When your business operations extend to the global market, ensuring the safety of your products during transit is non-negotiable.
There’s a certain amount of risk with ocean freight or air freight imports. From natural disasters, aka “Acts of God,” to shipping route disruptions, anything can happen to your cargo while it’s in transit. Because these incidents can lead to cargo loss or damage, further translating into business losses, operational downtime, and dissatisfied customers, it’s important to have a way to mitigate these losses.
The best and most effective risk mitigation in this instance is insurance. However, a quick online search for the types of insurance that an SMB or eCommerce importer can buy often leads to freight or cargo insurance. These two are often used interchangeably, but they’re not the same.
In this post, we’ll be doing a breakdown of freight insurance vs cargo insurance. By the end of the post, you should be able to tell the difference between the two and decide which is best for your organization.
Freight Insurance vs. Cargo Insurance
Here’s a quick summary of both insurance types, including their pros and cons:
| Freight Insurance | Cargo Insurance |
| Freight insurance covers liabilities due to a freight forwarder’s errors. | Cargo insurance provides shippers with coverage and protects them from losses. |
| Pros | Pros |
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| Cons | Cons |
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| Best For | Best For |
| Best for freight forwarders seeking to protect themselves from liabilities arising due to their errors or mistakes | Best for shippers, importers, consignees, and anyone importing or shipping freight via air, sea, land, or rail and requiring an insurance policy that protects their cargo while in transit |
We’ll discuss these in detail later in the post. However, if you need affordable and reliable insurance policy coverage for your shipments, we offer excellent cargo insurance with up to a $2 million limit at Ship4wd.
Sign up with us to enjoy peace of mind.
What is Freight Insurance?
Freight insurance, also sometimes referred to as Freight Forwarders Liability (FFL) insurance or Freight Service Liability (FSL) insurance, is intended to protect freight forwarders and similar service providers. Unlike cargo insurance, which compensates for the actual value of lost or damaged goods, this policy provides liability coverage for the service providers themselves. It can be considered a form of professional indemnity insurance, covering the forwarder against liabilities that arise from errors during the transportation process.
How Much Does Freight Broker Insurance Cost?
Freight broker insurance, an insurance plan available to entities that broker freight, negotiate shipping carrier rates, and arrange for the transport of freight from the point of origin to the port, can cost anywhere from $47 a month to $1500 per year.
It all depends on the coverage type they require.
There are four types of freight broker coverage:
- Contingent cargo insurance: Costs $125 monthly or $1500 annually and provides a policy limit of up to $2 million.
- General liability insurance: Costs about $108/month or $1300 per year with a policy limit of up to $2 million.
- Freight broker surety bond: Also known as a BMC-84 freight broker bond, this is priced at about $85 a month or $849 a year with an annual maintenance value of $75,000 per the Federal Motor Carrier Safety Administration (FMCSA).
- Errors and omissions insurance (E&O): Priced at approximately $48 monthly and $567 yearly with a policy limit of up to $5 million.
How to Calculate Freight Insurance
Here’s a step-by-step guide on calculating freight insurance:
Step 1: Calculate the Total Insured Value (TIV). To do this, add the commercial invoice value of your cargo to the freight cost.
For instance, let’s say the commercial invoice value of your cargo = $100,000. Freight cost = 10,000 at 10% of freight value.
So, the total insured value is: $100,000 + $10,000 = $110,000
Step 2: Find the insurance rate. This is usually between 0.3% and 0.5% of the shipment’s commercial invoice value.
Step 3: Calculate the premium. To do this, multiply the insured value by the insurance rate.
In this case, if the insurance rate is 0.5%, the freight insurance would be: $110,000 x 0.005 = $550
How to Get Freight Insurance
It’s easy to buy freight insurance from the carrier, freight insurance agents or brokers, online freight insurance companies, or other insurance providers.
You can choose from one of two types:
- Basic freight insurance: Most shipping carriers provide basic freight insurance for all cargo transported on their ships. However, while basic freight insurance is cheaper than All-risk insurance, it’s cheaper for a reason: it has significant exclusions and may not cover certain types of goods.
While it covers cargo loss and damages, there are often limits to coverage, including a maximum amount per pound of cargo. This means that the policy limit may be lower than the commercial invoice value of the shipment. Therefore, if anything happens to the cargo, you may not recover the full value of your shipment.
