MKTG Discussion Questions Part 2

10-18 Chapter 10: International Insurance

Chapter 10: International Insurance 10- 17

Chapter 10

International Insurance

lEARNING oBJECTIVES

At the end of this chapter, YOU SHOULD:

Identify perils of the sea.

Identify perils associated with air shipments.

Identify insurable interest.

Identify methods of risk management.

Identify various forms of and coverages under marine insurance policies.

Identify elements of an airfreight policy.

Identify the functions of Lloyds of London.

Identify elements and functions of commercial credit insurance.

Identify nomenclature of international insurance.

Preview

Any study of insurance can be complex, especially in the area of marine insurance. Seafaring is an ancient trade and many of the concepts and traditions of insuring cargo have been used for many years. As a result, some of the ideas may be unfamiliar to those first exposed to them.

Chapter Outline

10-1 Complexity of International Insurance

I. One of the most complex issues in international logistics is insurance

II. Topic is of utmost importance

10-1-1 Particularities of International Insurance

I. Large number of different coverages

II. Many of the risks are misunderstood

III. Incoterms rules are somewhat misleading; “insurance” under CIF and CIP is minimal coverage

IV. Carriers have very limited coverage

10-1-2 International Insurance Vocabulary

Makes sense to learn terminology before using to reduce risks:

a. Average

b. Barratry

c. General average

d. Hazard

e. Jettison

f. Particular average

g. Peril

h. Risk

i. Speculative risk

j. Pure risk

k. Objective risk

l. Subjective risk

10-2 Perils faced by International Shipments

I. Ocean shipment is risky

II. Most risks are not well-known by shippers used to land transit

10-3-1 Cargo Movements

I. Ocean shipments are subject to numerous cargo movements

II. Exporter usually carefully packs goods, say, into a container

III. After leaving exporter’s shipping dock, goods are in care of less scrupulous hands

a. Typical container is handled four to six times in each of the ports of departure and destination

b. Containers are “dropped into the ship” quite literally

c. Cargo is subject to ship’s movement in six directions at one, even in good weather

d. Storms can cause excessive damage

10-3b Water Damage

I. Strong possibility of water damage unless cargo is very well packed and protected

II. Traditional for a shipper of higher value merchandise to request that the cargo be stored “under deck”

III. With modern containerships the concept of deck has disappeared, making cargo vulnerable to sea and rain water

IV. Cargo can be damaged by container “sweat” due to lack of air circulation, other cargo with high moisture content, or loading in hot, humid areas. Break-bulk goods can be damaged in holds by ship “sweat”

10-3c Overboard Losses

I. Worldwide ships lose containers on a daily basis

II. Container collapses also can damage goods

10-3d Jettison

I. Captain of ship may throw freight overboard to save ship and rest of cargo

II. Old maritime tradition of “general average” determines loss compensations

10-3e Fire

I. Since dangerous cargo cannot travel by air it is often onboard ship

a. Fireworks

b. Explosives

c. Compressed gases

d. Ammunition

e. Chemicals

II. No way crews can effectively fight fire on contemporary container ships

10-3f Sinking

I. Not common for containerships, but possible

II. In 2008, there were 75 ships lost at sea, a decrease from previous years

10-3g Stranding

I. Ships get stranded:

a. Mechanical breakdowns

b. Stormy weather

c. Incompetent crews

II. Direct damage to cargo not usually likely:

a. Damage may result due to delay

b. Damage may result due to lightering onto another ship

10-3h General Average

I. Exclusively a marine insurance term

II. General average is a general loss affecting all parties in an ocean voyage

a. Ship owners and cargo owners all share goal of successful completion of voyage

b. Owners of goods that arrive safely have a liability toward owners of goods that did not arrive

i. Cost of damage to ship and cargo is expressed as a percentage of value of ship and cargo

ii. Ship owners and shippers (or their insurance companies) contribute that percentage from respective values of their ship and cargoes

c. Each year about five situations in which a shipping company declares a general average involving United States shippers

