Differences and Key Aspects of Cargo and Freight Insurance

Have you ever wondered about the fate of those massive shipping containers you see stacked high on cargo ships? 

Every year, thousands of these containers find their way to the ocean's depths, causing a considerable financial burden and disrupting the supply chain management of numerous businesses globally. 

This is where cargo and freight insurance plays a crucial role in safeguarding your investments.

Common Terminology Confusion: Cargo vs. Freight

Cargo

Cargo refers to goods transported primarily by ship or plane, sometimes including mail. It focuses purely on the items being transported, not the cost or fees associated. Cargo is typically moved in large containers, using pallets or nets suitable for the items being shipped.

Freight

Freight refers to commercial goods transported by rail, truck, plane, or ship, and it also encompasses the cost of transportation. 

Unlike cargo, freight specifically relates to commercial goods and includes payment, making "freight charges" a common term in shipping logistics.

When considering insurance, marine cargo insurance specifically covers the goods being transported, while freight insurance focuses on protecting the financial interest of the cargo owner against the loss of freight charges. 

Also Read: Understanding Insurable Interest in Marine Insurance Contracts

Key Differences Between Cargo Insurance and Freight Insurance

If you’re involved in import and export, you’ve likely come across the terms cargo insurance and freight insurance. 

While they might seem similar, understanding their differences is crucial to protecting your shipments effectively.

Here's a detailed table comparing Cargo Insurance and Freight Insurance:

Importance of Cargo Insurance and Freight Insurance

Why are marine insurance policies essential?

• Protects Against Financial Losses: Whether you’re facing damage, theft, or loss, having cargo insurance ensures you’re compensated for your goods' value, while freight insurance protects the carrier’s liability.
• Peace of Mind in Supply Chain Management: With both policies in place, you maintain business continuity, even when disruptions occur during freight forwarding.
• Compliance with Trade Requirements: Many countries mandate marine cargo insurance or inland marine and ocean marine insurance to safeguard international trade, ensuring you stay compliant.

Also Read: Reefer Breakdown and Refrigerated Cargo Insurance Coverage

Freight Insurance: Detailed Coverage and Setup

Freight insurance serves as a protective shield for freight forwarders and carriers, ensuring they’re covered against potential liabilities during the transportation of goods. 

Unlike cargo insurance, which covers the value of the items themselves, freight insurance focuses on protecting the transportation process, offering peace of mind to carriers engaged in freight forwarding and logistics operations.

Why This Matters:

If you’re a freight forwarder, any damage or loss to the goods during transit could result in hefty claims against you. Having freight insurance ensures you’re not left bearing these financial burdens alone.

Also Read: Understanding Import Export Insurance and Its Benefits

Coverage Limitations: Proof of Negligence Required

One critical aspect of freight insurance is that it often requires proof of negligence before a claim can be processed. This means the freight forwarder or carrier must be proven to have been at fault for the damage or loss.

What This Means for You:

• If negligence is proven: The insurance will cover the claim, protecting the freight forwarder from financial liability.
• If negligence cannot be proven: The claim might be denied, leaving the freight forwarder or carrier to handle the expenses.

Example: Suppose a shipment gets damaged due to improper packaging by the sender. In this case, the freight insurance might not cover the damages since the freight forwarder wasn't negligent.

Claim Calculation: Based on the Weight of Goods

When filing a claim under freight insurance, the payout is typically calculated based on the weight of the goods, not their value. This makes it different from cargo insurance, which covers the full value of the items.

Why This Matters:

For businesses transporting high-value, lightweight goods, this calculation method might not fully compensate for the loss. It's crucial to understand this difference to avoid financial surprises in the event of a claim.

Common Misconceptions and Implications for High-Value Goods

Many businesses mistakenly assume that freight insurance offers the same level of protection as cargo insurance, but that’s not always the case, especially for high-value goods. Because freight insurance claims are calculated based on weight, it may fall short in covering expensive items, such as electronics or jewelry.

Real-Life Example:

Imagine shipping a consignment of luxury watches worth ₹50 lakhs, weighing only 50 kg. If damaged, freight insurance might compensate based on weight (say ₹1,000 per kg), resulting in a payout of just ₹50,000—far less than the actual value.

Pro Tip: Always ensure you have adequate cargo insurance to cover high-value goods, as it provides comprehensive coverage for such items.

Who Pays: Typically Paid by the Freight Forwarder, Included in Customer’s Shipping Cost

Freight insurance premiums are usually paid by the freight forwarder, who often includes this cost in the customer’s overall shipping charges. This setup allows freight forwarders to protect themselves without directly charging the customer separately.

Why This Setup Works:

• For Freight Forwarders: They’re safeguarded against potential claims without having to cover costs out of pocket.
• For Customers: It ensures goods are protected during transit without having to handle the complexities of setting up insurance themselves.

Also Read: Claim Process and Required Documents in Marine Insurance

Cargo Insurance: Detailed Coverage and Setup

The primary purpose of cargo insurance is to protect the owner of the goods being transported, ensuring they're compensated if the cargo is damaged, lost, or stolen during transit. 

This form of insurance is crucial in import and export activities, as it safeguards the financial interests of the sender, providing peace of mind throughout the shipping journey.

Why It Matters: Unlike freight insurance that primarily protects carriers, cargo insurance ensures the sender’s investment is protected, regardless of the shipping method.

