From the October 2011 issue of American Agent & Broker • Subscribe!

Ship Shape

When small businesses enter the overseas market, they need to understand the additional risks they may face. Learn the ins and outs of ocean marine insurance.

Globalized trade has become so pervasive that its effects can pop up in unexpected ways—unfortunately, sometimes with negative consequences that can catch both insurance agents and their customers by surprise.

Take the simple example of a small business with a customer base firmly rooted in the U.S. that earns some of its revenue from website sales. An order is placed by a buyer in Germany. The company's owner ships the goods, not realizing that additional insurance coverage may be necessary. He learns that his business package coverage doesn't extend overseas when something goes wrong—and suddenly the agent may be blamed for not offering the extra coverage needed.

The ins and outs of international shipping can be challenging for anyone not well versed in ocean marine risks and insurance coverage. What can an agent do to protect customers, avoid misunderstandings and emerge as a trusted advisor?

Keep Tabs on Customers

It used to be safe to assume that a small business kept its activities close to home. Exporting goods and materials was left to huge companies with the resources to establish overseas business relationships and access distant markets.

Related: Read the article "New Risks Mean New Opportunities For Specialty Insurers, Execs Say" by Susan Scalfane.

Today, a small business can go global with surprising ease. The Internet makes connecting with suppliers and customers abroad almost as simple as phoning someone across the country. With the domestic economy continuing to face challenges, many companies turn to overseas sales as a way to find new customers and expand opportunities to generate revenue. In fact, U.S. census data indicates that about 280,000 U.S. companies are now involved in exporting activities and two-thirds of those are businesses with fewer than 20 employees.

What this means for agents is that a customer who has only needed basic commercial coverage can, overnight, become a business with far-flung risks and exposure to loss. That same customer may not think to advise his agent of a change in business practices, an expanded scope of operations or a move into offering different types of goods and services.

A proactive agent, therefore, needs to continually strive to update his understanding of his customer's business, even as that business adapts to changing economic conditions and opportunities. At renewal time, and in between, it is important to ask if the company has engaged in any overseas trade, or plans to do so in the future.

If the answer is yes, a series of questions can follow: What is being shipped? Are the items fragile, perishable or possible contaminants? Where are the goods being shipped to and from? Is the destination a developed country with established commercial processes and modern infrastructure? What level of trade is the business engaged in; i.e., is this a one-time shipment or a steady stream of sales? The answers to these and other questions can help agents determine the best path for protecting their customers.

Understanding Terms of Sale

Companies that are new to the export world quickly find out that everyone is speaking another language—even when the words are in English. Terms of sale that seem simple and universal in the U.S. may not have the same meaning outside the country. Conversely, the meaning of unfamiliar wording may not be easily recognized by new exporters.

For example, when someone buys a couch from a furniture store in the U.S. and has it shipped to their house, they expect it to be delivered in perfect condition. If it isn't, the customer knows the store is responsible for taking care of the problem. Things are not as clear cut in international trade. Sometimes the seller is responsible for damages occurring in transit, but other times the buyer may take on the risk of loss from the moment a shipment is underway. It is important to know who is responsible for possible damage. If the buyer and seller do not have a meeting of the minds about this important detail when their deal is struck, the result can be misunderstandings, reputational damage, finger-pointing and recriminations at the time of loss.

Related: Read "Going Global: One Broker's Story" by Laura Mazzuca Toops.

To standardize and make the responsibilities between buyers and sellers more explicit, the International Chamber of Commerce has issued and updated "Incoterms"—a set of international commercial terms with established meanings about when ownership of goods passes from the seller to the buyer and who is responsible for providing insurance on a particular shipment. Recently updated, Incoterms 2010 defines 11 sales terms or rules that went into effect Jan. 1. Three of the most commonly used terms of sale are:

  1. EXW: Ex Works. Title and risk of loss pass from the seller to the buyer at the place of shipment. This places the maximum obligation on the buyer and thus the buyer provides insurance.
  2. FOB: Free on Board. The seller must load and clear goods for export as instructed by the buyer. Title and risk of loss pass from the seller to the buyer when the shipment passes the ship's rail. The buyer provides insurance.
  3. CIF: Cost, Insurance and Freight. The seller is responsible for the arrangements, export clearance and cost of shipping to the port of destination. However, the seller's risk and responsibility for the condition of the cargo end when the goods are placed on board. Although risk is transferred to the buyer once goods are loaded on the ship, it is the seller who must provide the insurance. Because the seller sometimes only obtains minimal coverage, a buyer may wish to purchase additional insurance.