10-3i Theft

I. Risks greater on shore

II. Increasing with goods easier to fence:

a. Athletic shoes

b. Cellular telephones

c. Computer equipment

III. Protections against theft:

a. Unmarked containers and pallets

b. Restrict number of people with access to shipping documents

IV. Most risk is during inland trip:

a. Truck hijackings

b. Some firms are using armored trucks

10-3j Piracy

I. Usually is robbery of ship’s crew

II. Some pirates take ship, kill or set crew adrift, and change ship’s identity

III. Defenses:

a. Satellite tracking

b. On-board commandoes

c. Rapid response teams

10-3k Other Risks

I. Collision

II. Contamination of cargo by other cargoes

III. Stowaways:

a. Cause delays

b. Pilfer cargo

c. Die and corpses contaminate cargo

IV. Government arrest

V. Owners go bankrupt or abandon ship and crew

VI. Poor port handling due to inadequate equipment

VII. Port social unrest, strikes

10-4 Perils Associated with Air Shipments

I. Much less than ocean

II. Fire and explosion risk is minimal, given restrictions on airfreight

III. Cargo movements

a. Pilots do not avoid turbulence on freighters and rates-of-climb and descent and banking are less gentle than on passenger planes

b. Some freight can be shipped on passenger planes

IV. Greatest dangers are in ground handling

V. Can be some risk due to colder temperatures and less pressurization in cargo holds

10-5 Insurable Interest

I. Several parties are interested in cargo’s safe arrival:

a. Cargo owner

b. Exporter before title transfer to importer

c. Importer wants goods safely at destination

II. Insurance contract is legally binding only if insured has interest in subject matter of insurance and interest is insurable

III. Incoterms help exporter and importer determine where respective responsibilities begin and end

IV. It would seem the insurable interest of the exporter ends when possession shifts to importer, but it is not that simple

V. Issue is muddied by several factors:

a. Foreign exchange exposure

i. Exporter in a developing country sells to importer in developed country on a CIF basis: responsibility transfers when merchandise crosses ship’s rail but exporter is responsible to provide minimum coverage insurance

ii. Assuming importer is in agreement with such minimum coverage, there is still the problem that should there be a loss, the importer would have to file a claim with the insurer in the developing country, or, at least, an insurer not chosen by the importer

iii. It is possible that the claim processing will take a few months, leaving the importer with the risk of foreign exchange devaluation

iv. Since the terms are CIF, the exporter delivered the goods as agreed, and therefore the invoice has to be paid by the importer, causing a cash-flow problem as well

v. In this case, the importer has an insurable interest and can obtain coverage in its country to minimize its foreign exchange risk exposure. A similar situation can arise in a CIP shipment

b. Trust

i. Exporter may sell FCA to importer in country that mandates that importer buy insurance in the importing country

ii. Exporter usually ships without evidence of coverage, since responsibility shifts to importer as soon as goods are in carrier’s care

iii. However, should goods be damaged in transit, importer may refuse payment, despite the fact that the accident happened under its responsibility

iv. The exporter has therefore an insurable interest in the completion of the trip

1. Problem would be avoided if exporter sold on a letter of credit basis, as the documents for the shipment, including the intermodal bill of lading, would be in order, and the issuing bank would have to pay

2. The same situation would arise in FAS, FOB, CFR, CPT, and DAF shipments; it could also happen in an EXW transaction

c. Insufficient coverage

i. Exporter agrees to sell to an importer on a CIF basis

ii. The importer requests that the terms be modified to “CIF maximum cover,” but, since it is an open account shipment, does not obtain evidence of this coverage

iii. The goods are slightly damaged in transit by condensation, and the importer seeks to collect compensation under the terms of the insurance policy provided by the exporter

iv. However, the claim is turned down because the exporter did not contract for Coverage A, but for Coverage B or C, which do not allow claims for such damage

v. Importer has an insurable interest in cargo and can obtain coverage in its country to protect itself from such losses

10-6 Risk Management

10-6a Risk Retention

I. Company decides it is more economical not to buy insurance

II. Usually four reasons for risk retention:

a. Very large international traders self-insure

b. International traders with little exposure due to small value shipments

c. International traders with little exposure due to small percentage of their business which is international

d. Out of ignorance

10-6b Risk Transfer

I. Firm transfers all risk to insurance company

II. Usually three reasons for risk transfer:

a. Firm has a lot of exposure due to high value shipments

b. Firm has relatively high exposure

c. Firm has minimal experience in international trade and are uncomfortable with risks or they are unable to properly assess their exposure