Scope: Coverage Not Limited to Forwarder Errors

One significant advantage of cargo insurance is that its coverage isn't limited to just forwarder errors. This means the protection extends to a wide range of potential risks, including:

• Weather-related damages during ocean shipping
• Accidents or collisions
• Theft or pilferage
• Handling errors by third parties

This comprehensive scope ensures your goods are protected from various unforeseen incidents, making marine cargo insurance an essential part of any shipping operation.

Also Read: Understanding Shipping Insurance and Coverage for 2024

Comprehensive Coverage Details

Cargo insurance offers comprehensive coverage, ensuring protection against various risks that may occur during transit:

Acts of God

Natural disasters like storms or floods during transit

This extensive coverage ensures your business is protected against most shipping risks, making it indispensable for effective supply chain management.

Claim Calculation: Based on Full Commercial Value

Unlike freight insurance, which calculates claims based on weight, cargo insurance claims are determined by the full commercial value of the goods. This means if your goods are lost or damaged, the insurer compensates you based on the total value you declared, ensuring you don't suffer financial setbacks.

Example: If your electronics consignment worth ₹40 lakhs gets damaged, you’ll be compensated based on this full value, not just the weight. This approach ensures you’re adequately covered, especially for high-value items.

Who Pays: Typically Secured by the Sender

Cargo insurance is usually secured by the sender, who includes it as part of the overall shipping process. This ensures that the goods are protected from the moment they leave the warehouse until they reach their final destination.

Why This Is Important: By securing cargo insurance, senders take control of the risk management process, ensuring they’re not left vulnerable during freight forwarding or logistics operations.

Also Read: Understanding the Basis of Valuation in Marine Cargo Insurance

Modes of Transportation Covered in Cargo Insurance and Freight Insurance

Imagine you're transporting high-value goods across the globe, involving land, sea, and air. It’s crucial to know that your cargo insurance and freight insurance can adapt to every mode of transport, ensuring comprehensive coverage throughout the journey.

• Land Transport: Whether your goods are moved by truck or rail, inland marine insurance protects your cargo during road transit, covering risks such as theft, accidents, or damage.
• Sea Transport: For shipments via ocean shipping, marine cargo insurance offers coverage for various risks, from natural disasters to piracy. Freight insurance also plays a role in protecting the carrier's liability.
• Air Transport: Air freight can be exposed to risks like handling errors or damage during loading/unloading. Both cargo and freight insurance ensure coverage against these risks.

Why This Matters: Multimodal Transport Insurance

In modern trade, goods often travel using combined modes—road, sea, and air—referred to as multimodal transport. This is where marine insurance shine, covering your goods seamlessly across all modes.

Example: Suppose you’re shipping electronics from India to the USA via ship, and then by truck to the final destination. Cargo insurance protects your goods throughout this journey, while freight insurance covers the carrier’s liability across all touchpoints.

Also Read: Exploring Different Types of Marine Insurance Clauses

Premium Calculation for Cargo Insurance and Freight Insurance

1. Factors Affecting Premiums for Freight Insurance

The cost of freight insurance depends on several factors:

• Type of Goods: High-risk or fragile items have higher premiums.
• Distance and Route: Longer or riskier routes increase costs.
• Mode of Transport: Air freight typically costs more than land or sea.
• Claims History: Frequent claims can lead to higher premiums.

2. Factors Affecting Premiums for Cargo Insurance

For cargo insurance, the following factors play a role:

• Declared Value of Goods: The higher the value, the higher the premium.
• Nature of Goods: Perishable or hazardous goods attract higher premiums.
• Packaging Quality: Well-packaged goods often receive lower rates.
• Coverage Type: All-risk coverage costs more than limited coverage.

Also Read: Essential Elements and Principles of Marine Insurance Contract

Who Should Purchase Each Type of Insurance?

1. Eligibility and Best Practices for Freight Insurance

• Best For: Freight forwarders, carriers, or logistics companies.
• Ideal Practice: Secure freight insurance to protect against liability, especially if handling high-risk or high-value cargo.

Pro Tip: Include insurance costs in your client’s overall shipping charges.

2. Eligibility and Best Practices for Cargo Insurance

• Best For: Importers, exporters, or owners of the goods being shipped.
• Ideal Practice: Always secure cargo insurance, especially when shipping high-value items across long distances.

Conclusion: Simplify Global Trade with Pazago’s Cargo Insurance and Freight Solutions

Pazago is your go-to EXIM management platform for streamlining cargo insurance and freight processes. 

Supporting over 110+ countries, it offers up to a 20% cost saving and reduces turnaround time (TAT) by 50%.

Key Features:

• Digital Trade Management: Streamline your entire process from procurement to fulfillment.
• Real-Time Cargo Tracking: Monitor shipments globally with 180+ shipping companies.
• Seamless Payment Processing: Fast international payments with low Forex rates.
• Document Management: Create and manage essential trade documents securely.
• Proactive Planning: Get automatic notifications to avoid delays.

Comprehensive Cargo Insurance

Pazago offers fully digital cargo insurance through ICICI Lombard:

• Digital Insurance: No paperwork; everything is handled online.
• Full Coverage: Protects your cargo from almost all risks, unlike standard carrier liability.
• Quick Claims: A seamless claims process with no need to prove carrier fault.

Why Choose Pazago?

"Ensuring security, simplifying trade" 🌏—that's the Pazago advantage. We don't just streamline your logistics; our comprehensive digital cargo and freight insurance offers top-tier protection, ensuring your shipments are safeguarded every step of the way. 🚚

Want to secure your global shipments? Discover how Pazago’s robust insurance solutions can elevate and protect your international trade journey.

Choose Pazago, where protection meets efficiency! 📦

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