Logistics Terms Marine Cargo Insurance

Marine Insurance can be classified into cargo insurance, hull insurance, freight insurance, etc. based on insurable interest, and can be further classified into voyage insurance, institute time clause, etc. based on the insurance period.

(Source : Clip Art Korea)

Cargo insurance compensates for the damage suffered by cargo transported by ship or air in an accident during transportation. In the event of damage, the insurance company compensates for the damage according to the predetermined method and scope. The insurance policy specifying the insurance contract and the bill of lading are used as means of payment such as shipping documents and commercial invoice, respectively. Shippers must purchase cargo insurance in order to receive full compensation of cargo damage. These documents can be useful in minimizing economic losses as they are used to compensate losses caused by unexpected accidents during transportation. However, since cargo insurance falls under voyage policy whereby the insurance period is determined by region (location), compensation can only be made for accidents that occur during the transportation and is not available before or after the transportation.

Hull insurance compensates for the damage suffered by ship during shipbuilding, sailing, repair, and anchoring. Some of the major risks include sinking, stranding, grounding, fire, collision, and war.

In case of cargo transportation on the condition of freight collect, if the voyage is suspended due to an accident occurred during sailing, the shipowner will not be able to acquire the contracted freight. In such case, freight insurance has the effect of protecting uncollected freight.

Voyage insurance sets a fixed sailing period as the insurance period, and is more frequently used for cargo insurance than hull insurance.

Institute time clause sets a fixed period (1 year in general) as the insurance period and is purchased by many ships currently in operation. Institute time clause corresponds to voyage insurance of which the insurance period is set as a specific single voyage period.

(Source : Clip Art Korea)

- Subject of insurance purchase : All import/export cargo and domestic coastal cargo
- Method of insurance purchase : You can sign up via insurance company after preparing the necessary documents

1) Insurance Policy No. : The serial number given by the insurer to the insured when issuing an insurance policy.
2) Name of the Assured (Insurance Policyholder) : Import/export company name; in case of export in a CIF contract, if there is no separate agreement or instruction for the assured, the exporter itself can be regarded as the assured and transfer on the blank endorsement when purchasing an export bill.
3) Reference No. : This number is used for business reference by the insurer; in case of export, the number of letter of credit or contract, etc. shall be entered, and in case of import, the number of commercial invoice or contract, etc. shall be entered.
4) Insured Amount : The maximum amount compensated by the insurer as insurance money. In most cargo insurances, the insured amount and the insurable value are in the same amount.
5) Insurance Terms & Conditions: The terms and conditions of insurance should be determined in the most ideal manner after considering cargo type, packaging, transportation method, expected sailing period, etc. Some matters to be included are: basic terms and conditions, additional risks to be added considering the specialty of cargo and transportation, how to address the risks of war and alliance strike. The name, quantity, packaging status, etc. of the insured cargo shall be the same as the content of commercial invoice, letter of credit, bill of lading, and packing list.
6) Final Destination and Means of Transportation : If the final destination is located inland which is different from the POD, the final destination and means of transportation from the POD to the final destination shall be stated in accordance with the terms and conditions of transportation.
7) Name of Vessel and Scheduled Departure Date : The insurer shall impose an additional premium according to the level of aging of the vessel, whether the vessel is small, the classification of the vessel, etc. based on the Institute Classification Clause.

The insurance rate is determined in proportion to the conditions of insurance (risks covered, scope of compensation, etc.) and transportation sections. The insurance rate shall be applied differently depending on the characteristics and types of cargo, and ocean transport is more expensive than air transport. The insurance rate is adjusted according to the packaging status of cargo, on/off-deck shipment, additional coverage, as well as the loss ratio.

- Additional Premium for Vessel : An additional premium shall be imposed depending on whether the vessel is liner or tramper, age of the vessel, prepayment status, material of hull, type of cargo, total tonnage of vessel, and type of vessel.
- Additional Premium for Insured Amount : A fixed premium rate shall be applied to the insured amount from 130% to 150% of the invoice value equivalent to CIF.
- Additional Premium for Export Area : An additional premium shall be applied when exporting to areas where many accidents occur.

Damage refers to economic disadvantage suffered by the assured due to the occurrence of risk, and can be classified into physical damage and expenses.

