If you’re an adult, then it’s safe to assume you’re familiar with insurance. Insurance policies were created to protect us from being fully liable for different facets of our lives. From automobiles and homes, to our health, there exists a myriad of different insurances policies which are all specific to our many needs. While some of them are now mandated—we’re looking at you, automobiles—others are not.
This means that, when it comes to insurance, generally it’s up to the person to decide whether or not it’s important to them. These questions have different levels of severity, being that most would argue health insurance is vastly more important than say, insuring a wedding ring. Regardless, it is commonly recommended that, if any insurance is declared essential, if the person has the means of paying for it to certainly do so.
The freighting industry is no different. If you’re here because you’re trying to decide if it’s important that you insure your cargo, then within your world, insurance is certainly considered essential. At the end of the day, a shipper is paying for a safety net that could protect them from disastrous loss if an unfortunate event were to occur. Still, what you’ll come to realize regarding freight insurance is it’s simply not black and white. In accordance with the multilayered industry that is freighting, insurance within the shipping world has many more dynamics than you might be used to.
In which, the question becomes, why do you need freight insurance?
What is Freight Insurance?
Freight insurance is a policy set forth by a third party which protects the shipper in the case of damages, theft, and even missed deliveries (on occasion—this is policy-dependent). It is not to be confused with liability coverage, which is a necessity for all freight carriers, not shippers, to have. It comes clothed in multiple different names. Every risk, all risk, broad form, cargo insurance, motor freight insurance, and legal insurance are all included in the host of names thrown about by insurance companies.
At its core, freight insurance (generally) works similarly to the other insurances we’re used to. You pay for a certain policy, a plan chosen specific to your or in this case your company’s needs, and this plan contains certain parameters. You’ll have a deductible, a value of cargo insured, and preset reasons that would make your insurer liable for damages or losses accrued.
In tandem with other insurances, the general rule of thumb is you get what you pay for. Better policies are going to cost more, and lesser coverage policies are going to cost less. In this, freight insurance is not complex. The vehicle that drives forward its complexity is the language used in the freighting industry, how it’s woven into policy contracts, and the ever-evolving landscape of shipping that seems to create new intermediaries every year.
Why You Need Freight Insurance
As a shipper, it is your responsibility to oversee every facet of your shipment. Putting aside the quality of whatever it is you’re selling when it comes to manufacturers or your customers, you need to ensure that you don’t sacrifice your delivery promises.
Regardless of the time in which you promise a delivery, what is the silent promise all companies make to their customers when it comes to shipping? We promise it won’t be damaged.
Thus, the reason you need freight insurance, is simply because you’re a shipper. With that being said, below are five reasons that further support this claim:
When cargo leaves its origin point headed towards its destination, at the very least it’s going to be loaded and unloaded. This means your entire shipment will garner two touches. Yet, rarely is this method of transit a reality. A more affordable option might guarantee the same delivery, but your cargo is going to switch trucks three times throughout the journey.
Through the passing of multiple hands, unscrupulous employees, and the general wear and tear of transit, damages occur. No freighter has ever been able to evade the impending promise that, at one point or another, something is going to go wrong with the cargo. It’s the nature of the industry, plain and simple.
Outside of physical damage caused by ‘moving pieces’ so to speak, temperature, natural disaster, vehicular accidents, weak packaging, weak packing, poor weight distribution, condensation, bad ventilation, and a host of other reasons can add to your cargo’s loss of value. We’re making a simple point: you’re insuring against a risk that poses a threat to any shipper, and one that should be taken seriously.
Liability Coverage Doesn’t Cut It
As aforementioned, liability coverage and freight insurance are not to be confused. In which you may ask, what exactly is liability coverage? In short: it’s a type of insurance each freight carrier is required to have that more often than not, protects them more than the shipper. Dependent on the policy, the value covered can be substantially less than the value of the cargo as a whole, which will result in cents on the dollar in the case of damage.
Sadly, a government amendment once imposed to up the standard of liability for carriers does not hold merit today. When researching freight insurance, it’s possible that you’ve heard of the Carmack Amendment. Established in the early 20th century, the amendment created something of a ‘universal’ language used to communicate damage claims between freighter and shipper. But it’s a double-edged sword and not partial to either party and it cannot be relied upon.
Lastly, the terms set for a freight carrier’s liability coverage were not created with your specific needs in mind. There’s a possibility that your cargo’s classification renders it uncovered by the policy. In a few rare cases, liability coverage can be enough to consider it a safety net (on the shipper’s behalf). But those are few and far between.