10-6c Mixed Approach

I. Firm retains some risk and transfers rest

II. Strategy can be achieved in two different ways:

a. Firm determines amount of exposure it can risk and assumes it through a deductible

b. Firm decides types of risks it will take and those it will transfer to insurance company

10-7 Marine Insurance Policies

I. International trading firm is generally only interested in purchasing marine cargo insurance

II. It only needs to protect itself from cargo damage and possibility of liability in a general average case.

10-7a Marine Cargo Insurance

I. Can be purchased through an insurance agent

II. Can be purchased through a freight forwarder

III. Types of policies:

a. Open policy

i. Open ocean cargo policy automatically covers all shipments of the insured as long as all shipments are reported to insurance company

ii. There is presumption of goodwill on the part of the firm

iii. Since premiums are based on value of shipments the firm knows cost of insurance coverage which can easily be put in pro forma invoices

b. Special cargo policy

i. Firm purchases policy for each of its shipments

ii. Tends to be cumbersome

IV. Obtaining insurance certificates

a. Often exporter must provide Certificate of Insurance to importer and its bank

b. Usually certificate is required by letter of credit

I. Purchase marine cargo insurance from two sources: insurance agent or freight forwarder

10-7b Hull Insurance

I. Covers ship owner’s risk against damage to or loss of ship:

a. Covers ship owner’s liability in case of general average

b. Covers ship owner’s liability in the event of collision

c. Version is also available to aircraft owners

II. Rates are dependent upon:

a. Vessel’s seaworthiness

b. Vessel’s maintenance

c. Vessel’s equipment

d. Appraisals by classification societies

10-7c Protection and Indemnity

I. Protection and Indemnity is yet another form of insurance for a ship owner

II. It is a protection against liability to other parties when a ship sinks or is damaged

III. In the last few decades, it has meant liability for oil spills—specifically cargo spills, but also ship fuel spills—on beaches, and their extensive clean-up costs

IV. It also addresses the ship’s owners’ liability toward the crew (injury, death) or in repatriating stowaways

V. It is not a traditional insurance as it is a mutual P&I club to which owners of ships contribute, and which absorbs the costs of one of the owners’ mishaps up to U.S. $7 million

a. Claims above U.S. $7 million, the 13 P&I clubs form an alliance and mutually insure up to U.S. $30 million

b. Claims involving cargoes of crude oil are covered by the International Fund for Oil Pollution Compensation

10-8 Coverages under a Marine Cargo Insurance Policy

I. Two types of insurance protect cargo during ocean or air shipment

II. The first group is governed by British Law and was completely re-written in 1982

a. This group of insurance policies seems to have become the standard for other countries as well

b. They are known as the Institute Marine Cargo Clauses, Coverage A, B, or C

III. The second group is older, with some antiquated clauses and more modern ones, and is mostly written by U.S.-based insurance companies, although some of the coverage can be written using older British clauses. These traditional policies are known as:

a. All Risks

b. General Average

c. Free of Particular Average

IV. Six general polices can be modified to add coverage not included in original contract (such as strikes and civil unrest), but none of the policies will cover:

a. Improper packing

b. Inherent vice—natural propensities toward decay of certain products as the rusting of steel when exposed to air and moisture

c. Ordinary leakage—wear and tear and usual leakage or physical shrinkage of certain products

d. Unseaworthy vessel—shipper must make sure ship is classified by Classification Society as seaworthy

e. Nuclear war—irradiation or destruction (but fire caused by nuclear war is covered)

10-8a Institute Marine Cargo Clauses—Coverage A

I. Coverage A similar to traditional “All Risks” policy

II. Differences:

a. Written in plain English

b. Policy is identical all over the world

III. Not truly an All Risks policy

a. Does not cover improper packing, inherent vice, ordinary leakage, unseaworthy vessel, and nuclear war

b. Does not cover strikes and civil disturbances, acts of war, and seizure by government unless separate endorsements are bought

