INSURANCE COVERING EXPORT/IMPORT SHIPMENTS:
MARINE INSURANCE

Marine insurance is the general category of insurance covering the risks of physical damage to property (goods) in transit. It covers goods purchased (shipped) from domestic and foreign sources, and sales (shipments) to domestic and foreign customers. Domestic shipments are insured under the Inland Marine (Domestic Transit) Policy of the corporate property insurance portfolio. Jurisdiction for determining the extent of liability between the common carrier and the domestic shipper/recipient of the goods is vested with the Interstate Commerce Commission (ICC) under the U. S. Department of Transportation. Interpretation of each party's degree of negligence, absolute and monetary, is defined by ICC. Inland marine insurance not only protects the domestic shipper/recipient of goods against losses falling within its responsibility (Acts of God, etc.) but also transfers subrogation time-and expense to its insurance carrier.

Foreign sourced or destined shipments, however, including the in inland U.S. portion of transit, do not fall within the auspices of ICC when the shipper's/recipient's responsibility for product extends beyond the territorial limits of the U.S. and Canada. International maritime law, largely by tested precedent through Lloyd's of London, determines the extent to which responsibility for product (and loss or damage) is vested with the shipper/recipient or the ocean carrier. For this reason, a differing interpretation of negligence and responsibility, foreign shipments are covered by a separate Ocean Marine (Cargo) Policy.

As a shipper/purchaser of goods destined for/shipped from foreign countries, one's direct responsibility for damage to goods in transit "product risk" is determined by the method of invoicing employed. However, as an unpaid vendor, a shipper may have indirect responsibility from the standpoint of a U.S. exporter (shipper) of product. You have simply to reverse the concepts discussed to view the situation from the standpoint of a U. S. importer (purchaser).

I. Product Risk.
As indicated, direct responsibility for goods in transit is determined by the method of invoicing. Four major categories of invoicing are:

1) FOB - "Free on Board"
2) FAS - "Free Along Side"
3) C&F - "Cost and Freight"
4) CIF - "Cost, Insurance and Freight"

As an exporter of product, one's responsibility for physical damage to goods in transit is least when product is invoiced on terms of "FOB U.S. Plant", and greatest when the terms of the invoice are "CIF" (warehouse to warehouse). The precise definition and interpretation of the various means of invoicing may be found in the most updated "Revised American Foreign Trade Definitions - 1941". (NOTE: In 1990 these definitions were updated and designated.- "INCOTERMS". Please refer to Appendix "A" which sets forth these "INCOTERMS".)

At first glance it may seem most logical for an exporter to relieve itself of product responsibility at the earliest point in time. When viewed purely from the standpoint of direct responsibility for physical damage to product, this is certainly the most expedient route.

Alternatives to relying on the buyer to obtain and maintain satisfactory marine insurance on the products would be for the exporter to obtain the insurance itself or through its freight forwarder. In any event, contrary to what may seem most logical or expedient, the exporter is wise to carefully evaluate the merits of maintaining its own marine insurance.

II. Money Risk.
A prudent exporter should also consider the "money risk" associated with each sale whenever payment for product is to be made on any terms other than cash in advance or irrevocable letters of credit confirmed by a U.S. bank. In such situations, the exporter is placed in the position of being an unpaid vendor and payment for its products may be unduly delayed or even refused because of damage to the goods in transit. In the event the buyer has neglected to properly
insure against such damage, the exporter may have litigation as its only recourse for payment if the buyer subsequently refuses to pay for damaged goods.

Since foreign credit selling is rapidly becoming the rule rather than the exception, U.S. exporters are increasingly assuming the responsibility for physical loss or damage to goods in transit.

Letters of credit are a very costly and oftentimes a cumbersome means of payment. Cash in advance is uneconomical. Credit is becoming a bonafide marketing tool for U.S. exporters and is often the deciding criterion for closing an export sale.

III. Evaluating the Proper Method for Handling Marine Insurance.
Based on the foregoing discussion, there may be several pitfalls, not readily apparent, which may warrant an exporter to carry its own Marine Insurance even though, at first glance, this may not seem to the most expeditious means of administering an export sale. Export sales, as opposed to domestic sales, inherently require more paperwork and closer administration. Initially, it may seem imprudent to voluntarily assume this additional responsibility. However, any of these pitfalls can have an important bearing on an exporter's international business and its profits especially because of the "money" risks involved.

Additional administration of one's own Marine Insurance can be virtually eliminated by retaining the services of a skilled insurance agent of broker in conjunction with a knowledgeable freight forwarder. Following will enumerate certain of the above mentioned pitfalls which must be considered as potential occurrences.

1. Incomplete/Inadequate Coverage.
By relying on others to insure the shipment, the exporter is never sure that complete Marine and War Risk Insurance is in effect. Often this is never known until a loss and then it is too late.

Contractual responsibility may mean very little and the exporter has little choice but to bear the loss itself or undertake costly foreign litigation in order to be repaid.

2. Freight Forwarder not Tailored Coverage.
If insurance is placed through a freight forwarder, the exporter cannot always be certain that coverage is as broad as necessary. What may result are several instances (otherwise unknown) when the buyer itself may be responsible for coverage. This can prove embarrassing to the exporter.

