Freight Insurance: Meaning, Types, Difference & Factors To Consider

By Okbima 04 Jul 2024
freight insurance

Freight insurance protects businesses and individuals shipping goods against financial losses due to damage, theft, or loss of goods during transit. There are different types of freight insurance, including marine cargo insurance, inland marine insurance, and air cargo insurance. Each type offers specific coverage for different modes of transportation. Let’s understand the difference between freight insurance & freight liability when you should buy & things to consider before buying.

 

What Is Freight Insurance?

Freight insurance is a type of insurance coverage that protects goods and cargo being transported from loss, damage, or theft during transit. This type of insurance can be purchased by shippers, carriers, or freight forwarders to provide financial protection in case of any unforeseen events that may happen during shipping. 

Freight insurance covers the full value of the goods being shipped, including the cost of freight and any additional expenses related to the shipment. Businesses and individuals involved in the transportation of goods need to consider purchasing freight insurance to reduce risks and protect their investments.

 

Benefits Of Freight Insurance In India

Freight insurance benefits in India include protection against loss or damage, legal and regulatory compliance, peace of mind, etc.

  • Protection against loss or damage: Freight insurance provides coverage for the value of goods being transported in case they are lost or damaged during transit. This helps prevent financial losses for both the sender and receiver of the goods.

  • Legal and regulatory compliance: Freight insurance is required by law or by the terms of a contract, especially for high-value shipments. Having insurance ensures compliance with legal requirements and can help maintain good relationships with clients and partners.

  • Peace of mind: Knowing that goods are protected by insurance provides peace of mind for both the sender and receiver of the goods. This can help reduce stress and anxiety with transporting valuable cargo.

  • Cost-effective risk management: Freight insurance allows businesses to transfer the risk of loss or damage to an insurance company, rather than bearing the full financial burden themselves. This can help companies manage their risks more effectively and avoid financial issues in case of a claim.

  • Competitive advantage: Offering freight insurance to customers can give businesses a competitive edge in the market. It can help attract more clients and retain existing ones by providing additional protection and value-added services.

  • Customizable coverage options: Freight insurance policies can be tailored to suit the specific needs and requirements of different businesses. This allows companies to choose the level of coverage that best fits their shipping needs and budget.

 

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Types Of Freight Insurance In India

There are many types of freight insurance in India such as marine insurance, air cargo insurance, road freight insurance, rail freight insurance, inland transit insurance, etc.

  • Marine Cargo Insurance: This type of insurance covers loss or damage to goods transported by sea. It protects against risks such as sinking, fire, collision, and piracy.

  • Road Freight Insurance: This type of insurance covers goods transported by road. It protects against risks such as accidents, theft, or damage during transportation.

  • Rail Freight Insurance: This insurance provides coverage for goods transported by rail. It protects against risks such as derailment, theft, or damage during transit.

  • Inland Transit Insurance: This type of insurance covers goods transported within a country, whether by road, rail, or waterways. It protects against risks such as accidents, theft, or damage during transportation.

  • Project Cargo Insurance: This type of insurance is designed for large, complex shipments such as construction equipment or machinery. It provides coverage for risks specific to these types of shipments, such as delays, damage, or loss.

 

Difference Between Freight Insurance And Freight Liability

Below, we have mentioned the difference between freight insurance and freight liability in a table based on coverage, beneficiary, compensation limits, etc.

 

Aspect

Freight Insurance

Freight Liability

Definition

A type of insurance that covers loss or damage to goods during transit.

A carrier's legal responsibility for loss or damage to goods in their care.

Coverage

Provides comprehensive coverage for various risks including accidents, theft, natural disasters, etc.

Limited to specific liabilities as defined by law or contract, usually less comprehensive.

Beneficiary

The shipper or consignee who purchases the insurance policy.

The shipper, consignee, or third party depending on the contract.

Compensation Limits

Generally up to the declared value of the goods.

Often subject to legal limits, such as per pound or per kilogram rates.

Premium

Paid by the shipper or consignee.

No premium; liability is part of the carrier's service terms.

Claims Process

Typically involves the insurer directly; proof of loss is required.

Claims must be filed against the carrier, often involving a more complex process.

Applicability

Optional and can be tailored to specific needs and routes.

Automatically applies under national and international transportation laws.

Documentation

Requires an insurance policy outlining the terms and conditions.

Governed by bills of lading, waybills, or other transport documents.

Control

The shipper or consignee has control over the terms and coverage.

Limited control; terms are set by the carrier and regulatory frameworks.

 

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When Should You Buy Freight Insurance?

