Supply Chain Insurance

What Is Supply Chain Insurance?

Supply Chain insurance means insurance cover or covers taken to protect an enterprise’s full supply chain, which consists of coverage of following risks:

  • Marine risks to the cargo-which are incidental to marine transit-e.g loss after an accident on board the ship
  • Risks to cargo which needs to be stored temporarily, purely incidental to transit-this coverage is part of (a)-export cargo shipped to a specific customer in Canada from Mumbai, waiting in JNPT Port to be loaded onto the ship.
  • Intermediate Stocks insurance, where storage is intentional on the part of enterprise which owns the goods-e.g. storage for subsequent re-sale or stock kept in custom-bonded warehouse. This insurance cover is not part of standard marine cover covering risks in (a) & (b). You need to buy separate insurance cover for these risks.
  • Third Party Job-worker-risks such as storage & loss during job-work
  • Movement of Semi-finished or Finished goods after (d) to Owner’s premises. (Note: You can cover (d) & (e) above as part of marine cover)
  • Risks of loss to raw materials or finished goods at Owner’s factory or godown. This is generally covered in Owner’s Property (Fire & allied perils) Policy.

You can see the above risks, collectively known as “Supply Chain Risks”. There are different stake-holders in supply chain, like carrier/shipping line, their agents, port authorities, private or public godown owners, port equipment handlers, Customs, local transporters and so on. Except Customs, all other agencies may become liable to the cargo owner, depending upon their contract terms with the owner, if something happens to the goods. Hence these agencies are also interested in getting their risks covered in separate insurance risk covers.

You can see therefore the study of supply chain risks is to ensure there are no gaps in the above chain. i.e. Objective is to ensure Owner is always covered at reasonable cost and is never out of pocket, if a calamity strikes.

Marine Cargo Insurance

Marine cargo insurance relates to insurance of cargoes while they are being transported (with incidental storage) not only by water (sea/river/lake) but also by air, road/rail, post parcel, courier or any combination of the above. However, water transport should be playing a significant role to qualify as marine insurance. In other words, a combination of two or more modes of transport is OK for a marine insurance to be in place, provided marine transit by sea plays a crucial role.

Pure or predominant land transits are covered by a policy similar to marine cargo cover, called “Inland Transit Cover” 

Origin of Marine Insurance

Marine insurance is the oldest forms of insurance. The merchants, who needed cargo insurance and insurers who wanted to issue cover used to meet in a coffee house in Tower Street, London, run by Edward Lloyd’s around 1688. This joint was a favourite meeting place for ship captains, shipowners and traders and soon became a place for not only coffee but also a source of shipping news and marine insurance! By 1691 Edward Lloyd developed a network of correspondents at main ports allowing him to get information on movement of vessels quickly, as a base for his publications.

What can you get in Marine Insurance

Over the centuries, many technical terms peculiar to marine insurance have evolved such as general average, sue and labour, salvage and salvage charges and constructive total loss. These are the heads under which an Insured could make a claim and hence you should be fully aware of these.

Partial loss of cargo/Partial or full damage to cargo, but repairable

Constructive Total Loss, where the cargo is as good as lost, though they are in someone else’s possession.

Actual Total Loss-Goods have been actually lost.

General Average-Sacrifice by one adventurer to protect a voyage (one of Ship interest, Freight interest, Cargo interest) being made good by other interests

Sue & Labour-Loss minimization efforts by the insured

Salvage-Physical remains as well as Value of damaged cargo

Salvage Charges-incurred to salvage the cargo

Valued & Unvalued Policies

It is important to know if your marine cargo policy is a valued policy or unvalued. Generally all cargo insurances today are valued and the value is given in the policy or the valuation basis is give (e.g CIF + 10%), The valued policies are also called “agreed value” policies, as valuation is agreed. In the case of unvalued policies, the claim will be settled at the time of loss based on value at the time of loss, irrespective of whether the sum insured was more than such value at the time of loss. 

Special Institute Cargo insurance Clauses

Institute Theft, Pilferage and Non-delivery Clause

It is used where you have not taken out wider form of cover like ICC-A-for e.g you have taken a narrower form of cover like ICC-B or C. You need to pay additional premium though. 

