Say you're an independent agent or broker in a community in anyregion of the United States. For years, you've been working withbusinesses of all sizes in your area — helping them obtain thecommercial insurance they need as they grow and expand.

You've known one client, the owner of a manufacturing firm,since he started his business. Over the years, the firm has grownand expanded. In that time, while the owner has worked withsuppliers and distributors in the U. S., he now interacts withfirms in other countries as he builds an international clientele.E-commerce drives much of the business and has opened up globalopportunities.

Although for most of the company's history logistics firms havehandled the company's cargo insurance, you determine it's time toreassess the cargo insurance program and possibly consider speakingwith a marine cargo insurer.

"We're a broker's broker," says Joel Berrian, president ofBerrian Insurance Group inLittleton, Colo., who explains that his firm's marine cargobusiness can originate with an agent or broker virtually anywherein the U.S.

Patrick Murphy, global marine practice leader at Integro Insurance Brokers in NewYork, acknowledges that it is appropriate for smaller firmsshipping small and infrequent quantities to buy their insurancefrom freight forwarders, steamship lines and similar firms. "Butwhen you get to a certain size and volume of regular shipments,that doesn't make sense," Murphy says.

That was reinforced by Allan Ilias, national cargo practiceleader for Catlin US, whoworks with Berrian, Murphy and other brokers across the country."There's nothing wrong, in and of itself, with a company obtainingcargo insurance from a freight forwarder," Ilias explains, notingthat Catlin provides cargo insurance to freight forwarders,logistics firms and other shippers.

"Insurance through a freight forwarder makes sense for one-offshipments," Ilias says. Freight forwarders buy their insurance frominsurers such as Catlin, and then mark up the cost when chargingcustomers to insure the freight. Freight forwarders limit theircargo insurance exposure by charging by the weight of theshipment.

"If a business is shipping a lot of volume under thatarrangement, it can eventually start losing money," Ilias explains."At a certain point they can save substantially by arranging fortheir own cargo insurance."

The proper valuation

One advantage offered to clients by marine cargo insurance Iliassays, is in the valuation of shipments. Rather than being limitedby concepts such as "replacement cost," as with commercial propertyinsurance, marine cargo insurance offers more flexibility indetermining what is needed to make a firm "whole" in the event of acargo loss.

Ilias offers this example: Consider a U.S. firm thatmanufactures a product at a cost of $500,000. The company intendsto ship the product to another country, where it is to be sold fora total value of $1 million. "If the insured has a standardvaluation of cost, insurance and freight, plus 10 percent, in theevent of a total loss he would only get the original investmentback," he explains. "But with a selling price valuation on thepolicy, the insured would get the full $1 million."

The insured would need to provide proof of the impending sale todocument the sales price. "To set the correct valuation theunderwriter needs to understand the actual values shipped and therelated selling price valuation," Ilias states.

"From a marine perspective, we're looking to make our insuredswhole in the event of a loss," he adds. "Since we are dealing withworld trade, we try to be attuned to our customers' needs, whichcan sometimes be complicated when it comes to valuationissues."

Those issues have arisen from increased global trade andexpansion of the global supply chain, which today includes not onlymultinational firms, but small and mid-sized firms as well. "Whenyou think of world trade, think of logistics," says Ilias. "We canhave an insured whose product travels to several differentcountries at each stage of its manufacturing, thus adding valuealong the way. Without having a bespoke valuation clause, theinsured could have a claim somewhere in the middle of the process,but be paid at the original raw material price of the goods."

Stock throughput

There are different levels of cargo insurance, includingpolicies that cover only the ocean-going part of a shipment, orpolicies that add coverage for inland transit. The most flexible,open, "all risk" marine cargo insurance coverage is providedthrough what is known as a "stock throughput" policy.

Stock throughput policies combine ocean cargo, inland transitand property/storage coverages to insure a company's inventory andflow of goods from the source of production to the finaldestination. Policies can be used to cover raw materials, works inprogress or finished goods. The destination may be a warehouse orother storage facility, or a "retail stock throughput" can bewritten to include coverage for goods all the way to the retailfloor.