10-8b All Risks Coverage

I. Goods must be shipped “under-deck” according to Shipper’s Letter of Instruction

II. Similar to Coverage A

10-8c Institute Marine Cargo Clauses—Coverage B

I. “Named perils” coverage—lists risks it covers:

a. Fire

b. Stranding

c. Sinking

d. Collision

e. Jettison

f. Washing overboard

g. Water damages

h. Total losses during loading and unloading

i. Does not cover:

i. Partial losses during loading and unloading

ii. Losses due to bad weather

II. Appropriate for goods with high tolerance for bad weather: coal, lumber, etc.

10-8d Institute Marine Cargo Clauses—Coverage C

I. Named perils policy

II. Covers:

a. Fire

b. Stranding

c. Sinking

d. Collision

e. Jettison

III. Does not cover:

a. Washing overboard

b. Rough weather damages

c. Water damages

d. Losses during loading and unloading

IV. Minimum coverage required by Incoterms CIF and CIP

V. Insufficient for most goods, including most containerized goods

a. Probably good for scrap metal or recyclable paper

b. Good for bulk cargoes

10-8e With Average Coverage

I. Generally written to include coverage in between an All Risks policy and a policy with Coverage B of the Institute Marine Cargo Clauses

II. Named perils policy (fire, explosion, etc.)

III. Also covers items Coverage B does not:

a. Damage to cargo from heavy weather

b. Partial losses due to loading and unloading

c. Bursting of boilers

IV. Partial losses are covered through a Franchise:

a. Losses up to a certain percent are not covered

b. Losses above that percentage are covered 100 percent (as opposed to a deductible for which deductible amount is not covered)

V. Covers things like fresh water damage, condensation, or breakage and pilferage, meaning shippers with risks in this area would be inclined to use with average coverage.

10-8f Free of Particular Average Coverage

I. Also a named perils policy

II. Divided between English Conditions and American Conditions:

a. English Conditions—partial losses covered if they happen on same voyage as fire, stranding, sinking, and collision without these perils contributing directly to loss

b. American Conditions—partial losses covered if they happen on same voyage as fire, stranding, sinking, and collision only if these perils contribute directly to loss

III. More restrictive than Coverage C

a. Rarely appropriate for international shipment of containerized or break-bulk cargo unless cargo is inexpensive

b. Could be appropriate for some bulk cargo of minimal value

IV. Not enough to cover minimum insurance requirements of CIF or CIP shipment

10-8g Strikes Coverage

I. All standard policies have a “Strikes, Riots, and Civil Commotions” (S.R. & C. C.) clause which excludes such perils

II. Amendment can be added to cover them, but it only covers direct physical damage or storage costs, not market losses

10-8h War and Seizure Coverage

I. All standard policies exclude coverage for war and war-like situations.

a. “Free of Capture and Seizure” (F.C. & S.) clause in American policies

b. “War Exclusion” clause in Institute Marine Cargo policies

II. “War Risks Only” policy is available

10-8i Warehouse-to-Warehouse Coverage

I. Covers goods from when they leave exporter’s warehouse to arrival at importer’s warehouse or 15 days after arrival at port of destination, whichever comes first

II. Extension of traditional All Risks, With Average, and Free of Particular Average policies

III. Integral part of Coverages A, B, and C and is called a “Transit” clause

10-8j Difference in Conditions

I. Fills gap between what an importer would like to have covered under its open cargo policy and what is covered under its supplier’s CIF or CIP coverage

II. Since International Chamber of Commerce only requires Coverage C of Institute Marine Cargo Clauses for a CIF or CIP shipment, it can be difficult to ensure that a supplier will actually cover the shipment more fully, even though the importer may request maximum coverage. In those cases, it is simpler for the importer to purchase a Difference in Conditions endorsement and not have to worry about what the supplier will provide.

10-8k Other Clauses of a Marine Insurance Policy

I. General Average clause—specifies that the insurer will cover the general average responsibilities of a shipper

II. Constructive Total Loss Coverage clause—all insurance policies contain this clause

a. Essentially specifies that insurer will reimburse the shipper for goods that have been abandoned after a stranding or a sinking, as long as the costs of recovering the goods and making them marketable is greater than their value

b. If it is possible to recover the goods at a cost lower than their value, then the insurance company pays for these costs