- All-risk freight insurance: All-risk freight insurance, on the other hand, is a broad-form coverage type. It provides comprehensive coverage for significantly more risks than basic freight insurance.
Because it’s more comprehensive, policyholders can tailor or customize their insurance requirements. The policy coverage often extends to fire, theft, cargo loss, natural disasters, unintentional damage, etc.
What is Cargo Insurance?
Cargo insurance protects the party who employed the freight forwarder in the first place, usually the importer or exporter of goods. The purpose of the policy is to cover the actual value of the goods. It is designed to assure shippers that almost any damage or loss of value to the goods in transit will be compensated if something goes wrong.
What is Contingent Cargo Insurance?
This insurance policy is available for freight forwarders, brokers, logistics companies, and other parties in the international shipping and logistics industry.
Costing just 0.1% to 0.5% of the cargo’s commercial invoice value, it’s a “backup” insurance policy that kicks in when the primary cargo insurance isn’t able to cover all the losses and damages due to inadequate policy limits, exclusions, or other reasons.
Contingent cargo insurance often provides that extra layer of protection and covers gaps that the primary insurance doesn’t. Examples of losses that it covers include theft, fire damage, storage fees, general average sacrifices, cargo loss or damage, and customs fines or penalties.
How Much Does Cargo Insurance Cost?
It depends on the length or type of cargo insurance policy:
- One-off or pay-as-you-go cargo insurance policies cost between $20 and $150 monthly.
- Annual insurance coverages cost from $400 to $1800.
Note: This is dependent on policy limits.
Higher premiums naturally attract higher policy limits. For instance, $50,000 policy limits can cost a maximum of $700 annually, while $250,000 limits may cost a maximum of $1800.
At Ship4wd, we provide comprehensive all-risk cargo insurance for SMBs and eCommerce businesses. While our cargo insurance policy limits are $2 million, you can obtain cargo insurance for as low as $20.
How to Calculate Cargo Insurance
To calculate your cargo insurance, do the following:
1. Determine the insured value: This means commercial invoice value (CIV) + freight fees. E.g., suppose CIV = $20,000, while freight fees = 10% of CIV.
Insured value: $20,000 + $2,000 = $22,000.
2. Calculate premium: To do this, use the following formula: insured value x insurance rate (between 0.3% and 0.5% of CIV). So, using the insured value above and a 0.3% (0.003) rate,
Cargo Insurance: $22,000 x 0.003 = $66
How to Get Cargo Insurance
As an SMB and eCommerce business owner, the easiest way to obtain cargo insurance for your imports is through freight forwarders like Ship4wd, which carry comprehensive policies.
Although you can sign up with big insurance companies, the process is often tedious and time-consuming, the premiums are usually high, and the insurance companies typically prefer to work with large importers.
With Ship4wd, however, the process is fast and straightforward.
Sign up with us today to check out and take advantage of our fast and reliable cargo insurance services.
What Are the Key Differences Between Freight Insurance and Cargo Insurance?
Freight insurance and cargo insurance, though closely related, have their own unique aspects. Anyone looking to secure their shipments against potential losses must thoroughly understand their differences and how they apply to various situations. This knowledge ensures that businesses and business owners can make informed decisions regarding insurance plans and requirements, providing peace of mind and financial protection.
Scope of Coverage
Freight insurance aims to protect freight forwarders who might be liable for any damage or loss of goods in transit. In this scenario, compensation is provided if it can be proven that the damage or loss resulted from the freight forwarder’s error or negligence. This type of insurance does not directly compensate the shipper for the value of the goods; instead, it covers the legal liabilities of the freight forwarder, providing a safety net against unforeseen incidents that occur due to their fault.
In contrast, cargo insurance provides essential coverage for businesses involved in international shipping. This insurance policy offers compensation for losses without the need to prove the shipping company’s fault or negligence. It safeguards against various risks such as accidents, adverse weather, fire, natural disasters, and mishandling during the loading and unloading stages.
