Inland and Ocean Transit Insurance

Tractor-trailer on interstate highway
Image courtesy of [Jeremy Woodhouse] / Getty Images.

Many businesses transport property from one place to another. A bakery delivers fresh baked goods to restaurants. A building supply wholesaler hires a trucking firm to haul lumber and other materials to hardware stores. An electronics manufacturer buys components overseas that are transported via a container ship.

Property in transit may be lost, damaged or stolen anytime during the shipping process.

To protect themselves against losses, many businesses purchase transit insurance. There are two basic types of transit coverage. Inland transit insurance covers goods transported over land. Ocean cargo insurance covers goods transported over the high seas.

Essential Transit Terminology

The following terms often appear in transit policies. These terms are widely used in the transportation industry.

  • Consignee This is the person or company to whom the goods are delivered. The consignee is often, but not always, the purchaser of the goods.
  • Shipper This term means the seller of the goods. The transit process begins with the shipper.
  • Carrier The carrier is the transporter of the goods. The carrier might be a trucking company, a railroad, or an ocean cargo transporter.
  • Bill of Lading A bill of lading is a written contract between the shipper and the carrier. It is issued by the carrier. It describes the goods being shipped, and the terms of transport. A bill of lading serves as evidence that the goods have been loaded onto the conveyance (ship or truck). It also serves as evidence of title.

    Inland Transit

    Shipping agreements for U.S. domestic shipments often contain the term FOB (free on board) followed by the name of a city. This term indicates the point when ownership of the goods (and the risk of loss) passes from the seller to the buyer. The named city may be the shipping point (origin) or the destination.

    For example, suppose that you have purchased goods from a seller in Los Angeles. Your business is located in Philadelphia. If the seller has quoted a price with the words "FOB Los Angeles," ownership of the goods will pass to you once they are loaded onto a truck at the shipping point (Los Angeles). If the quote states "FOB Philadelphia," you will take ownership of the goods once they arrive at their destination in Philadelphia.

    The point at which ownership transfers from the buyer to the seller is important. If the property is damaged during the course of transit, the loss will be sustained by whoever owns the property at the time of loss. Depending on the terms of the sales agreement, this could be the buyer or the seller. Thus, the sales agreement must clearly state when the transfer of ownership occurs. Otherwise, a dispute may arise over who is responsible for a loss.

    Not Covered by Property or Auto Policies

    If property you own is damaged while being transported on a truck, can you rely on your commercial property or auto policy to cover the loss? The answer is no.

    Commercial property policies are designed to cover property located on your premises. Most provide very limited coverage for property in transit.

    For example, the ISO property policy provides only a $5,000 limit for personal property that is damaged while in the course of transit. To be covered, the loss must occur while the property is in a vehicle you own, lease or operate. Coverage applies only to damage caused by fire, lightning, and a few other perils listed in the policy.

    Commercial auto policies provide no coverage for cargo contained in a vehicle. Commercial auto liability coverage specifically excludes damage to property owned or transported by you, or that is in your care. Commercial auto physical damage coverage applies only to damage to insured vehicles themselves.

    Types of Carriers

    Much of the cargo shipped within the U.S. is transported on trucks. The truck may be owned by a private carrier, a contract carrier, or a common carrier.

    A private carrier is a company that transports its own products on its own trucks. An example is a bakery that uses company-owned vans to deliver bread to customers.

    A contract carrier transports goods for specific clients with whom it has contracts. For instance, Frigid Freight owns a fleet of refrigerated trucks. The company uses the trucks to transport food products on behalf of customers who have engaged its services under a contract. A common carrier is a trucking firm that offers transportation services to the general public. It transports goods on behalf of anyone who pays for its services.

    Common carriers that transport goods across state lines are liable under federal law for loss or damage to cargo that occurs during the course of transit. Carriers are not liable for damage by certain causes, such as acts of God or poor packing by the shipper. A carrier may negotiate with the shipper to reduce its liability for cargo damage in exchange for a lower shipping rate.