Agents can help customers understand the importance of choosing specific terms of sale for each shipment, and can review the circumstances to determine the pros and cons of various insurance-buying strategies for a customer. For example, while it may sound attractive to have the buyer be responsible for insurance costs and damages from the moment a product leaves the seller's hands, it may build better long-term customer relations to keep control until the product is in the buyer's possession. By keeping control, the seller can make sure there is adequate insurance and that coverage is with a carrier that will work swiftly to resolve claims.

Balancing Costs and Convenience

Once a company understands the responsibility it has agreed to for overseas shipments, the next step is to determine the right option for covering risks. One possibility is using a reliable freight forwarder to obtain insurance for each shipment. Another option is to purchase an ocean marine insurance policy.

Related: Read the article "Pirate Attacks Rise Again" by Chad Hemenway.

In many ways, freight forwarders may be compared to travel agents. Just as a travel agent might line up airline tickets, hotel rooms and car rentals for someone planning a vacation, a freight forwarder is in the business of facilitating the shipment of goods. Their expertise includes proper packaging, transit options, port protocols, and offering insurance coverage. Often, freight forwarders specialize in certain types of shipments or specific areas of the world, so it is important to identify one with a strong track record and familiarity with the type of exporting the company is planning.

For the company that engages in little or moderate exporting, a freight forwarder who provides insurance specific to each shipment may be a convenience that is worth the price. However, once a business begins to ship large amounts of goods or to export items on a regular basis, a company may be able to obtain expanded coverage and reduce insurance costs with its own ocean cargo policy that provides automatic coverage for all company shipments.

Finding the Right Policy Fit

If a company knows it is only going to ship certain products, an ocean cargo policy that provides broad coverage for just those products may fit the bill. However, if a company that has always shipped office furniture to Europe suddenly has the opportunity to send glassware as well, it may find it needs a different type of policy to help avoid uncovered exposures.

In response to these types of situations, many insurance carriers have created so-called "all-risk" forms that continue to protect the customer by providing extensive coverage even when they ship different merchandise. These types of policies frequently allow the customer to pay premium based upon annual shipment value, or some other measure such as gross sales.

Agents can assist companies in finding the right policy to fit each company's coverage needs and to decide whether or not to obtain an ocean cargo policy. Agents may help customers find policies that include a number of specialized coverages; sometimes at no additional cost. Several insurance carriers provide policy forms with coverage that include features such as:

  • Concealed Damage.
  • Shortage from Containers.
  • Consolidation.

With respect to these and any types of insurance coverage, it is critical that the company and its agent closely review the policy forms in order to understand the terms, limitations, sub-limits and exclusions that apply to the particular coverage.

What to Look for in a Carrier

As with any business that supplies support for other companies, carriers that offer ocean marine insurance have different levels of expertise and experience in providing service to customers. A company that buys ocean marine insurance will want to know that it can reach someone to report a loss, and that its claim will be handled swiftly and fairly. Providing top-notch claim service is more complex when the loss takes place overseas.

Carriers with significant experience in the ocean marine industry typically have claim representatives all around the world, ready to address the challenges of export business claims. Additionally, many carriers will issue a certificate of insurance for overseas shipments, which contains information about the coverage and what to do in the event of a loss or damage. With today's instant communications, local claim representatives can inspect damage, report back to the U.S.-based carrier, and begin the process of adjusting the claim without delay.

Saving the Day for Customers

Technology makes shipping goods abroad easier than ever and today's economy makes reaching out to new markets more attractive for almost every size of business. Agents cannot presume their customers are still selling to the same close-to-home purchasers they always have.

Instead, agents should routinely check in with their small business customers and be ready to provide expertise about international risks and protection. Doing so positions the insurance agent as the professional who is watching out for the best interests of customers, even as their businesses change and grow.

If goods are damaged while a freight forwarder waits to combine several shipments into one container load, the ocean cargo policy will provide coverage. If goods are placed into a sealed container and are missing upon arrival, the policy provides coverage for the loss, provided that the amount loaded into the container was documented.When a shipment is received, the buyer may note the package is intact, but then find the contents are damaged once the package is opened at a later date. A policy that includes concealed damage will provide coverage for losses when discovered, up to a set amount of time, after the shipment is received. 

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