Congratulations, you've just arranged a trial order for 40 drums of maple syrup to be shipped from your warehouse in Vermont to your new customer in Busan, South Korea. Your customer has agreed to your purchase price and asked for CIF (Cost, Insurance, Freight) terms of sale. Your company will be arranging the "I" (marine cargo insurance). The proper placement of marine cargo insurance is an integral part of the international trade process. It could make the difference between a single trial shipment and a long-term contract.
Since your company will be arranging the insurance for this transaction, you could secure coverage through your own logistics provider. Alternatively, if your company has sufficient annual insured shipments, you would have access to your own open ocean cargo insurance policy. In the latter policy, all ocean shipments are automatically covered as per the agreed terms and conditions.
While the CIF terms of sale only obligate the seller to provide a minimal amount of insurance, the buyer's letter of credit will probably stipulate an "all risks" marine cargo policy. Your insurance company will respond for "all risks" of physical loss or damage from any external cause during transit as agreed in the policy.
A forklift that accidently pierces a shipping container and impales two of your maple syrup drums at the pier is an example of a physical loss from an external cause. However, contamination of the syrup at its destination inside sealed drums would probably not be a payable claim under the policy, because there was no external cause of damage during transit. In all likelihood, the damage occurred prior to shipment.
Therefore, the "all risks" cargo policy is not a perfect contract of indemnity that pays all losses. The policy is subject to exclusions and other obligations.
One of the common exclusions is insufficiency or unsuitability of packaging by the insured. (Note: If a third party is responsible for stowing the drums within the container, this exclusion would not be applicable). The marine insurance company requires that packaging on an export shipment be sufficient to withstand the rigors of international trade, including but not limited to high winds, heavy seas, rough handling, and the numerous land transfers that may occur during a single voyage.
The introduction of the shipping container has enabled exporters to protect shipments from most loss and damage. However, you will need to perform your own due diligence to establish the sufficiency and suitability of both the container and packaging prior to shipment.
Perhaps one of the most valuable documents that any exporter can easily generate is a container inspection report. The purpose of the container inspection report is to note the container's condition at the time of shipment. While the completed report may contain 10 or more inspection points, the most critical assessment is ascertaining the presence of holes and loose patches in the sides, roof and floor of the container. These openings are potential access areas for ingress of fresh and salt water.
It's essential that someone stand in the middle of the closed container and note any light that may be streaming into the container through door gaskets, holes or loose patches. You can ask for a copy of the container inspection report if your company did not load the container. Taking a photograph of the fully loaded container is also helpful to establish its condition prior to shipment.
If the container does not pass your rigorous inspection, your company should reject the container. Don't try to correct deficiencies or accept a container that is heavily patched. The inspection report may be valuable in the event of a claim to reject a surveyor's incorrect opinion that a container had holes in the roof prior to shipment.
A second consideration is the blocking and bracing of the palletized drums of maple syrup within the container. The containers are subject to the unpredictability of ship movements and environmental conditions, as well as shifting during land transit. The pallets and drums must be affixed within the container to minimize movement in any direction. Key considerations are: Use dunnage to prevent any gaps between products or between product and container; ensure that the center of gravity of the palletized drums is toward the middle of the container on all sides; observe maximum container payload weights; utilize sufficient steel straps for holding the drums together; and brace adequately in front of the doors.
You may wish to consult with your ocean carrier, logistics provider or marine insurance company on the proper method of loading and securing a container. Your customer expects to receive their trial shipment in good order, not with maple syrup oozing from damaged drums that were improperly stowed.
A third consideration is the type of drums being used. Are they intact at the time of loading? Is there any obvious distortion or leakage of contents? Is there any rust or corrosion on the drum? When shipping maple syrup in drums, the insurance company may seek more specific packaging requirements.
Your insurance company may also place a warranty (a promise by the insured to perform a specific requirement) in the policy that the maple syrup be packaged in new, clean steel drums. If your company places the syrup in new, clean, heavy-duty plastic drums, it has not satisfied the warranty from the insurance company, and the coverage could be voidable from inception of the voyage in the event of a claim.
It's important to check with your insurance company to determine if there are any packaging or other warranties in the policy. In many cases, the insurance company will agree to alter the warranty so that the exporter can be in compliance: new, clean, heavy-duty plastic drums or new, clean steel drums. However, the insured must request a change so they remain compliant with the warranty in all respects.
The foregoing information is a general overview of one of the important exclusions and a warranty in the cargo insurance policy. It's not meant to be a complete treatment of the subject. The actual coverage is always subject to the policy terms and conditions of your particular ocean cargo policy.
Bob Furjanic is a freelance contributor on marine cargo insurance and president of Four Anchors Worldwide LLC, Pleasantville, N.Y.