Value of the Claim
The value of a cargo insurance claim, known as the Total Insured Value (TIV), is determined based on the commercial value of the goods shipped, including their cost and additional expenses like packing and transportation. It’s calculated to align with the insurance policy’s coverage limits to ensure full compensation for loss or damage without exceeding the policy’s maximum coverage amount. This ensures the cargo insurance policy provides appropriate coverage and premium rates.
On the other hand, the value of a freight insurance claim is typically based on predetermined limits set by international conventions governing the respective modes of transportation – sea, air, or road freight. These conventions place ceilings on the maximum compensation due to the shipper for a freight forwarder’s liability. The compensation amount is often calculated on a per package or per weight basis rather than being directly tied to the nature or value of the goods themselves. This is because the contractual framework for employing a freight forwarder is usually based on transporting a certain weight and/or dimension of goods, irrespective of the specific contents or their commercial value.
Who Pays for the Insurance?
Cargo insurance is available to anyone looking to insure their goods while they are being transported. This type of policy compensates virtually the entire value of the goods if they are lost or damaged, requiring policyholders to inform the insurance company about the estimated value of the cargo being shipped. Typically, the responsibility for securing cargo insurance generally falls on the shipper, who can acquire it through their trusted freight forwarder. However, this responsibility can vary depending on the Incoterms agreed upon in the contract. For example, under CIF (Cost, Insurance, and Freight) terms, the seller is required to secure insurance for the goods until they are delivered to the port of destination. In contrast, under FOB (Free on Board) terms, the buyer becomes responsible for the goods once they are loaded onto the ship at the port of origin, including securing any necessary insurance from that point forward.
Freight insurance, in contrast, is specifically designed for freight forwarders and other related service providers. It serves as a safety net against unforeseen liabilities that may arise from negligence or mistakes during the shipping process. The freight forwarder who arranges the transportation typically pays for freight insurance. This cost is then usually passed on to the customer as part of the shipping quote, meaning it is included in the overall cost paid by the shipper.
Freight Insurance Vs. Cargo Insurance
The following table helps illustrate the main differences:
| Freight Insurance | Cargo Insurance | |
| Policy Type | Basic and all-risk insurance policy. | Basic, named perils, and comprehensive insurance. |
| Deductibles | $0 to $1,000 for shipments valued at less than $10,000 to $100,000. 2% of shipment value for cargo valued at more than $100,000. | The standard deductible is $1,000. However, flexible rates may be available depending on the importer’s requirements. |
| Premium Calculation | Total insured value x 0.3%-0.5% | Total insured value x 0.3%-0.5% |
| Exclusions | Losses due to wear and tear, poor packing, war and civil unrest, and delays are excluded from standard policies. | Losses due to inherent vice (nature of the goods), fires, manufacturing defects, customs rejection, depreciating commercial value, and intentional damage are often excluded. |
| Claim Process | Insurance company is notified, followed by document and claims submission. Then, negotiations and settlement. | The insurer is notified within 7 to 365 days for air and ocean freights. The claim is filed. The adjuster reviews the extent of damage or loss. Documents are submitted, and the claim is processed, followed by a settlement. |
| Legal Framework | Freight forwarder is liable for damages due to errors or negligence. | Shippers or importers are protected until the cargo arrives at its destination. Exceptions apply if proven exclusions are apparent, e.g., intentional cargo damage. |
| Risk Mitigation | Shields freight forwarders from financial losses caused by forces out of their control e.g. acts of God and port congestion. | Protects importers from financial losses associated with cargo damage or loss while in transit by implementing loss prevention and effective packing and handling practices. |
| Control Over Policy | The freight forwarder or carrier entity has limited control. | The importer or cargo owner has the most control. |
| Add-ons and Extensions | Add-ons such as theft, war risk, rust and oxidation, cargo shortage, temperature-controlled, and rejected cargo coverage can be included. | Add-ons can include theft, pilferage and non-delivery (TPND), general average protection, spike/gap, breakage and rough handling, and specific trade clauses coverage. |
| Subrogation Rights | This is available to freight forwarders and can shield them from liabilities. | This is available under cargo insurance policies |
| Documentation Required | Completed claims form, relevant shipping documents like bill of lading, commercial invoice, packing list, photos/videos of damaged goods, repair invoice (if necessary), disposition of material, and written statement and other documents | Completed claims form, survey report, original insurance certificate, commercial invoice, bill of lading, repair quote, written statement, delivery receipt, and other documents |
The Case for Cargo Insurance
The consensus among industry professionals strongly supports the idea of adopting cargo insurance for the assurance it provides in facilitating smooth global trade operations. The key reason to buy cargo insurance lies in its comprehensive coverage of the full commercial value of the shipped goods.