Property damage is the damage suffered by the assured as the subject matter insured itself is directly damaged, and is also known as direct damage. Physical damage can again be divided into total loss and partial loss, depending on the degree of damage.

- Total Loss : If the insured cargo has been completely damaged by risk.
1) Actual Total Loss : If a ship or cargo has been totally destroyed, the compensation is paid independently of insurance conditions.
2) Constructive Total Loss : If a cargo cannot be used any further even though it has not been totally destroyed or lost.

- Partial Loss : If the insured cargo has been partially damaged by risk.
1) Particular Average : If the damage has been caused by accidents such as stranding, fire, storm, collision, etc.
2) General Average : If the damage has been caused by voluntary sacrifice for common interests, such as jettisoning cargo to save the ship from stranding.

Expenses are borne by the insured in order to prevent/reduce damage to the subject matter insured and are indirect damage that occurs incidentally in relation to the damage to the cargo. Expenses include salvage charge, salvage awards, sue and labour charge, and special charge.

- Salvage Charge : Salvage charges are amounts paid by the rescued to the rescuer under maritime laws independently of contract to prevent damage caused by natural risks from sea.
- Salvage Awards : Salvage awards are amounts by the rescued to the rescuer through contract to prevent damage caused by natural risks from sea.
- Sue and Labour Charge : Expenses used by the assured (user or agent) to prevent damage to the subject matter insured in the event of risk.
- Special Charge : Expenses used by the assured (agent) for the safety and preservation of the subject matter insured.

In Incoterms (international commercial terms), the abbreviation “I” found in CIF and CIP stands for “Insurance”, meaning the contract party has been insured and representing conditions that require exporters to take insurance.
- CIF (Cost, Insurance, and Freight; delivery including fares and insurance premiums): The exporter (seller) pays the fare and insurance premiums to the designated destination port
- CIP (Carriage and Insurance Paid To; delivery whereby transportation costs and insurance premiums are paid): The exporter (seller) pays the fare and insurance premiums to the designated destination

- Insurance Policy : An insurance policy is insurance contract certificate document issued by the insurance company or the insurer when the policyholder signs insurance contract(s) with the insurance company and the insurer for each subject matter insured. An insurance policy is delivered by the insurer at the request of the assured as evidence of an insurance contract, and despite not being a contract, it has the nature of securities and is usually transferred by way of endorsement or delivery.
- Insurer (Underwriter, Insurance Company) : An insurer refers to an underwriter or an insurance company.
- Assured : The assured is the person who has the right to receive damage compensation and has insurable interests. In other words, the assured receives the insured amount from the insurer as compensation for damage in the event of an insurance accident.
- Insurance Policyholder : An insurance policyholder is a person who has signed an insurance contract with the insurer and promised to pay insurance premiums. Insurance policyholders are generally the same person(s) as the assured, but in some cases the two are different. In FOB (Free On Board) contract, the buyer signs an insurance contract for itself and receives the insured amount in the event of damage, and therefore the buyer becomes both the policyholder and the assured. However, in the case of CIF (Cost, Insurance, and Freight) contract whereby another person becomes the assured, the seller becomes the policyholder and the buyer becomes the assured.
- Insurance Premium : An insurance premium refers to the amount of money paid by the policyholder for the assured’s promise to compensate for damages.
- Insured Amount : An insured amount is the maximum amount to be paid by the insurer to the assured when total loss has occurred.
- Clauses : Clauses are various promises and regulations on insurance policies printed in advance by the insurer regarding the standard matters found in the insurance contracts.
- Policy No. / Certificate No. : The number given by the insurer when issuing an insurance policy to the assured.
- Claim, If any, Payable at [Place of Payment] : Place where the payment of the insured amount is made
- Ship or Vessel called the [Name of Export Vessel] : The name of the export vessel; in case the vessel has not been determined, TBD (To Be Determined)
- Sailing on or about [Date of Shipment] : Date on which the vessel departs the port of shipment
- At and from [Departure] : Port of Loading (POL)
- Arrived at [Destination] : Port of Discharge (POD)
- Transshipped at [T/S] : Port of Transhipment
- Amount Insured Hereunder [Insured Amount] : The amount covered by the insured amount