III. Sue and Labor clause—all traditional insurance policies have this clause

a. Directs shipper to act in the best interest of the insurance company when a loss occurs

b. The principle is that, after a loss, the insured should protect the cargo from further damage, as it would if it had not been insured, in order to keep the loss to a minimum

c. Policies written under the Institute Marine Cargo Clauses have similar wording but do not use this clause name

IV. Inchmaree clause

a. Named after ship involved in an old lawsuit that ruled that cargo damaged by burst ship’s boiler is not covered

b. Coverage was then added to All Risks, With Average, and Free of Particular Average policies

c. Also covers for errors in navigation and seamanship

d. Not included in Coverages A–C (which also do not include coverage for poor navigation)

10-9 Elements of an Airfreight Policy

I. Tend to be less complicated than ocean marine cargo insurance policies

II. Written as All Risk policies except for:

a. Improper packing

b. Inherent vice

c. Ordinary leakage

d. Unairworthy aircraft (rarely a concern as aircraft tend to be better regulated than ships)

e. Nuclear war

III. Exclude war and S.R. & C.C. coverage plus two conditions that can be unique to aviation:

a. Damages by cold

b. Damages by changes in atmospheric pressure

IV. Practically speaking, most air cargo policies are included as a clause in the open cargo policy of a firm, which allows the firm to manage its shipping risks with a single document, whether its goods are moving by ocean or by air

10-10 Filing an Insurance Claim

10-10a Notification

I. Promptly notify all parties in writing that there is a claim pending

II. Inspect cargo damage as soon as possible

III. Hire a surveyor

10-10b Protection of the Damaged Cargo

I. Protect the cargo from further damage

II. Protect the interests of the insurance company

III. Ensure that the correct cause of the loss is identified

10-10c Filing of a Claim

I. Submit all documents to insurance company and other parties

10-10d Carrier Liability Limits

I. Maritime claims are governed by COGSA (or the so-called Hague, Hauge-Visby, Hamburg, or Rotterdam Rules

II. International air claims are governed by Warsaw Convention

III. Multi-modal shipments are more complex

10-11 Lloyd’s

I. Not an insurance company

II. It is the oldest insurance market in the history of shipping

10-11a Principles

I. Insurance company strikes balance between collecting large number of premiums and the law of arithmetic averages of losses

II. Lloyd’s of London is a market through which unusual risks are insured, risks where the law of averages does not work

a. Lloyd’s insurers are called Bespoke Names and are organized in a syndicate and act as underwriters of the insurance

b. Each name is “wagering” there will not be a loss

c. Names collect a portion of the premium that it shares with rest of syndicate—this is the Name’s income

d. In the event of loss, all the names in a syndicate pay the loss

e. Venture can be very profitable, but there is unlimited liability on Name’s personal assets so personal exposure is high

III. In 1994, Lloyd’s decided to allow corporations to become Corporate Members

a. Corporate members were given the advantage of having limited liability and joined syndicates in which individual names retained unlimited liability

b. This decision, which allowed the syndicates to have more capitalization, also created some friction, as individual Names resented the creation of two classes of members and responsibilities

c. Most of Lloyd’s underwriting capability is provided by corporations. As of 2009, the number of individual unlimited liability Names was 773, with 1,238 corporate members

IV. Asbestos product liability resulted in bankruptcies of some Names, even though Lloyd’s tried to spread risk to more syndicates than originally involved

V. Number of Names soared from 14,000 in 1978 to 34,000 by the end of the 1980’s

VI. Some Names who joined in the 1980’s claim to not have been informed of the extent of the liabilities that Lloyd’s syndicates faced, and filed lawsuits alleging fraud

a. In November 2000, Lloyd’s was found not guilty of fraud by the British courts, but was called “grossly negligent”

b. Some criminal lawsuits against Lloyd’s are still pending as of June 2009

10-11b Lloyd’s in International Logistics

I. From the perspective of an exporter or importer, the Lloyd’s market would only be used for some of what is referred to as “project cargo”, or cargo of exceptional dimensions which would not fit in a traditional container or would need special arrangements with the shipping line

10-12 Commercial Credit Insurance

I. Increasingly, competitive pressures are pushing firms to sell on an open-account basis, as customers try to wrestle the best possible payment alternatives

II. Several countries used to offer subsidized terms on export insurance to their exporters and, although these practices have officially ended with the creation of the World Trade Organization (WTO) which prohibits export subsidies, the mindset was established

