With increasing global trade volumes, every shipper understands the importance of protecting the goods they are transporting. However, while many shippers assume that carrier liability is sufficient to protect the value of their goods, it may not cover the full amount of the losses they would endure in the event of a worst-case scenario, such as theft or irrevocable damage.
Below are some key differences in carrier liability and cargo insurance to help shippers make the most informed decisions possible when it comes to safeguarding their shipments.
Understanding Carrier Liability
Carrier liability refers to a carrier’s legal responsibility for a shipment and is typically limited to periods in which the carrier has control or the freight is in its care. Carrier liability has a maximum compensation limit that is determined based upon either the number of containers or weight of the cargo and is not tied to the value of the freight itself. Payouts are generally made up to a specified amount based on the weight of the goods and do not always cover the full value of the cargo. Furthermore, the carrier is not deemed liable for events outside of their control, which may include extreme weather, natural disasters, theft, piracy, or accidents at sea (often referred to as acts of God). Because it is designed to protect the carrier, payouts are only made in instances in which the carrier is proven to have been negligent.
Carrier liability is generally considered to be sufficient for a shipment when the overall value of the goods is low, when the goods are not deemed to be fragile or easily damaged, and when there is low risk of damage to the cargo. When opting for carrier liability, it is important to ensure that the carrier’s contractual liability coverage aligns with the value of the goods being shipped in order to prevent excessive losses.
The Role of Cargo Insurance
Whereas carrier liability coverage is designed to protect the carrier, cargo insurance policies are designed separately for shippers and can be purchased to cover the full value of their goods. Cargo insurance is usually available through a few types of coverage.
- All-risk: The most comprehensive cargo policy, all-risk insurance protects the full value of the cargo — from pickup to delivery — and covers a wide range of potential risks, including physical damage (i.e., damage incurred from weather, accidents, etc.), theft, natural disasters, and improper handling or storage.
- Named perils: Also referred to as FPA (free of particular perils) policies, named perils coverage only protects the shippers in the event of total loss due to specific perils listed in the policy. These can cover incidents such as sinking, fire, stranding, lightning, collision, or circumstances outside of human control such as earthquakes or weather events.
- Single shipment: Single-shipment policies can be purchased on a one-off basis to cover individual shipments traveling from one specified location to another. Single shipment policies can cover the full value of the load and protect the shipper against losses or damages due to accidents, theft, natural disasters, or other unexpected incidents during transport.
- Annual policy: Annual cargo insurance policies are ideal for companies that have numerous shipments each year. These policies have preset terms that apply to all shipments for the length of the contract so that shippers do not need to obtain separate coverage for each individual shipment. These policies cover everything from accidents to acts of God and ensure that in the event of loss or damage, the shipper’s financial loss is limited to their deductible.
Regardless of the type of coverage selected, cargo insurance provides greater protection for shippers against potential losses, in addition to coverage for many types of damages that are not covered by carrier liability alone. Because cargo insurance is designed to protect the shipper, the reimbursement process also tends to be much faster since carrier negligence must be proven in order to receive compensation through carrier liability.
Key Differences Between Carrier Liability and Cargo Insurance
Shippers with a large number of annual cargo shipments have greater exposure to potential risks that can arise from weather, theft, natural disasters, and more. While carrier liability only covers losses up to a certain amount (based on the weight of the cargo) if a carrier is shown to be negligent, cargo insurance can cover any type of incident that could arise while reimbursing the full declared value of the shipment.
The claims processes also differ for carrier liability versus cargo insurance. For carrier liability claims, shippers must file the claim within a certain amount of time (typically nine months) of when the damage occurs. Proof of value and loss must be provided, and carrier negligence must also be proven. Carriers then have 120 days to respond to the claim, which means it could take months for shippers to receive a payment that likely will only cover a fraction of the shipment value. With cargo insurance claims, the coverage is far greater, so there are fewer disputes around whether a claim should be covered, which translates to quicker settlements and payments.
Real-World Scenarios: Cargo Insurance in Action
To better understand how utilizing carrier liability versus cargo insurance could play out in the real world, consider the examples below:
- Example 1: Consider the potential losses a shipper with only carrier liability would incur if a 40-foot container holding approximately 1,000 laptop computers (each valued at $2,000) were lost or destroyed. For ocean carriers that often cap their losses at $500 per container, the loss for the shipper would be nearly $2 million. If the carrier liability coverage were $25 per pound and each computer weighed 3 pounds, the shipper may only recoup $75 per unit, or less than 5% of the total shipment value.
- Example 2: A shipment of fruit traveling from South America en route to Florida is impacted by a hurricane, causing a full-week delay in transit to avoid the storm. Because of the already limited shelf life of the fruit, the delay causes the fruit to extend past its shelf life before arriving, resulting in a complete loss. While carrier liability may cover a fraction of the cost (minus the loss in potential sales), cargo insurance would relieve the full loss.
Do You Need Cargo Insurance?
When determining whether carrier liability is sufficient for a shipper’s needs or if a more comprehensive cargo insurance policy is the best option, it’s important to consider the overall shipment value, the fragility of the cargo, the complexity of the route, and the risk of theft involved, including how many times the cargo may need to be transferred and potentially exposed to bad actors. For high-value and/or fragile shipments, carrier liability will not cover the value of the shipment in the event of unexpected damage, so it would be wise to consider a cargo insurance policy to avoid potential losses.
For shippers who make multiple cargo shipments per year, an annual cargo policy may provide peace of mind and help avoid any inconvenience associated with obtaining individual policies for every shipment. However, individual policies are also an option for those who only ship occasionally.
EFW creates customized shipping solutions for its customers and is experienced in assessing shipment risk and helping to determine whether carrier liability is sufficient or a cargo policy may be the best option based on a shipper’s specific needs. With a wealth of domestic and international shipping solutions available, EFW takes the guesswork out of developing efficient and effective shipping strategies and can advise on the best plan of action to ensure your freight arrives safely and on time.
To understand the best options available for handling your freight and keeping it protected, contact EFW to learn about cargo insurance solutions to meet your unique needs.