Freight insurance isn't mandatory for every shipment, but it's recommended for many situations. Here are some factors to consider.

  • Value of Goods: If you're shipping high-value items like electronics, artwork, or perishable goods, even minor damage can be financially devastating. Freight insurance provides a safety net in case of loss or damage.

  • International Shipments: International shipments involve more handling and longer distances, increasing the risk of complications. Freight insurance offers peace of mind for these journeys.

  • Long-Distance or Large-Scale Shipments: Similar to international shipments, long distances, and large quantities elevate the risk of incidents. Freight insurance safeguards your investment.

  • Carrier Liability Limits: Carriers have limitations on their liability for cargo loss or damage. If the value of your shipment exceeds this limit, freight insurance covers the difference.

  • Fragile Goods: Even with careful handling, fragile items are more susceptible to damage during transport. Freight insurance provides financial protection for these delicate shipments.

  • Peace of Mind: Knowing your shipment is insured can reduce stress and allow you to focus on other aspects of your business.

  • Customer Expectations and Business Reputation: If you're shipping for clients, they might expect you to have freight insurance. It shows professionalism and protects your reputation in case of unforeseen events.

  • Legal and Contractual Requirements: In some cases, legal requirements or contracts might mandate freight insurance for specific types of goods or shipments.

 

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Factors To Consider When Buying A Freight Insurance Policy

There are some factors to consider when buying a freight insurance policy such as value of goods, type of coverage, incoterms, exclusions, deductibles, etc.

  • Value of Goods: Ensure the policy covers the full declared value of your shipment. Don't under-insure, as you might not be reimbursed for the entire loss.

  • Type of Coverage: Choose between all-risk coverage (protects against most perils) or named perils coverage (covers only listed events). All-risk offers broader protection but costs more.

  • Incoterms: Understand how your chosen Incoterms (international commerce terms) impact insurance responsibility. Incoterms clarify which party (buyer or seller) is responsible for getting insurance at different points in the shipping journey.

  • Exclusions: Carefully review what's excluded from coverage. Common exclusions might include wear and tear, inherent vice (flaws in the goods), or acts of war.

  • Claims Process: Know the claims process, including required documentation and specified time for filing claims.

  • Payment Options: Consider whether you prefer a single policy for a specific shipment or an open policy that covers all your shipments for a period (usually a year) for a set premium.

  • Financial Stability: Choose a reputable insurer with a strong financial position to ensure they can pay out claims when needed.

  • Proper Packaging: While insurance protects against unforeseen events, proper packaging can reduce the risk of damage during transit.

  • Accurate Information: Disclose accurate information about your shipment's value and nature to avoid coverage disputes.

  • Documentation: Maintain proper documentation like bills of lading, invoices, and photos of the shipment in case you need to file a claim.

 

Read More:

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Conclusion

In conclusion, freight insurance is a crucial component of supply chain management that helps protect businesses from financial losses due to damage or loss of goods during transit. Understanding the different types of freight insurance, such as cargo insurance and general average insurance & considering factors such as the value of goods, mode of transportation &  destination are essential for businesses to select the most appropriate coverage for their specific needs. For any assistance, you can contact “Our Experts”.

FAQs

Cargo insurance covers goods being transported in a specific vehicle or carrier, while freight insurance protects against losses incurred during the entire shipping process, including storage, handling, and transportation.

Freight and transit insurance provides coverage for goods being transported by land, sea, or air from potential damage, loss, or theft during transit.

Freight covers the cost of transporting goods or merchandise from one location to another

Typically, the party arranging the shipment, whether it be the shipper or the consignee, pays for freight insurance.

Freight insurance is necessary to protect against potential losses or damages that may occur during the shipping process.

Freight insurance is crucial for protecting businesses and providing peace of mind for sellers and buyers. It ensures compensation for lost, damaged, or stolen goods during transit, helps mitigate financial risks, and improves customer relationships by demonstrating a commitment to safe delivery.

There isn't a fixed percentage cost for freight insurance in India. It depends on factors like the value of your goods, shipping route, and type of coverage.

Freight insurance cost is calculated by multiplying the insured value of your goods by the insurance rate. The insured value considers the commercial invoice value, freight cost, and a 10% buffer. Insurance rates depend on factors like the type of goods, shipping route, and desired coverage.

Calculating freight cost per kg isn't straightforward. The key factor is chargeable weight, which can be actual weight or volumetric weight (based on dimensions), whichever is higher. You'll need the freight rate per kg (obtained from carriers) and divide the total chargeable weight by this rate to get the cost per kg.

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