Understanding Increased Value Clause in Cargo Insurance

When transporting goods through ocean shipping or freight forwarding, the market value alone may not reflect your financial risk. You might have additional costs like freight charges, customs duties, or even profit margins that need protection. 

This is why many importers and exporters opt for increased-value insurance to safeguard their investments beyond the basic coverage. This is where increased value insurance cargo steps in, providing the extra layer of protection that ensures you’re not left financially vulnerable.

Let’s explore why this clause is essential for businesses engaged in import and export and how it offers a much-needed cushion against unexpected losses.

What Is Increased Value Insurance Cargo?

Increased value insurance cargo is an extension of traditional marine insurance that covers your goods for an amount exceeding their market value. 

This type of insurance goes beyond the basic coverage, protecting you from potential losses due to fluctuations in market value, additional costs, or unforeseen events.

How It Differs from Traditional Marine Insurance:

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How Does Increased Value Insurance Work in Real Life?

Imagine you're shipping a batch of luxury watches worth ₹50 lakhs, but you also have additional freight charges, duties, and anticipated profit margins totalling another ₹20 lakhs. 

Traditional marine cargo insurance would only cover the market value of ₹50 lakhs. However, with increased value insurance, your coverage includes the entire ₹70 lakhs, protecting your complete financial interest.

Why Do You Need Additional Coverage Beyond Market Value?

In international trade, the market value often fails to capture the full cost of your goods. Factors like freight charges, customs duties, and potential profit margins contribute to your overall financial stake in your cargo. 

These additional expenses can be substantial if your shipment is damaged, stolen, or lost at sea.

By opting for increased value insurance cargo, you safeguard these extra costs, ensuring your business doesn’t suffer a significant financial setback. This type of coverage is especially beneficial for:

• High-value goods: Jewelry, luxury items, electronics, etc.
• Goods with fluctuating market prices: Commodities, raw materials, etc.
• Fragile or easily perishable items: Pharmaceuticals, perishables, etc.

Recognition of Additional Insurable Interests

Having an insurable interest means you have a financial stake in the cargo you're transporting, and you stand to lose financially if the cargo is damaged or lost. 

Traditional shipping insurance only covers the declared market value of your goods, but what if your financial interest extends beyond that?

This is where the increased value insurance cargo clause recognises your additional insurable interests, such as:

• Freight Costs: The money spent transporting goods from one place to another.
• Customs Duties and Taxes: Charges incurred when your goods cross international borders.
• Expected Profit Margins: The profit you would make upon selling the goods.

By incorporating these factors, the increased value insurance clause ensures that you are fully compensated, even if these additional expenses exceed the standard market value of your shipment.

Also Read: Inland Marine And Ocean Marine Insurance Comparison: Coverage, Benefits, Difference

What Makes the Increased Value Clause Essential for Your Cargo?

This clause considers the market value and any additional financial interests you may have, such as freight charges, customs duties, and expected profit margins.

One of the increased value clause's most significant advantages is its ability to offer an extra 20% to 25% coverage on top of the insured value in the event of a total loss. 

This means that even if the worst happens—whether due to a storm, collision, or piracy—you’ll receive compensation that more accurately reflects your overall financial stake.

Key Benefits:

• Full Financial Protection: Ensures you’re compensated for the actual cost of your cargo, including any additional expenses.
• Avoids Financial Setbacks: Provides a buffer against total losses, preventing a major financial blow to your business.

Also Read: Essential Elements and Principles of Marine Insurance Contract

Benefits of Increased Value Clause in Cargo Insurance

Let’s explore why incorporating the increased value clause into your marine insurance policy is a game-changer for any business involved in import and export.

1. Low Likelihood of Total Loss

One of the most significant advantages of having an increased value insurance cargo clause is the significantly lower likelihood of experiencing a complete financial loss. 

This additional coverage ensures that even if your goods are damaged or lost entirely, you won't face the devastating consequences of receiving only a fraction of their true value.

With this clause, you gain a safety net that offers complete financial protection, reducing the risk of substantial losses in global trade.