III. Firm may have to cover several types of transactions for which it feels uncomfortable:

a. Sale to foreign customer on open-account basis, where firm is concerned about its exposure, or the amount of money it has at stake in the sale

b. Sale to a foreign customer on credit terms: the customer has requested payments be extended over a period of several months. Terms are also open account since the sellers’ competitors have offered this alternative to the customer. The exporter is concerned about its exposure to this stream of payment

c. Construction firm is retained by foreign customer to build a plant; however, in order to earn the contract, it had to post a number of performance bank guarantees (or performance bonds). It is concerned about its exposure in the case of unexpected delays, if the customer calls on the bank guarantee

10-12a Risks Involved

I. Political risk—risks presented by country in which transaction takes place. For example:

a. Country’s government can decide to increase tariffs on certain imports and the customer refuses delivery

b. Country’s government can decide to freeze accounts held in foreign currencies and the customer cannot pay

c. Country’s government decides to prohibit the sales of a particular product

d. Country’s government commits a political faux pas and an embargo is declared by the remainder of the world, which means that no payments can be forwarded by the customer

II. Commercial risk

a. For whatever reason importer refuses to pay

10-12b Risk Management Alternatives

I. Firm can retain risk

II. Firm can transfer risk to insurance company

III. Firm can have a mixed strategy of retaining some risks and transferring others

10-12c Insurance Policies Available

I. Government programs

a. Ex-Im Bank (Export-Import Bank)

i. Job-creating U.S. government agency of the 1930s

ii. Large number of programs

iii. Two difficulties:

1. Long delays in application process.

2. As government agency it is subject to political pressures

b. OPIC (Overseas Private Investment Corporation)

i. Created in 1971 to encourage private investment in developing countries

ii. Very political aim—to further U.S. values overseas

iii. Like the Ex-Im Bank, applications are lengthy, but since long-term investments are involved, delays are less critical

c. SBA (Small Business Administration)

i. Created two programs designed to help exporters finance sales abroad: working capital loans and long-term loans for capital investments

ii. Does not provide insurance for exporters

II. Private insurance companies

a. FCIA (Foreign Credit Insurance Association)

i. Created in 1961 to combine Ex-Im Bank’s political insurance coverage with commercial credit insurance products

b. Euler-ACI

i. American Credit Indemnity offers commercial credit insurance product

c. American International Insurance Group

i. Largest U.S.-based provider of Commercial Credit Insurance

d. Lloyd’s

i. Provides insurance for countries for which United States government will not

Key terms

actuarial tables

Tables used by insurance companies that illustrate the exact probability, based upon historical data, of a particular peril.

average

A loss incurred on an ocean voyage by a cargo owner. It can be further qualified as a particular average or a general average.

barratry

An act of disobedience or willful misconduct by the captain or the crew of a ship that causes damage to the ship or the cargo.

Bespoke Names

In the Lloyd’s of London vernacular, the individuals who take on the risks insured by syndicates, and who have unlimited liability for those risks on their personal assets.

classification society

A company that is responsible for determining the seaworthiness of a particular vessel. It places a ship in a specific “class” as a function of its age, maintenance records, and the availability of on-board equipment. The premium paid by the ship’s owners for hull insurance is based on its class.

franchise

The portion of a loss, expressed as a percentage, below which a “With Average” insurance policy will not cover a partial loss. If the amount of the partial loss exceeds the franchise, then the entire costs of the partial loss are covered.

general average

A loss incurred on an ocean voyage that involves all of the cargo owners on board, such as in the case where the captain of the ship tosses overboard some of the cargo (see jettison) to save the ship and the remainder of the cargo, or when the captain decides to ground the ship to prevent a total loss. The owners of the cargo saved by this action are indebted to the owners of the cargo sacrificed and to the owners of the ship.

hazard

A situation that increases the probability of a peril and therefore of a loss. For example, a hazard would be a storm, which increases the probability of the peril of water damage; or a poorly trained crew, which increases the probability of a peril, grounding.

jettison

The act of throwing overboard part of the cargo of a ship (or of the fuel of an airplane) in an attempt to lighten the ship. The purpose of such an action is to save the ship, the remainder of the cargo, and the crew.