Institute Malicious Damage Clause

If you take an ICC-B policy, there is an exclusion for deliberate damage. This extension of cover for an additional premium covers such exposure

The Law Governing Marine Insurance

The Marine Insurance Act 1906 of UK (MIA 1906) was adopted in India and the Indian Act of 1963 is a replica of the UK Act barring some very minor differences. The chief aspects covered in the 1963 Act are:

You cannot ‘gamble’ by trying to insure a property or interest that you have no stake in. Unlike other branches of insurance, in the case of marine insurance, insurable interest must exist at the time of loss, even though it may not necessarily have been present earlier

For marine insurance to be an effective policy, there should be an important leg of transport in sea, though the full transit need not be in sea.

What Does Marine Cargo Insurance Cover?

The subject-matter insured in a cargo policy is goods and/or merchandise incidental to your business, which are owned by you and/or for which you are responsible (or have received instructions) to arrange insurance on behalf of someone else and/or have insurable interest under the Terms of Sale.

The Schedule to the MIA 1963 defines ‘goods’1 and this definition does not include goods on ship’s deck (unless customary). Special terms would need to be added to the policy in the case of deck cargoes.

It is a rule of thumb in the marine insurance market that ‘packing’ too does not form part of ‘goods’ unless there is a need to insure packing materials, in which case a special clause needs to be added to the policy.

Institute and Non-Institute Cargo Clauses

There is a wide variety of clauses in marine insurance. However, the Institute Cargo Clauses and the associated War and Strike clauses form the basis on which coverage is provided. Though not stated explicitly, it is only the physical loss or damage to the goods which is generally the subject- matter of insurance.

The prominent clauses which are used today are the following:          

ICC-A-

ICC-B    1/1/2009. You get to choose one of these three. Premium is low for C, moderate for B and high for A, as the risk coverage is narrow for C, better for B and very good for A

ICC-C War & Strikes Clauses-covers war & strikes risks in cargo transit, for an additional premium

You can choose any of the following clauses as an alternative to ICC-A, B or C, depending upon your trade:

Institute Bulk Oil Clauses-meant for Oil trades, instead of ICC-A,B or C, covering special transportation by pipelines from tanks to tanks, contamination and guaranteed outturn.

Institute Commodity Trade Clauses

Institute Natural Rubber Clauses

Institute Timber Clauses

Institute FOSFA (federation of Oils, Seeds & Fats Associations) Clauses

Institute Jute Clauses

Institute Frozen Foods Clauses

Institute Coal Clauses

Typically, these clauses address specific trades-for e.g. Coal clauses do not foresee on-land transport of coal and hence the cover omits “Overturning” coverage. Further, the coal trade did not want “All Risks” cover, as they were just worried about fire risks and hence there is only one option for Coal-“B” risks. As spontaneous combustion is very likely for coal and its claim should not be denied due to “inherent vice” exclusion, this has been removed for coal trade.

Hence you should choose the right clauses for your business!

What is ICC-A, B & C Clauses

Institute Cargo Clause A

Institute cargo clause A provides the most extensive coverage among the A, B & C clauses. It is also called “All Risks” cargo insurance, since it offers protection against almost all potential risks except those that are explicitly excluded.

Institute Cargo Clause B

ICC B provides limited coverage as compared to clause A. It covers against perils such as loss or damage caused by fire/explosion, lightning, volcanic eruption, earthquake, collision, sea water entering the ship, container, place of storage, lift van, etc.

Institute Cargo Clause C

Institute cargo clause C provides the most limited coverage against risks among the three clauses and therefore comes at a low premium. In addition to this, most of the risks covered should occur during carriage. ICC C cover in marine insurance can include fire/explosion, collision, stranding, sinking, grounding, etc.

Exclusions in Institute Cargo Clauses

Willful Misconduct-This is a common exclusion in all ICC-A, B & C clauses. The burden of proof is on the Insurer to show that the claimed loss would not have arisen, but for the wilful misconduct of the Assured.

Ordinary Leakage/Breakage– This exclusion applies to A, B & C clauses. This clause is applied generally to evaporation, which is natural & unavoidable in liquid cargoes. ICC clauses do not show ordinary breakage as an exclusion, but insurers do not pay for ordinary breakage due to Marine Insurance Act Provisions Section 55 (2) (c).

