damage, pilferage or other peril. In the current, disruptive environment, the odds that a major event will impact the smooth movement of freight from origin to destination have increased.
“The biggest word right now is disruption, and whenever there’s a disruption to an existing pattern, the risks tend to increase,” said Andrew Ashenhurst, General Counsel and Head of Insurance at DB Schenker. This occurs because shippers start using new routes, working with new partners and experimenting with different modes of transportation.
For example, freight that once only moved by air may now be transported by ground due to a lack of air freight capacity. This shift may introduce unknowns that, subsequently, increase the potential risks—the kind of risks that can be avoided, mitigated or addressed with an investment in cargo insurance.
“People generally buy insurance because they are concerned about risks that they can’t control. In today’s climate with Covid, increased geopolitical issues and other factors, there are certainly a lot of risks that people can’t control. Disruption equals more risk, which generally equals a greater need for insurance, and especially cargo insurance.”
Have Early Conversations About Insurance
With shipping costs continuing to escalate, the financial impacts of lost, damaged or stolen cargo is also growing. Without cargo insurance, a company may have to 1) cover the cost of the initial shipment, and 2) also pay for the replacement shipment. This may have been less of a concern when shipping rates were low, but it’s a major issue now that container shipping, trucking and air freight rates are all rising.
Because cargo insurance covers the cost of shipping replacement cargo, it adds a layer of protection for the companies that use it. To get the biggest benefit from this investment, Ashenhurst tells shippers to insure the cargo before it leaves the dock. This is important because, much like any other type of insurance coverage, it has to be purchased in advance of the actual cargo movement.
For best results, start the conversations about cargo insurance at the same time that you book the shipment with your logistics provider. “That’s the time to have the conversation,” Ashenhurst emphasizes, “not when the shipment is already on the water. By that time, it’s already too late.”
When obtaining the insurance, companies should consider both the value of the cargo and how much it will cost to ship replacement cargo. An exporter that’s shipping $3 million worth of product to a customer and that suffers a loss, for example, may wind up paying $500,000 or more out of pocket to re-ship the goods without adequate cargo insurance coverage.
Ashenhurst also tells shippers to factor in the possibility of a general average declaration, and warns that it doesn’t take a monumental event like the Ever Given’s Suez Canal dilemma for a carrier to invoke this maritime law principle. “If your cargo is on a sinking boat and has to be jettisoned in order to save lives and the ship, you may be on the hook for general average,” he explains. “Cargo insurance kicks in to cover the losses.”
Digitalizing the Experience
Knowing that customer education is crucial in the logistics sector, Ashenhurst says DB Schenker works to ensure that shippers understand the potential risks involved with their transportation activities. It then works to mitigate those risks in advance using tools like cargo insurance.
“Our customers ship with us because they trust us to take care of their cargo,” he says. “If they have questions about insurance and risk we work to provide rapid responses to those questions.”
DB Schenker is also digitalizing the insurance coverage and claims processes with the goal of facilitating the cargo insurance purchase and claims submittal processes. “We’re always looking for ways to use technology to make that process less onerous for the customers and also get them faster answers,” says Ashenhurst. “This is one of our major focuses this year, and it will continue to be important in the future.”