Carriers Are Rarely Accountable
50% of claims issued in the freight industry, to a carrier, are denied. The current regulatory structure states that a freighter is innocent until proven guilty. This means that, without insurance, if you’re trying to get compensation from the company you employed to handle your cargo, the process is long, extraneous, and filled with nuances. This occurs even if your claim goes answered or you come out the other side having won.
Liability is one of the main concerns these freight carriers must prepare for. They do so with diligence, creating walls to ensure that in the case their shipper does not pay for insurance, responsibility is not going to make a home on their shoulders. Also, when it comes to immediate compensation, the reality is that these things take time. A fact that highlights this phenomenon is the claim process differences between freight insurance and liability coverage.
For liability coverage, you have 9 months to file a claim. For freight insurance, the window is only 30 days. If you’re to file a successful liability coverage claim or win in court against a freighter, it can take years before you see any money returned.
The Terms, They’re Yours to Negotiate
Don’t fall victim to believing that a carrier, broker, or freight forwarder has your best wishes in mind. While these industry liaisons should treat shippers with care and ensure that every facet of the process is covered and handled professionally, that’s not always how life—and more importantly the freighting industry—works.
You may very well hear that the liability coverage is enough to insure your cargo and it may be. The prospect of not having to pay a third-party insurance company is appealing, as cutting overhead and shipping costs are important to a shipper. But you’ll soon come to realize that the language used with freight insurance is angled in a way to exclude as much as possible.
By purchasing and signing off on your own insurance, you’re guaranteeing that the policy in place is molded around your specific needs. You don’t want to be one of the horror stories we hear too often; the freight carrier declared they had liability coverage but after a claim was filed, the shipper learned their coverage excludes the class of commodity shipped.
By having ultimate control of the insurance terms, you solidify your safety net. This is important when it comes to the product you’re selling, as it’s the lifeblood of your company.
Unfortunately, there’s no standard freight insurance. Unlike health or automobile coverage, the types of policies are not cut and clear. They vary depending on the shipper, company, and the dynamics of the shipping process as a whole. This means, respectively, that there is room for negotiations and companies that will have a perfect, affordable policy seemingly just for your needs.
When was the last time you purchased insurance? Perhaps for your new iPhone? Car? Home? Whatever it was, it’s safe to assume that the insurance purchased could’ve been up to 15% of your asset’s total value. Being that shipping costs are often the bulk of a company’s operational expenses and that freight insurance is rarely that high of a percentage, the total cost of freight insurance can be overwhelmingly negligible.
You may think, that’s ridiculous! I’m shipping $500,000 worth of cargo, that’s going to be a fortune to effectively cover. Yet, many policies cap after a certain point, dependent on value, and insure the entire cargo although they calculate only half its value. As with any type of insurance, it’s important to identify reputable insurance companies, reach out to them, and to generate a plethora of quotes.
It’s a No-Brainer
In those five examples, we’re essentially recommending to purchase freight insurance because your cargo is at risk of damage, liability coverage only protects carriers, and by law it’s difficult to pursue and prove that a carrier is guilty of wrongdoing. In addition, the terms of insurance need to be exclusive to your specific needs, and it can be very affordable.
Until you finalize your shipment, and by this we mean sell it, you want to own it end-to-end. From point A to point B, one of your responsibilities as a shipper is to know that it is securely your cargo, with every part of its value accounted for. Insurance is the safety cushion that lets you rest peacefully at night knowing that, in the event of damages or loss, you’re not going to go belly up on a shipment. Doesn’t that sound like a necessary expense?
While we’re here advocating the need for freight insurance, we haven’t touched on the process of actually pursuing it. That’s an entirely different conversation altogether. However, when it comes to freight insurance, the first victory is to vote in favor of it. The second victory rings its siren once it has been done correctly.
Freight insurance is tricky and just because you’ve decided to purchase it for your cargo doesn’t guarantee things won’t go awry. Unfortunately, unscrupulous companies and hidden language can render an entire policy ineffective towards the shipment in question, yet it’s completely legal for a company to sell the policy.
Negotiating a freight insurance contract without any experience doing so can be a nightmare. Not only is it draining, but the room for error—if you’re not familiar with the jargon—is massive. That’s why it’s important that if you’ve made the decision, you either reach out to your freight broker, advancer, or find your own insurance agent that focuses on freighting.
By employing these professionals, you’re ensuring your decision regarding freight insurance was a sound one.
It’s easy for us to answer why you need freight insurance by simply saying, ‘because you’re a shipper,’ but when it’s thoroughly explained, the reasons shine bright and true. The fact is this: you don’t ever want to be in the hospital without health insurance. The same applies to shipping. Take the necessary steps and further optimize your shipping process!
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