Skip to main content

Untangling the risks in export cargo transit requires sound knowledge of your supply chain and plenty of expert advice.

Ships at sea can be hurled in six directions at once, and their containers jostled as often as ten times a minute.
If that doesn’t impress upon shippers the importance of suitable packaging and stowing, perhaps this will: goods damaged or lost as a result of inadequate packaging and stowing are not covered by standard cargo insurance clauses, as principally poor preparation gives rise to inevitable losses.
And perhaps worse still, the overseas customer, disgruntled at late or non-delivery, might rush off to the exporter’s competitor, says John McKelvie, underwriting and risk manager at Vero Marine Insurance, a division of Vero Insurance New Zealand.
Yet by far the most common reason for exporters’ insurance claims is inadequate packaging for the handling the goods will receive, and poor stowing. “Things just go bump in the night – and more so since shipping companies have rationalised their routes to include more trans-shipping via port hubs such as Singapore’s. The possibility of damage increases with each handling,” McKelvie says.
The theft of goods is always a risk but has not increased markedly in the recession, he adds.
The trade route east to west that most Kiwi exports take between Asia, Europe and the US often involves a tropical port layover where boxes can sit around in the sun – therefore increasing the prevalence of damage.
Slow steaming can reduce the shelf life of meat to as much as six days once it reaches the destination port.
But stories of pirates on the African coast are not relevant to most New Zealand exports, which don’t travel in that direction.
Exporters need to talk to their insurance broker who provides independent advice and handles premium payments. Most professional insurers do not deal direct with clients except to have an open dialogue with them, McKelvie says.

Air freight less risky
Air freight is less risky than sea for a shipper: airlines share liability to a greater extent than shipping lines in certain circumstances – such as needing to offload goods so planes can land – says New Zealand marine manager at QBE Insurance (International), Graeme Orchard.  
But high-value, air freighted goods also risk delays and extra handling
in hubs.
And then the Rena [ship grounding] can happen, highlighting complications in recovering goods even when they are undamaged. Shipwrecks happen once every two weeks somewhere in the world, usually out at sea and out of mind.
Fraser Walker, senior underwriter – marine at AIG Insurance New Zealand, says the nature of the goods makes some more susceptible to mishandling (eg, fragile items); some more ‘desirable’ and susceptible to theft. Some simply disappear – ‘lost’ or stolen along the journey. 
Violent seas, wicked variations in temperatures and climactic conditions make packing for sea freight more important than for an air freight equivalent transit.
And whilst freight forwarders or carriers offer ‘tick the box’ insurance, an exporter may be better served purchasing an annual policy to cover their whole year’s sendings. This is generally accepted as much more cost effective, Walker says.

Dos and don’ts for transit
John McKelvie says exporters know best how their own particular cargo will withstand rough handling. Insurers’ claims experience can add to the conversation but it’s best for exporters to first talk to packers at a freight forwarder.
“There’s a big difference between the robust packaging needed for export compared to local transit.”
Containers themselves need to be checked for their viability at sea. McKelvie recommends the ‘broom, light and hose’ test to see how much daylight and potentially seawater comes through rust and holes. Door seals and air vents also need checking.
The Bill of Lading (agreement between the shipping company and exporter) might say the shipping company is not responsible for the condition of its own containers.
And because of the high cost of freight/shipping, exporters are tempted to overstuff their refrigerated containers past the interior red load-line. The air can’t circulate as well and cargo suffers.
“Some insurers take a dim view of poorly maintained containers, and if the exporter stuffed it after having the opportunity to inspect it, they could well decline a subsequent claim for water damage,” McKelvie says.
In fact, the exporter might need time to replace a container.
“Do check the container; don’t overload it, especially if it’s refrigerated.”
Refrigerated containers for sea freight have their own refrigeration machinery, but someone has to ensure it is plugged in and the temperature remains correct. With the fullest cover, these are insured risks.

Insurance categories
Marine or transit insurance is provided in three broad categories: Institute Cargo Clauses (A), (B) or (C), with (A) Clauses being the widest, all-risks cover with specific exclusions; and (B) and (C) for specified risks. Air cargo is covered by separate insurance called ICC (Air).
Cover for risks such as War and Strikes are adjuncts to the (A) clauses, as are ‘Removal of Debris’ and ‘Expediting Expenses’, as important examples.
Removal of Debris insurance pays for goods that have deteriorated in transit to be dumped. Standard cargo insurance pays for the lost cargo, but the cost of dumping may be an additional third of the cargo’s value. In order to keep that customer, Expediting Expenses cover can provide for airfreighting portions of the cargo till a new load can be seafreighted to him.
The standard ‘Duration’ clause covers dry goods moving from the inland start of the international journey for 60 days while in the ordinary course of transit – until they arrive at the other end.
“This boundary between goods in transit and goods that are (property) stock is important to keep in mind,” McKelvie stresses. “When delivery is taken, which may not necessarily be at the stated destination, transit ends. It pays for exporters to be very clear with their customers on logistics.”
And a final warning: “Don’t arrange insurance at the last minute. You’ll miss out on the best options, or fail to consider all the risks.”