Ordinary Loss in Weight or Volume: For reasons described above, this exclusion appears.

Ordinary Wear & Tear: This applies to all 3 sets of ICC clauses. This mainly concerns equipment which are sent out for repair, where the insured cannot expect ‘new for old’ principle to be applied. Similarly normal rust formation over a long journey cannot be claimed. 

Improper Packing/Stowage: This exclusion will not apply to where the stowage by anyone other than Assured or their servants. Similarly this exclusion applies only where such improper packing/stowage had taken place prior to attachment of risk. 

Inherent Vice: This exclusion appears in all ICC clauses. This represents a quality inherent in the goods that manifests sometime after shipment, resulting in damage-e.g. all perishable goods like fruits

Loss Proximately caused by delay: Loss proximately caused by delay is excluded. Even if the delay is caused by an insured peril, this exclusion applies. For e.g. if there is a collision of insured’s cargo vessel with another vessel and transit is delayed, the loss caused by such delay is also excluded.

Insolvency of Carrier: Note this exclusion applies only where the carries becomes insolvent after the ship sails. This exclusion clause however will not apply where the cargo owner is not privy to the carrier’s financial information when the cargo sails. 

Deliberate Damage: It appears in ICC-B & C clauses.

Nuclear Weapons: This is a paramount exclusion.

Rats & Vermin: Rats could either consume edible cargoes or contaminate the cargo. They could also damage the packing, resulting in damage. Vermin create damage from within the cargo. However, where the vermin from an external source, an ICC-A policy will indeed cover the damage.    

Seaworthiness: This is in cases only where the insured is privy to the fixation of the vessel. 

Why is a claim rejected despite passing all above hurdles?

You wonder why your cargo loss claim is still rejected, though the above conditions have been met and exclusions do not apply?

Did you have Insurable Interest at the time of loss?

Your insurable interest is known if you answer the question-if you had a title or risk exposure in the cargo, when they were damaged. For this you should look at the contract of purchase (commonly known as Purchase Order) or contract of sale, depending upon whether you are a buyer or a seller. For e.g. if your purchase order says you are buying FOB from a seller, your own cargo policy will not pay if the damage to the goods had happened before loading the goods. Your only recourse is to ask the supplier to replace the goods.

Did you check if there is double insurance?
If you had bought the goods on CIF basis and still covered in your own cargo insurance also, there is a problem-the local insurer of yours will refuse to pay the claim first and ask you to claim from supplier’s insurers. Or your local insurer will offer to settle only a part of the claim, expecting you to get the balance from the supplier’s insurers.

Did you meet your duty as an Assured?

If, after a loss, you have not taken prompt actions to protect the cargo from further deterioration, the insurers will say you have defaulted on your duty under the policy and refuse the claim.

Did you cross the time limit allowed under the policy for temporary storage?

In cases, where there is an un-avoidable delay, you should get an extension from the insurers and if a loss happens after the permitted time of say, 60 days, in the policy and if you haven’t taken insurer’s permission, you would lose the claim.

Did you inform the insurers of any change in destination?

If you changed the destination or the shipping company changed it, you should promptly inform the insurers and take their approval, else if there is any loss, you will lose the claim.

Did you value the cargo in the policy correctly?

If you have not established cargo valuation basis clearly (e.g. CIF + 10%), you may end up getting a lower value in claim in an inflationary market.

Did you declare the cargo specifications in the policy schedule correctly?

If you have not disclosed cargo specs clearly in the policy, you may end up losing a Claim, as insurers will hold you responsible for omission in disclosure.

Assignment of Cargo Policy

In case you have sold the goods to another buyer high-seas or bought the goods from a re-seller high sea, you can assign the marine policy to the buyer or ask the seller to assign his insurance to you.

Use of Brokers/ Proclaim Energy & ERMIS

 Thus, you now realize that supply chain insurance is not as simple as taking a marine cargo policy in an hour like buying a scissor in a hardware shop. You need to consult your insurance broker or risk manager and carefully review the risks and design your coverage. Please contact Proclaim Energy Private Ltd for a consultation or designing your insurance cover or a training!

EMBARK

on a journey of insurance know-how

EXPAND

your knowledge by staying updated

ENQUIRE

for more information

Here to Help!