    Insurance Coverage

    Inland transit insurance covers property transported over land within the continental United States. It does not cover property transported over the ocean.

    Most inland transit policies cover property you own while it is the course of transit on vehicles you own. Policies vary widely from one insurer to another. Some cover property being transported by a carrier for hire (common carrier or contract carrier). Some include coverage for air shipments. Because of the wide variations in inland transit forms, it is important to read your policy carefully.

    A majority of inland transit policies cover damage to insured property by any peril not specifically excluded. Here are some common exclusions:

    • Improper packing
    • Criminal acts by you, company principals or employees
    • Insects, rodents, rust, corrosion
    • Denting, chipping, marring or scratching
    • Seizure of the property by a government authority
    • War, nuclear reaction or nuclear radiation

    When purchasing inland transit coverage, be sure you understand how the value of lost or damaged property will be determined. Depending on the policy, the value may be based on one of the following: 

    • the agreed value stated in a contract between the buyer and seller
    • the invoice price of the property
    • the property's actual cash value plus shipping charges

    Ocean Transit

    Ocean cargo insurance covers cargo transported over the high seas. This coverage is purchased by the party that owns the cargo during its ocean transport. Depending on the terms of the sale, this may be the seller or the buyer.

    There are two basic types of cargo policies. A voyage policy covers specific cargo traveling on a single voyage. An open policy covers all cargo shipped on all voyages during the policy year.

    Ocean cargo policies may cover either named perils or all risks that aren't specifically excluded. Named perils policies typically cover accidents caused by perils of the sea. These are perils associated with ocean transport such as wind, waves, sinking, and collision with another object. A named perils policy may also cover fire, explosion, jettison and other perils.

    Incoterms

    Most ocean cargo policies are purchased to cover goods traveling from one country to another. The buyer and seller are often located thousands of miles apart and speak different languages. To simplify the sales process, the International Chamber of Commerce developed a set of standard shipping terms called Incoterms. These terms are used for international shipping only. They do not apply to domestic shipments within U.S. borders.

    An Incoterm is typically followed by the name of a place. Depending on the term, the place may be the shipping port, the destination port, or some other location. Each Incoterm has a specific meaning. Here are a few examples:

    IncotermStands For MeaningMode of Transit
    FASFree Alongside ShipSeller clears goods for export and delivers them alongside the ship at the designated port. Buyer is responsible for goods thereafter.Maritime only
    CIPCarriage and Insurance Paid ToSeller delivers goods to the specified location and pays the cost of insurance. Buyer is responsible for goods after delivery.Any
    DATDelivered at TerminalSeller is responsible for transporting, delivering and unloading the goods at the specified location. Buyer is responsible thereafter.Any

     

    Who Needs Cargo Insurance?

    When goods are bought and sold, the sales agreement should indicate when ownership of the property is transferred from the seller to the buyer. The point of ownership exchange is typically determined by the Incoterm listed in the agreement. For instance, "FAS" indicates that the buyer assumes ownership of the goods once they are delivered alongside the ship. Once a party assumes ownership of the goods, he or she also assumes the risk of loss or damage to the cargo.

    A few of the Incoterms, such as CIP, require the seller to insure the goods during transport. However, most of the shipping terms are silent on the subject of insurance. This doesn't mean insurance isn't necessary. The party who has ownership of the goods during their transport on the ship has an insurable interest in them. He or she should protect that interest by purchasing ocean cargo coverage.

    Most cargo shipped by sea is transported inside shipping containers. Once the voyage has ended, containerized property is often loaded onto a train or a truck and then transported to its final destination. Traditional ocean cargo policies provided coverage only while the cargo remained on the ship. Yet, the buyer or the seller may have ownership of the property before it is loaded onto the ship and/or after it is unloaded.

    Fortunately, many cargo insurers offer a combination of ocean cargo and inland transit insurance. Policies are available that provide coverage "from warehouse to warehouse." This coverage applies throughout the transit process. It begins when the property leaves the seller's premises and ends when it reaches its final destination.