Cargo Often At Risk When Pirates Pillage

The struggling economy has also created a surge in cargo theft, especially for cargo "at rest" in port facilities or on its way to the port. FreightWatch (USA) International noted that in the United States in June 2009, there were 74 cargo theft incidents, compared to the average of 48 thefts per month. Full truckload theft in 2008 increased 13 percent over the prior year.

It is estimated that up to 80 percent of cargo thefts may be inside jobs, and these losses often go unreported, since they can lead to increased insurance costs.

Cargo en route across the sea also is at an elevated risk.

Recently, the ICC International Maritime Bureau identified several suspect shipments of hydrogenated palm oil that were loaded on a ship in Jakarta, with delivery scheduled for China and the Philippines, according to the Bills of Lading.

However, following some inquiries by the International Maritime Bureau, it became apparent that a scam was being run, since boxes in the consignment were really destined for discharge at ports different from those listed on the Bills of Lading.

In this instance, the suspect shipments were discovered, but not until after they had been delivered at the incorrect ports.

Exporters that purchase their own cargo insurance policy will be familiar with the policy terms and conditions. Some exporters, however, may choose to rely on their customer's or freight forwarder's insurance policy, which may exclude certain kinds of losses–making it difficult to collect on a claim. Without being able to examine and understand the policy language, an exporter is at increased risk.

What can happen if the cargo is stolen and the customer's insurance policy excludes theft? If the customer refuses to pay for the stolen cargo and has no insurance protection, the exporter may suffer a sizable financial loss.

In another situation, a machinery manufacturer sold a sensitive high-tech machine, intended for use in a clean room, to a customer in China. When the machine arrived at the port in China, the customs inspector required the shipment be opened, exposing the shipment to dust and moisture, which caused damage to the machine. When the claim was submitted to the insurer, it was denied as the policy only protected damage done by U.S. Customs agents.

Relying on freight-forwarders or customers to provide insurance may seem more convenient, but as shown, the lack of control over the policy's terms and conditions may prove costly in the long run.

When evaluating whether to buy a cargo policy or rely upon a third party's insurance, the exporter should consider the following:

o What is the commodity to be shipped and the risks of loss or damage while in transit?

o How are the goods being packed and prepared for shipment?

o What are the terms of sale governing the goods?

o Where are the shipments going and by what route?

o Will the insurance apply through to final destination or to port of discharge only?

o What exposures are present in the locations where the property is being shipped to or from? Are roads adequate for overland transit to or from the port or airport? What is the risk of theft or hijacking?

To reduce the unknown risks to their business due to transportation of goods, U.S. exporters should consider purchasing their own ocean cargo policy rather than rely on someone else for protection. If the buyer or logistics company wants to provide insurance for the shipment on an exporter's behalf, the insurance should be adequate to cover the exporter's financial interest.

By clearly setting out the terms of sale ahead of time and by taking control of the insurance transaction and buying their own cargo policy, companies can help protect their cargo and mitigate the risk of a loss.

Kathleen S. Ellis is senior vice president at Chubb & Son, and manager of the Multinational Risk Group–Global Accounts. Terry Montgomery, a vice president at Chubb & Son, and worldwide ocean marine manager for Chubb Commercial Insurance, contributed to this article.