3. Coverage Unavailable in Host Country.
In some countries "all risk, warehouse-to-warehouse" coverage is not available. If a loss is incurred and not covered by such insurance the buyer may look to the exporter to make good for any amounts not paid by its own insurance company. Interpretation and settlement of claims might result in an opinion that all, or a substantial part of the loss could have been prevented by the exporter (different packing, alternative routing, etc.). These misunderstandings do not promote good business relations between seller and buyer and can be alleviated by controlling one's own insurance. Your own representative sees to it that all of the pertinent facts are brought to the attention of the insurance company at the outset of issuance of the policy or at the time of a loss. In this way you can be assured that the rates charged have fairly taken into account these factors.

4. Title Transfer - Uncertainty/Confusion.
Often there arises misunderstanding or uncertainty as to the point at which the products become the buyer's responsibility. When this occurs, a buyer often will not pay drafts or even accept them if the goods fail to arrive, or arrive in a damaged condition.

5. Buyer's Financial Difficulty.
If the buyer should get into financial trouble while shipment is enroute and the shipment becomes lost or damaged, its insurance company might settle directly with the buyer and the exporter would merely become a general creditor in order to be repaid. When the insurance on the products is placed in U.S. dollars in the U. S., the exporter is guaranteed, in case of loss the availability of dollars for replacement product without unnecessary delay.

6. Local Currency Exchange Risk.
If the buyer collects for a loss in its own currency, an exchange fluctuation may not provide enough U.S. dollars for a replacement shipment. In some countries exchange controls limit the buyer so that dollars are not available until the goods have actually cleared customs. If the products were lost or damaged in customs, the buyer would be unable to get dollars to pay the exporter. With its own policy, immediate payment in U.S. dollars is assured the exporter.

7. Centralized and Uniform Service.
In case of a loss or claim, Export Insurance Services, Inc. (the exporter's own insurance broker and advocate) stands between the exporter, the shipping company/carrier and the buyer in order to expedite a claim. Our primary interest is in representing and servicing you, our insured. Maintaining a centralized, uniform claims procedure is a major benefit of managing one's own Marine Insurance. The insurance company with which you are placed will have access to surveyors around the world and, should a claim occur, a survey representative is immediately dispatched to assure proper protection of the property and speed in the settlement of a loss. Also, we have access to trained experts in the areas of packing and shipping, which may be of assistance to you in order to reduce the chances of a future loss from occurring. There are relatively few knowledgeable Marine underwriters in the world, and these are the underwriters with whom we arrange coverage for our clients.

"Contingency" insurance may, however, be necessary when the local laws of a country require that importers insure domestically. For example, the laws of Mexico and Colombia in the Western Hemisphere, and a few countries elsewhere, require imports to be insured locally. Contingency coverage would be required in these cases. Contingency coverage is also a hedge against the failure or inadequacy of another's insurance on FOB or FAS sales where credit has been extended. This coverage is necessary in order to complete a comprehensive policy of Marine Insurance for the exporter.

The program we generally recommend provides "all risk, warehouse-to-warehouse" coverage with a predetermined limit per vessel via any appropriate means of transportation selected. Upon issuance of the Marine Insurance policy, the exporter is provided a schedule of rates applicable to its specific need (i.e. rates by conveyance and destination). Each policy is rated based on the many unique characteristics of its particular operations. Some of these variables are: product, packing, route of shipment, transshipment, types of carriers, unit and carton values, salvage potential, etc. Because of the interrelationship of these many variables, it is impossible to set forth a specific rate schedule applicable to every exporter's operations. Suffice it to say that the rates applicable under the exporter's own policy will be an accurate assessment of the risks involved, and generally will be lower than those provided by the freight forwarder or buyer. For example, the rates of a freight forwarder are delineated by broad product lines and tend to overstate hazards in transit if a product does not conveniently fall within the indicated categories.

We are able to obtain a firm quotation at your direction which will serve to identify the particular facets of your own business. This quotation is available at no charge, and is certainly deserving of comparative analysis with any existing program. We would be most willing to obtain this quotation and assist in its careful evaluation and explanation.

The basic rate schedule provides for CIF terms of sale computed on a cargo's value at "CIF + 10%" to include a margin for reimbursement of additional expenses which occur after a loss. Contingency coverage would be provided at approximately 30-50% of the basic CIF rates.

A separate "War Risks" policy would be issued in connection with the basic Marine Policy. The rates would be approximately $.02 - $.03 per $100 of insured value for most countries, but can vary almost daily for selected markets. For some countries, war risks rates are controlled by a central governing organization within the United States and can change without notice.

In summary, we feel that an exporter is only fully protected for its exports when it administers its own program of comprehensive marine insurance. You should be aware of the many contingencies which may cause an irretrievable loss due to damage to goods in transit, especially when reliance is placed on someone else-to provide adequate protection. It is our tested opinion that the only way to adequately protect goods in transit against loss from physical damage, at rates which are most economical, is to administer one's own Marine Insurance program.

We would be very pleased to obtain a firm quotation concerning the applicable costs of a Marine Insurance program for anyone. The quotation is available at no cost and may be carefully evaluated against existing coverage and expense.

P.O. Box 211837 - Augusta, Georgia 30917-1837
Telephone: (706) 210-4379 - Fax: (706) 210-4389
E-mail: info@exportinsurance.com

© 1999 Export Insurance Services, Inc. All Rights Reserved.