If your business relies on the Import & Export of goods and materials, then you must prepare for unique risks that face your operation by implementing risk management strategies and considering Import and Export Insurance. With so many complex transactions along the way, getting your goods from their point of origin to the final destination is a lot more involved than it sounds. Not to mention, the added liabilities that are created when operating on a global platform. So, when things do go wrong, the impact can have a devastating impact on your operation, supply chain (including customers), and your reputation. Some important considerations for importers & exporters include:
- What are the terms of sale and who is responsible for insuring the goods?
- Do I need Ocean Cargo Insurance?
- What are benefits of Trade Credit insurance and how does it protect my company?
- Does my company need Foreign Liability insurance?
- Is my current risk management strategy and insurance coverage adequate?
1. What are the terms of sale and who is responsible for insuring the goods?
The terms of sale are dictated by the contract outlining transfer of title. ICC Incoterms are a set of widely used terms of trade recognized internationally that outline the responsibilities of buyers and sellers. The terms are used in sales contracts when importing and exporting to define the parties’ responsibilities and liabilities for the goods through the shipment process. One of the important items determined by the terms of sale is at what point each party is financially responsible for the goods. If you fail to establish in the contract when risk transfers and a loss subsequently occurs, the resulting dispute of ownership will most likely be resolved in court.
There are 11 incoterms as of 2020, with common incoterm examples including:
CIF – Under (CIF) the Cost, Insurance and Freight are expenses paid by the seller. Therefore, the company exporting the goods will be responsible for insuring the goods while in transit.
FOB – Free On Board is a shipment term indicating that the seller OR buyer may liable for the goods if lost or damaged while in transit. FOB refers to the point where a specific party to the transaction assumes ownership of the goods
EXW – Ex Works – refers to a transaction where the seller of the goods fulfills his obligation to deliver where he has made the goods available at his premise. The purchaser would assume liability for the goods from the point of origin at the seller’s facility.
2. Do I Need Ocean Cargo Insurance?
Depending on the terms of sale, your company may be responsible for insuring the goods from your supplier’s warehouse until they arrive at your facility or your customers location. When seeking out a comprehensive import and export insurance solution, you must consider a flexible form of coverage called Ocean Cargo Insurance.
Ocean Cargo Insurance covers goods in the ordinary course of transit, anywhere in the world, from warehouse to warehouse. The policy is written to indemnify the exporter or importer for damage to their products, which may include, but not limited to, consumer goods, chemicals, food products, machinery, metals, pharmaceuticals, and other perishables.
What does the Ocean Cargo policy cover?
Goods Insured: Shipments of all lawful goods and/or merchandise, as agreed by the carrier, subject to the terms and conditions of the policy. Coverage may include shipments by air, land, and sea as well as goods at exhibitions and salespersons samples.
Warehouse to Warehouse Coverage: Depending on the terms of sale, the Cargo Policy is designed to cover the goods at the point of origin during the shipment and inland transit through final delivery at the buyer’s facility.
General Average: In the event the Captain orders cargo to be jettisoned for the safety and benefit of the vessel and crew the remaining shippers of record will be required to contribute to offset the losses.
How are products valued on the Ocean Cargo policy?
In the event of loss, an important consideration is the value of the goods to determine the insured value.
CIF plus agreed %: Cost of goods, insurance and freight plus and additional agreed %
Selling price: Insurers traditionally offer the flexibility to insure goods at the buyers selling price
How much does an Ocean Cargo insurance policy cost?
Cargo policy premiums take into consideration several factors including:
- Type of goods or commodity being shipped . As an example, perishable goods are more susceptible to damage or loss in transit compared to plastics and would therefore have a higher rate.
- Geography. Where are the goods being shipped from?
- Storage requirements and limits and location of warehousing facilities
- Optional coverages
Which optional Ocean Cargo coverages are available?
Stock Throughput: The stock throughput policy combines worldwide transit and storage exposures into a single policy. This policy includes continuous, comprehensive coverage for all stock and materials in trade, wherever you have an insurable interest.
Contingency for Unpaid Vendor: In the event you export on terms of trade where the importer is responsible for the insurance and payment terms have been extended, Contingency for Unpaid Vendor provides you with protection in the event of loss if the other parties’ carrier is non–responsive or your customer is refusing to pay for the goods.
Guaranteed Outturn: The coverage is added on to policy for bulk shipments I.e. grains, ore and petroleum that protects the party liable for any shortfall in volume or weight of the load and discharge.
What are some examples of Ocean Cargo exclusions?
Unexplained Loss or Shortage: If upon arrival or unloading goods or materials are found to missing from a closed container or an unexplained shortage occurs to certain goods and commodities, the policy will not provide coverages.
Improper Packaging: When packing is performed by the named insured, they are responsible for properly preparing and packaging the goods for their intended shipment.
Inherent Vice: Damaged to goods in transit that arise from a condition or physical nature of the goods is not covered.
3. What are benefits of Trade Credit insurance and how does it benefit my company?
Trade Credit Insurance, sometimes referred to as receivable management, provides sellers with protection for unpaid credit balances from sales made to your customers. The policy can be written to insure all receivables or select customers. This policy is not only applicable to international transactions but domestic as well. Insuring receivables can also help in obtaining better borrowing terms from lenders. It is easy to worry about customer insolvency or delayed payments when engaging in everyday business transactions, this product has been developed to minimize the risk to your company.
What is the goal of Trade Credit insurance?
The goal of the Trade Credit insurance policy is to indemnify losses as they arise and help businesses prevent foreseeable losses from occurring. Insurers provide businesses with services to help strengthen their credit management practices. Carriers may offer policyholders the following services: Proactive customer credit monitoring, foreign market analysis, management of outstanding receivables, and proactive debt collection procedures.
Is Trade Credit the same as a Letter of Credit?
No. A Letter of Credit is a commitment issued by your bank to reimburse your company, as the exporter, in the event your foreign buyer, and importer of record fails to settle. A Trade Credit policy on the other hand is issued by an insurance company to protect your accounts receivables in the event your customer does not pay. The carrier will then take the lead on efforts to reduce the overall loss which is in your best interests.
How much does a Trade Credit insurance policy cost?
The cost of Trade Credit insurance varies by insurer and the risks being covered. Policyholders can choose to insure single transactions or all sales. The policy is often written on all turnover and rates are generally a percentage of that turnover figure.
4. Does my company need Foreign Liability insurance?
Would you be surprised to know that most standard General Liability policies do not afford coverage if a suit is brought in a foreign jurisdiction. However, if goods or materials in which you are the supplier of record cause body harm or property damage your firm can absolutely be held responsible.
Foreign Liability Insurance is similar to domestic liability coverage; however, it applies to foreign occurrences and includes protection for U.S. occurrences when a suit is brought outside of the U.S. For example, manufacturers and distributors that sell products outside of the U.S. may be sued in foreign jurisdictions. A U.S. based policy typically only covers lawsuits that are filed in the U.S., Canada, or U.S. territories.
5. Is my current risk management strategy and insurance coverage adequate?
This industry is highly specialized and Import and Export Insurance should just be a part of your overall risk management strategy. Consider the risks that face your unique operation and implement best practices accordingly. Some notable factors to analyze are:
- Goods being imported and/or exported
- Terms of trade
- Types of shipments i.e. containerized or bulk
- Foreign exposures
It’s important to partner with a firm that has the expertise to understand your import / export operation and its unique exposures. The team at Biscayne Risk Group specialized in working with companies in the import / export industry and is ready to show you what differentiates our level of service.