What is a 3rd Degree Cargo Insurance: Benefits, Types, and Coverage
When your freight is in transit, it is prone to risk that can damage or cause the loss of your shipment. If a shipment was lost at sea because the container ship sank, the carrier liability is usually not enough to cover the value of the freight. If your truck was involved in an accident, you just lost two assets — your truck and your goods.
That’s why it’s important to consider a 3rd Degree cargo insurance for your freight. It allows you to save time and money if your cargo is lost or damaged.
And through this article, you’ll learn more about cargo insurance and its benefits, types, and coverage.
What is 3rd Degree Cargo Insurance?
3rd Degree Cargo insurance protects you from financial loss due to damaged or lost cargo. It pays you the amount you’re insured for if a covered event happens to your freight. And these covered events are usually natural disasters, vehicle accidents, cargo abandonment, customs rejection, acts of war, and piracy.
It is also different from the carrier liability and insurance policies that are usually available from dedicated cargo and freight insurance companies, freight forwarders, agents, and large brokers.
What are the benefits of Cargo Insurance?
The primary benefit of cargo insurance is that you minimize your financial loss even if your shipment is damaged or lost. The small investment (a.k.a. the premium) you pay provides peace of mind as your goods leave your supplier warehouse.
It also includes these advantages for your business:
Your cash flow is protected from unforeseen stoppages
Profits are still generated if coverage includes it
Efficient procedure of claims because of professional service
Simplified reporting of losses
When do you need a 3rd Degree cargo insurance?
Generally, it’s always advisable to get cargo insurance for your shipment even if it’s not required by law.
Your freight is exposed to a lot of risk as it moves through different hands, different trucks, and different ports. There are also external factors such as weather and traffic conditions. So the longer it is exposed to risk, the more likely it is to be lost, stolen, or damaged.
Also keep in mind that even if the carrier is legally liable, their limit is usually less than the value of goods that are commonly shipped. Ocean freight carriers are liable for only up to US$500 per package/shipping unit or the actual value of the goods, whichever is less. Air freight carriers, meanwhile, are only liable for 19 SDR (~US$24) per kilogram. Based on these numbers, you could still lose a significant amount of money without any cargo or freight insurance.
However, there are situations where it may be unnecessary. It’s important to look at the incoterms of your contract because certain ones remove the burden from you at certain points in the shipping process. Determining the full scope of the contract allows you to save money because you only pay for insurance when it’s needed.
Types of Cargo Insurance
Cargo insurance is mainly categorized into land and marine cargo insurance (which also covers air cargo).
Land cargo insurance
This type insures cargo that is moved by land transportation, which includes trucks and small utility vehicles. It covers theft, collusion damages, and other risks involved in land freight shipping. It is also typically used for domestic cargo since its scope is only within a country’s boundaries.
Marine cargo insurance
This type insures ocean and air freight and it’s mainly used for international shipping. It covers damage due to loading/unloading, weather conditions, piracies and other risks faced by ships and aeroplanes.
There are also several kinds of marine cargo insurance policies, which we’ll discuss down below.
Open coverage
This covers freight for a specific period (usually for a year) and multiple shipments can be included under one policy. This is an efficient tool to manage risk if you ship frequently. It also has two kinds:
Renewable. The policy can be renewed after a shipment is delivered, making it more suited for single trips and voyages.
Permanent. The policy can be enforced for a certain period and allows unlimited shipments within that time frame.
Single coverage
Also known as a specific coverage policy, this covers freight on a per shipment basis and is ideal for businesses who ship infrequently.
Contingency
There are some instances where the customer is responsible for the insurance instead of the seller. And if the customer receives damaged goods, they tend to avoid the liability by refusing to accept them. The seller can ask for help from the legal system but it is a costly procedure and he can also lose the case.
To avoid further losses, this is the type of policy that a seller uses even if the customer failed to insure the shipment. It is also cheaper for the seller, who doesn’t have to inform their customer about its application.
Free from particular average
This type only covers major damage or loss to the cargo unless partial loss or damage is due to stranding, sinking, burning, or collision. The shipper is only liable for a significant portion of his shipment in case of its damage or loss.
It also covers risks not included in an all-risk coverage policy, like:
Acts of God
Collision
Bad weather conditions
Sinking
Derailment
Theft
Non-delivery of cargo
Warehouse to warehouse
This type covers the freight once it is unloaded from the ship and is on its way to the customer’s warehouse. It only applies to your cargo even if it is transported with other freight in the truck.