Understand your supply chain
Tim Groenestein, executive broker at Crombie Lockwood brokers, recommends exporters understand their supply chain and what might go wrong to minimise these exposures.
“Exporters should sit down with a broker to discuss the product and whether broad cover is enough; when to start and stop insuring according to the terms of trade, which the insurance premium should replicate.
“Don’t abdicate responsibility to someone else such as your customer who might say ‘you never delivered the goods’. Cover for this scenario
can be protected by a ‘seller’s
interest clause’.
“If you haven’t been paid, get involved [with insuring]!
“Insurers are there for genuine ones but take a dim view of poor management. It’s usually fairly obvious up front if it’s a legit claim due to peril during transit.”
And when making claims, talk to your broker. Insurers might also meet the insured to discuss the claim.
AIG Insurance’s Walker says another common mistake is when an exporter’s ‘Cost, Insurance and Freight’ (CIF) buyer suffers a loss and needs to make a claim on insurance the exporter provided to them – the exporter pays out the customer then claims on the insurance. 
“This is defeating the purpose of the insurance, and not strictly correct. The buyer (overseas party) is supposed to make the claim with the insurer. If done the other way, this leaves the exporter extremely vulnerable, as the claim in question might not be payable under the policy.”
The cost of cover depends on factors such as what is being insured, where it’s going and prior insured losses (claims) on the product.
Graeme Orchard at QBE Insurance (International) says exporters need to know the intricacies of importing and exporting; to understand terms of trade and the Incoterms that dictate who is responsible for what and when, and the exact points of delivery.
“Let’s see you sue your customer in Malaysia!” he challenges. “Every man and his dog think it’s easy. But you should get advice from Export New Zealand whose members share their collective knowledge of importing and exporting. Avail yourself of their mentoring and their years of experience from the school of hard knocks.
“Avoid pressure from big customers and suppliers to use an overseas insurer that might offer a better rate but might be hard to get hold of.”
 
Markets and trends
John McKelvie says exporters must have their documentation in order, as border officialdom these days has a much tighter grip due to health and other technical requirements – “Although we do suspect market protection lurking behind some of the refusals from time to time.”
Insurers can alert clients to trends in claims, such as those due to theft or poor transportation infrastructure. “Often these trends are very localised, so it pays to keep up a dialogue with an insurer’s claims department.”
In certain parts of the world, insurance isn’t seen in the same light as ours. “In parts of the Middle East and Asia, ill-fortune is seen to visit the unworthy, and buying insurance can be perceived as tempting fate and a deity’s ire,” says McKelvie.
“A New Zealand exporter is advised to negotiate payment terms that execute before the marine cargo transit ends, rather than presume there’s insurance in place after the marine insurance expires.”
McKelvie also recommends choosing a local insurer rather than one overseas. “Stay close to those who make you promises for money. It’s much easier, to resolve misunderstandings.”
Groenestein reminds us that goods traveling across the equator face high humidity and heat. Food samples taken at the border that show any tainting or failure to meet requirements (which can be political) can lead to a large claim or exporters finding themselves uninsured if they have no ‘rejection cover’, he says.  
Insurers are interested in the client’s loss history and the way he runs his business. “It’s not unheard of for an insurer to go and look at the whole operation and suggest improvements to internal processes to minimise risk and disruption to business.”
Walker has a reminder too – he says the infrastructure of the destination country varies, as do legislation and import rules, shipping methods and packing.
Then there are issues with foreign jurisdictions and port handling processes, and varying quarantine regulations.
QBE’s Orchard cautions against relying on New Zealand’s 100% pure label to get goods accepted: even third world countries are increasingly health conscious and wealthy, expecting top quality produce and other goods; and Australians can be quite protective.
“All are inspecting rigorously.”
Last but not least is the issue of price. Marine insurance prices are going up because of incidences such as the Rena, the recent burned ship in the Atlantic and the cruise ship sinking off Italy, he says.

Key Takeaways
• Beware of the difference of cargo in transit and static/stocked goods: insure accordingly.
• Pack and stow for the nature of the goods and the rigours of the expected journey.
• There’s a big difference between packaging for export and for local transit.
• Know your terms of trade and Incoterms.
• Actively choose insurance – don’t leave it to the customer or supplier.

Key person protection: have you got it?
Most New Zealand small businesses are highly dependent on the owners for success and survival, as it is these people who typically have the business know-how, provide the leadership, drive revenue and manage staff.   
Thinking about your situation, where would the impact be felt on your business if something serious happened to you or someone else in your team key to the business? Could you maintain your export relationships? Would your business produce the same standard of product? Could you meet your export orders on time? Would your credit facilities be restricted?
Some common effects that businesses may experience are; a loss of export orders; a reduction in revenue; increased costs of producing goods and an increase in operating costs. Anyone of these can result in a reduction in profitability.  
Triplejump’s experience shows that for many small businesses the effect will occur in a matter of months resulting in a business unable to meet its costs and creditor obligations. In the worst case this can result in business failure and put your personal assets at risk if you have provided personal guarantees over business loans.
Risk management planning to make your business resilient against the loss of a key person will enable you to identify strategies to reduce your risk exposure. It will also enable you to identify the financial risk you cannot manage and determine what insurance your business requires to minimise the risk of loss to your personal income and assets.  

Supplied by business risk specialist Triplejump.

Sprouting seeds
Seeds make a great theoretical example of the need to control container temperatures.
The temperatures inside a shipping container vary constantly throughout an ocean transit, as do humidity levels: together these can trigger seeds to sprout before you want them to. There is generally nothing fortuitous about this; the cause of the loss would be inevitable. 
Using temperature controlled or sealed containers, or adequately packing the goods, avoids the risk of a claim being declined.
If, however, a hole in the container led to the ingress of seawater causing the seeds to sprout, an insurer would have to pay such a claim (except if the insured owned the container or knew about the hole).

Dishing

Dishing up export possibilities

Exporter Today Editorial TeamExporter Today Editorial TeamApril 16, 2012
minefield

What’s mine is not yours

Exporter Today Editorial TeamExporter Today Editorial TeamApril 16, 2012
25-countries

25 countries… and counting

Exporter Today Editorial TeamExporter Today Editorial TeamApril 16, 2012