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Paying Higher Freight Costs? - Marine Insurance Has Your Back

Our industry is in the spotlight like never before. 60 Minutes recently did a piece on Supply Chain challenges at the Port of LA, freight rates are at all time highs, and the increased Tariffs continue to play their role. As a shipper navigating these challenges, marine insurance may be the furthest thing from mind, but it shouldn’t be. If you think your cargo is always covered automatically to adjust for these changes, think again.

Marine Cargo Insurance Policies contain a "Valuation Clause" which defines the insured value for a shipment. The standard practice for determining values under this clause is CIF+10% (That’s Cost of the goods + Cost of Insurance + Cost of Freight Charges + 10% for incidental costs) designed to make cargo owners whole again.

Most marine policies also contain the "Full Value Reporting Clause" which requires the assured to report the full value of the shipment even if it exceeds the policy's limits of liability. However, insurers will not pay more than the policy limit that applies. It is important to understand the "Valuation Clause" is what determines the full value of a shipment.

The “Valuation Clause” on your policy is a good thing that is designed to respond to value fluctuations like the ones we are experiencing with freight charges today, however if not handled right, could result in only getting paid a fraction of your claim. In the world of insurance, there is concept called the "principle" of coinsurance that is applied to claims when cargo values are understated. In other words, if a shipment isn't insured for the full value, in the event of a claim, you will only be paid the percentage of the value insured. Therefore, if you under report the numbers by 50% of the actual insured value, that same ratio applies in the event of a claim. For instance, if the cargo value is 100k and you only report 50k to underwriters, a claim totaling 20k would be settled at 10K.

So how does that come into play here? With freight rates and duty margins much higher than normal, cargo owners should be working with their forwarder or insurance broker to adjust for those increased amounts in their reporting of values to the insurance company. All this added exposure can easily be covered for pennies on the dollar. Sounds like a great deal right? Well it is. Just make sure to advise your clients properly to avoid any issue with the principle of coinsurance. It’s a good time to remind your customers the value of using a logistics professional for marine insurance as these rapid industry changes could be off the radar of insurance agents that don't specialize in transportation. 

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