objective risk

The chance of a loss that can be accurately calculated, because ample empirical data are available (e.g. the probability of a fire causing a total loss of a residence) or because a good mathematical model has been developed.

organized theft

Theft of a cargo shipment (or part of a cargo shipment) that is due to organized criminal activity, in which one or more individuals plan and eventually commit the theft.

particular average

A partial loss incurred on an ocean voyage; the cargo may have become wet from seawater or may have been damaged from rough seas.

peril

The event that brings about a loss; for example, a fire, a collision, and flood are all perils.

pilferage

Theft of part of a cargo shipment (rarely the entire cargo shipment) due to opportunity. The thief did not plan the crime; the circumstances were such that it was possible to commit it.

Protection and Indemnity club (P&I)

A group of ship owners who agree to mutually share the costs of a member’s liabilities to other parties; for example, the club members would be individually responsible for the costs of a single member’s liability in the event of an oil spill. If the costs of the oil spill exceed the ability of a specific P&I club to cover them, other P&I clubs are contractually obligated to cover them.

pure risk

The chance or the probability of a loss only. Pure risks can be insured against (i.e., transferred to an insurance company).

risk

The chance or the probability of a loss.

speculative risk

The chance or probability of a loss or a gain (e.g., an investment in the stock market).

subjective risk

The perceived risk of a loss by an individual or company. Whether this perception is correct can only be settled by calculating the objective risk.

surveyor

An individual or company whose responsibility it is to determine the extent and the circumstances of a marine cargo loss. A surveyor is an independent party who is not working for the shipper, the carrier, or the insurance company.

syndicate

Under the Lloyd’s concept of an insurance market, a group of Names who agree to insure a certain type of loss. The risks are shared by all the members of the syndicate.

system’s theft

Theft that is perpetrated by someone who also gains access to a computer in the information system of the supply chain and deletes the files related to that shipment. The theft is then likely to go undetected for a period of time.

Underwriter

The company, syndicate, or Name that assumes the risk of a loss for another party, in exchange for a premium.

PowerPoint SLIDES – STUDY THEM – PRINT THEM OUT !

· Introduction / Definitions (6 slides)

· Perils of International Shipments (17 slides, 11 photographs)

· Risk Management (4 slides)

· Marine Insurance Policies (17 slides)

· Filing an Insurance Claim (1 slide)

· Lloyd’s (3 slides)

· Commercial Credit Insurance (4 slides)

Additional Resources

Vaughan, Emmett J. and Therese M. Vaughan, Fundamentals of Risk and Insurance, 10th Edition, 2007, Wiley, Hoboken, New Jersey, USA.

Tetley, William, Marine Cargo Claims, International Shipping Publications, Blais, Montréal, Québec, Canada, 1988, Third Edition.

Turner, Harold A., The Principles of Marine Insurance: A Primer, Stone and Cox, London, England, 1986, Seventh Edition.

Brown, Robert H., Marine Insurance: Vol. 1 – The Principles, Witherby and Co, London, England, 1978, Fourth Edition.

Brown, Robert H., and John J. Novitt, Marine Insurance: Vol. 2 – Cargo Practice, Witherby and Co, London, England, 1978, Third Edition.

Brown, Robert H., Marine Insurance: Vol. 3 – Hull Practice, Witherby and Co, London, England, 1975, First Edition.

Marine Insurance: Notes and Comments on Ocean Cargo Insurance, Cigna Property and Casualty Specialty Insurance, P.O. Box 7716, Philadelphia, Pennsylvania 19192, USA.

Ocean Cargo Handbook, Chubb Group of Insurance Companies, Warren, New Jersey 07059, USA.

Tyska, Louis A. and Lawrence J. Fennelly, Cargo Theft Prevention: A Handbook for Logistics Security, 2001, American Society for Industrial Security.

Ports of the World, Fifteenth Edition, Cigna Insurance Corporation, available from Publisher, Cigna Companies, P.O. Box 7716, Philadelphia, Pennsylvania 19192, USA.

“Weekly Piracy Report,” International Chamber of Commerce—International Maritime Bureau, Piracy Reporting Centre, http://www.icc-ccs.org/index.php?option=com_content&view=article&id=30&Itemid=12.