2. Some Insurers Offer Lower Premiums

Many businesses shy away from additional insurance coverage, assuming it always comes with higher premiums. 

However, that’s not always true with the increased value insurance cargo clause. In fact, some insurers may offer lower premium rates when you opt for this extra coverage, making it a cost-effective solution.

Why Would Insurers Lower Premiums?

• The increased value clause represents a smaller proportion of the overall risk than the primary insurance policy.
• Insurers recognise that having this clause reduces the likelihood of a business facing catastrophic losses, leading to fewer large claims.

Benefit: You get the best of both worlds—enhanced coverage without the hefty price tag, ensuring your goods are protected without stretching your budget.

3. Helps Save on Premium Costs in the Long Run

While it might seem counterintuitive, opting for an increased value insurance cargo clause can help you save on premium costs over time. Here’s how:

• Avoiding Under-Insurance: Without the increased value clause, there’s a risk that your goods might be underinsured, which could result in higher out-of-pocket expenses if a loss occurs. You avoid these additional costs by covering your goods for their actual value.
• Reduced Claims Frequency: With adequate coverage, you’re less likely to file multiple claims, leading to lower premium rates over time, as insurers often reward businesses with fewer claims through discounts or reduced premiums.

Suppose you experience a partial loss of goods worth ₹30 lakhs. You’d be forced to bear some expenses if your coverage is inadequate. You're fully covered with the increased value clause, saving you money in the long run.

Also Read: Definition and Meaning of Cargo Insurance Certificate in Shipping Terms

Why Does Hull Insurance Need Additional Coverage?

Let’s dive into the implications of hull insurance, how underinsurance can impact compensation, and why covering ‘excess liabilities’ is crucial for your business's financial stability.

1. Underinsured Vessels: A Risk You Can’t Ignore

One of the most significant implications of hull insurance is the risk of having underinsured vessels. This means that the insured value of the vessel is less than its actual market value or replacement cost. 

This situation often arises when shipowners underestimate the potential risks or fail to update their insurance coverage as the vessel's value changes over time.

How Does Underinsurance Impact Your Business?

• Inadequate Coverage: In case of damage or total loss, you receive compensation based on the insured value, not the actual value, leaving you to bear the financial difference.
• Higher Out-of-Pocket Costs: If your vessel is underinsured, you may pay a significant portion of repair or replacement costs yourself, which can impact your bottom line.

Imagine your vessel is worth ₹100 crores, but you’ve insured it for only ₹70 crores. If an accident occurs and the repair costs are ₹40 crores, your insurance might only cover a proportionate amount, leaving you with a hefty bill to pay.

2. Reduction in Compensation for Liabilities, Salvage, and Average Claims

Underinsured vessels face a significant reduction in compensation when it comes to liabilities, salvage, and average claims. This reduction can affect your ability to recover costs associated with accidents, damages, or salvage operations.

Understanding the Impact:

• Liabilities: If your vessel causes damage to another vessel or property, your compensation might be limited, resulting in increased out-of-pocket expenses for settling claims.
• Salvage Costs: If your vessel needs to be salvaged, underinsurance means you’ll only receive a portion of the total salvage costs, leaving you to cover the remainder.
• General Average Claims: When a vessel faces a general average situation (where cargo and vessel owners share the costs of a loss to save the vessel), underinsurance could lead to reduced compensation, forcing you to pay a higher share.

3. Covers ‘Excess Liabilities’ – An Extra Layer of Protection

One of the most valuable aspects of incorporating the increased value insurance cargo clause into your hull insurance policy is its ability to cover ‘excess liabilities.’ 

These are liabilities that exceed the standard coverage limits of your import-export insurance policy, often resulting from unexpected events, accidents, or third-party claims.

How Does This Work?

• Excess Liability Coverage: This policy provides additional coverage for liabilities that exceed the insured value, ensuring you’re not left financially vulnerable.
• Comprehensive Protection: Whether it’s a collision, grounding, or damage caused to third-party property, covering excess liabilities ensures you have the financial resources to manage the situation effectively.

