The Difference Between Cargo and Freight Insurance

The Difference Between Cargo and Freight Insurance
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When your business operations extend to the global market, ensuring the safety of your products during transit is non-negotiable.

Two crucial services that are often misunderstood in this context are freight insurance and cargo insurance. It’s not uncommon for even seasoned industry professionals to mistakenly refer to these two types of coverage interchangeably, so clarifying their distinctions will undoubtedly strengthen your approach to managing risks associated with international shipping. 

The purpose of this post goes beyond explaining what they are and how they work. It is also about understanding why cargo insurance is something that you must pay more attention to as an importer or exporter of goods.

To begin, let’s compare freight insurance and cargo insurance in the context of international shipping:

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.

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 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:

Cargo Insurance

Freight Insurance

Purpose The insurance virtually covers the actual value of goods during transportation Covers liabilities of service providers arising from various errors and mistakes
Beneficiary Shipper: importer/exporter (owner of goods) Freight forwarders, carriers, and other service providers
Claim Value Based on the commercial value of goods (Total Insured Value) Based on predetermined limits set by international conventions, often calculated per package or weight
Coverage Compensates for loss/damage to goods without needing to prove fault Compensates if loss/damage is proven to be caused by the forwarder’s/carrier’s fault
Responsibility Typically falls on the shipper, but can vary based on Incoterms Paid for by the freight forwarder/carrier, in some cases, the cost passed on to the shipper
Risks Covered Accidents, theft, adverse weather, mishandling during loading/unloading Liabilities arising from errors or mistakes during the transportation process

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.

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.

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