"This product is very flexible," says Berrian. "We in the UnitedStates don't typically think about marine insurance capacitybecause the property market has vast capability. But the marinemarket has underwriting guidelines and reinsurance agreements thatare entirely separate from the non-marine side, making it anattractive alternative.

"A stock throughput policy can be adapted to things I once neverthought possible," he adds. "For example, we can design the stockthroughput policy to provide excess limits for ammoniacontamination above the sub-limits provided by an equipmentbreakdown insurer. We even use the policy to insure live cattleflown from the United States to Asia."

Because of the marine market's separation from the non-marineside, stock throughput policies can access the marine market'scatastrophe aggregate capacity. In the current soft marineinsurance market conditions, this can provide a strong advantagefor firms with large quantities of products or materials instorage.

"A customer came to us with more than $9 billion in stock storedat various locations around the world," Berrian says. "The FederalEmergency Management Agency (FEMA) is remapping flood zones."Because the remapping placed some of the customer's warehouses inflood zones with a higher-risk designation, the customer's propertyinsurer was required to buy facultative reinsurance for thoselocations.

"That would have been a huge expense," says Berrian. "We gotinvolved and tailored a stock throughput policy for materials instorage at flood zone 'A' locations. Integrating the capabilitiesof the property and marine insurers saved the insured hundreds ofthousands of dollars of premium.

"We often find opportunities to improve an insured's programwhere stock has been included within a property policy," hecontinued. "This is true for those insureds with locations exposedto hurricanes, earthquakes or floods, because we replace high,variable deductibles with low fixed-dollar deductibles, and webring fresh aggregate limit capacity to the insured at competitiveprices.

"Stock throughput policies are also useful to insureds who arenot exposed to catastrophe perils, as they can take control of howtheir stock is insured worldwide and how it is valued in the eventof a loss."

The flexibility of manuscript policies

Murphy shared other examples of coverage innovations possibleunder marine cargo policies, including another approach to productvaluation.

"We had a retail client who was required to remove from theirshelves pharmaceuticals that were past their expiration dates," hesays. "The retailer would return that product to the wholesaler inreturn for a refund equal to a percentage of the market value.

"In one case, the truck carrying the expired pharmaceuticalsoverturned, damaging the product. Fortunately, the 'refund value'was stipulated in the marine cargo policy."

In another example, a policyholder was covered when damage toelectronic equipment wasn't clearly evident, but the product wasstill disposed of out of an abundance of caution.

"A shipping container with 200 video recorders leaked, and halfof them were wet," Murphy explains. "The other 100, though notobviously wet, had been sitting in the same wet container, and themanufacturer didn't want to run the risk of selling product thatmay have had water damage."

How was insurance determined for the recorders that weren't weton first examination? Murphy explained that marine cargo contractshad traditionally read, "In case of physical loss or damage, theinsured will be the sole judge" of the damages. In the case of thewater-damaged recorders, the clause "….or if the insured reasonablysuspects damage," had been inserted into the wording in order toextend coverage for those items which were not visibly damaged. Theapproach, Murphy says, originated with the pharmaceuticalindustry.

He describes another innovation which didn't involve physicalloss or damage to cargo, but the unexpected diversion of cargo thatdelayed the shipment.

"If, for example, there's a longshoreman's strike in Long Beach,and the cargo is sitting offshore, that could mean a loss inrevenue for the owner of the cargo," Murphy says. "We developed andincluded a clause that covered the additional cost of diverting theship to Mexico, offloading the cargo there and shipping it by truckto its U.S. destinations. This covered an unexpected disruption inthe supply chain."

Murphy encourages clients to be willing to provide as muchdetail as possible to their broker and insurer on exposures, lossexperience and other factors in order to design the mostappropriate cargo insurance program.

When considering a marine cargo insurer, Berrian recommendsclients consider:

• License and authorization for the insurer to work in allcountries where the insured may have an exposure,

• The availability of loss control and claims-handling services inthose countries, and

• Flexible underwriting and broad coverages, "so you can getmanuscript coverages as needed."

The global economy has changed the scale on which companies dobusiness and expanded their areas of risk considerably. Thisprovides new opportunities for insurers who understand thecomplexities of these risks and have the tools to manage them.

Patrick Hirigoyen is an industry consultant with more than20 years of experience in insurance and reinsurance.