Suppose your vessel collides with another ship, resulting in damage claims totalling ₹60 crores. If your primary hull insurance covers only ₹50 crores, you’d be liable for the remaining ₹10 crores. The increased value clause covers this excess liability, fully protecting you.

Also Read: Exploring Different Types of Marine Insurance Clauses

How Does the Increased Value Clause Affect Your Marine Insurance Policy?

From the assured’s duty to provide accurate values to how claims are shared, the increased value clause significantly shapes your overall coverage.

Let's break down these impacts, ensuring you’re fully informed about how this clause affects your marine insurance policy.

1. Obligations of the Assured in Providing Full Values

One of the primary obligations of the increased value clause is for the assured (you, the policyholder) to provide accurate and complete values for your insured cargo or vessel. 

This means declaring the true worth of your goods, including any additional costs such as freight, customs duties, and expected profit margins.

Why Is This Important?

• Ensures Adequate Coverage: By providing full and accurate values, you ensure that your insurance policy covers the actual financial risk associated with your cargo or vessel.
• Prevents Underinsurance: Failing to declare the full value could result in underinsurance, where you only receive partial compensation in the event of a loss.

If you declare your cargo’s value as ₹50 lakhs but its true worth (including freight and customs) is ₹70 lakhs, your compensation in case of a total loss might be significantly lower than expected. This can leave you facing a substantial financial shortfall.

2. Sharing Claims Pro Rata with Increased Value Clauses

When an increased value insurance cargo clause is included in your policy, any claims you make will be shared on a pro-rata basis. This means compensation for any damage or loss will be proportionally divided between the original insured value and the increased value.

How Does This Work in Practice?

• Pro Rata Sharing: In the event of a loss, the claim amount is divided between the standard insurance policy and the increased value clause based on their respective coverage amounts.

Let’s say you have a standard policy covering ₹60 lakhs and an increased value clause covering an additional ₹20 lakhs. If your total claim is ₹30 lakhs, the payment will be divided proportionally—75% will be covered by the standard policy (₹22.5 lakhs) and 25% by the increased value clause (₹7.5 lakhs).

3. Effects When the Clause Appears in Only One Policy

Sometimes, the increased value clause might appear in only one of your multiple marine insurance policies. This situation can have unique implications for how claims are processed and compensated.

Possible Scenarios:

• Single Policy Coverage: If the increased value clause appears in only one policy, that policy is responsible for covering the excess value in case of a loss. This means that if your primary insurance doesn’t include the clause, you might not be fully compensated for the additional value.
• Multiple Policy Complications: Different policies with different coverage terms can lead to confusion or delays in claim settlements.

Example: Suppose you have two policies—Policy A covers the standard value (₹50 lakhs), while Policy B includes an increased value clause (₹20 lakhs). If your cargo suffers a loss worth ₹30 lakhs, the claim might be split between the two policies. 

However, if Policy A doesn’t recognise the increased value clause, you might face challenges in receiving full compensation.

Pazago – Your Trusted Partner for Marine Insurance Solutions

When it comes to securing your cargo, Pazago offers comprehensive solutions that simplify your marine insurance needs, especially with increased-value insurance cargo. 

Here’s how Pazago stands out:

• Digital Trade Management: Streamline your insurance process online, from policy updates to claims.
• Real-Time Tracking: Monitor shipments across 180+ shipping companies for complete visibility.
• Seamless Payment Processing: Make fast international payments with low Forex rates, ensuring your trade operations remain financially smooth and efficient. 
• Document Management: Create, manage, and store essential trade documents securely in one place. 
• Proactive Planning: Receive timely alerts to avoid delays in your import-export operations.
• Comprehensive Cargo Insurance: Tailor your coverage, including increased value clauses, to protect your goods from every possible risk.
• Quick Claims Processing: Enjoy a fast, hassle-free claims process without proving carrier fault.

With Pazago, you save up to 20% in costs and reduce turnaround time by 50%, making it the ideal choice for managing your global trade efficiently.

Ready to secure your cargo’s full worth? Choose Pazago today!

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