In particular, Ship4wd offers an all-risk cargo insurance policy. It protects against a wide range of risks, including accidents, theft, and adverse weather conditions that might occur while in transit. By opting for this type of insurance, businesses ensure their goods are shielded against common dangers they might face during their shipping journey.
The process for filing claims under cargo insurance is another notable benefit. The policies are structured to cover the entire value of the goods, irrespective of fault. Furthermore, cargo insurance is designed with the goods’ shipper’s interests in mind, differentiating it from policies that might focus more on safeguarding the interests of the service provider.
Cargo insurance is a necessity as a comprehensive and flexible coverage option, providing virtually full value protection for shipped goods. It is highly recommended for those engaged in the shipping of goods as it offers a level of security and support critical for the ongoing success of international trade.
What About Marine Insurance?
Marine insurance is an extremely broad insurance coverage that applies to every entity in the ocean shipping universe. It covers the damage and loss of shipping carriers, terminals, special transportation vessels, and cargo.
Insurance policies subsumed under marine insurance include:
- Protection and Indemnity (P&I) or liability insurance,
- All-risk cargo insurance
- War-risk insurance
- Freight insurance
- Hull insurance
Its policy types include open, voyage, and time coverages. These can be valid for one-time or multiple trips over an indefinite period.
Why Should I Buy Cargo Insurance with Ship4wd?
Ship4wd simplifies cargo insurance during booking, offering comprehensive coverage in a few clicks without needing an external provider.
As your trusted freight forwarder, Ship4wd offers a suite of services tailored for businesses engaged in international trade. We provide competitive freight quotes and easy booking for both air and ocean freight, including Full Container Load (FCL) and Less than Container Load (LCL). Ship4wd also facilitates the handling of customs clearance, offers cargo insurance, conducts pre-shipment inspections, and manages the entire shipping operation, including final delivery, as part of our comprehensive door-to-door service.
Our dedicated customer support team is always available to help answer your questions regarding your shipment or how to use our platform, ensuring a smooth and responsive shipping experience.
Register with Ship4wd to enhance your shipping operations. Let us take the lead on logistics while you focus on what you do best—running your business.
Bottom Line
Now that you understand the difference between freight insurance and cargo insurance, you can make an informed decision about which one applies to your situation.
But just in case you’re still unsure, freight insurance is for freight forwarders, carriers, freight brokers, and logistics entities. Cargo insurance is for shippers, importers, consignees, manufacturers, and suppliers.
If you need affordable cargo insurance with flexible payment options, fast claims process, up to $2 million coverage, and one you can buy in less than a minute, get started with Ship4wd today.
Frequently Asked Questions (FAQs)
Some of the more common questions we receive include:
In What Scenarios Would One Choose Freight Insurance Over Cargo Insurance?
If you’re a freight forwarder, logistics personnel, or freight broker, you would need freight insurance.
Are Freight Insurance and Cargo Insurance Applicable for All Modes of Transport?
Yes. Whether it’s ocean, air, rail, or land, these coverages obtained by entities on both sides of the divide can be helpful in the event of cargo loss or damage.
How Does the Liability of Carriers Differ Between Freight Insurance and Cargo Insurance?
Freight insurance covers negligent acts and errors made by the freight forwarder or carrier while transporting cargo. So, freight insurance is used to settle losses where the freight forwarder or carrier is liable.
Cargo insurance covers cargo damage, loss, and theft that occur during transit. Liabilities do not matter; the claims are usually paid regardless of who’s at fault.
Can Freight Insurance and Cargo Insurance Be Used Together?
Not by the same entities. Freight insurance can be used by freight forwarders and brokers, logistics companies, and transport entities.
Cargo insurance can be used by shippers, importers, and entities shipping cargo.
Who is Responsible for Purchasing Insurance in a Supply Chain?
Anyone whose service or job description involves significant risk should buy the best insurance coverage that they can afford.
Essentially, everyone from the freight forwarder to the importer.