Type of Policies for Cargo
1- Facultative Insurance
2- Open Contracts:
A- Floating Policies
B- Open Covers
C- Open Policies.
1- Facultative Insurance
This type of insurance refers to the placing of a specific or named risk and it relates to a particular ‘sending’ or shipment. Since, as you will have seen from the brief description above, the effecting of insurance may be a relatively complex procedure, most exporters regularly involved in sending goods abroad would find this type of insurance far too time-consuming for every consignment to be insured in this way.
2- Open Contracts
It is much more advantageous to the insured, that is the exporter, if the cost of insurance can be standardized. In this way, when making quotations or agreeing particular terms of sale, the seller will know approximately what allowance he should make for insurance cover. For these reasons the use of open contracts has developed with the growth of international trade. There are three types of open contracts; floating policies, open covers and open policies.
A – Floating Policies: This policy is intended to replace facultative insurance by insurance, which will cover a certain total value of goods. For example, it may cover shipments London-Vancouver over a period of six months for leather goods to a total value of £1,000,000 (1 million). There is initially a general description of the risk but the particulars of the goods and ships are declared prior to individual shipments. The shipper declares each of these until the ceiling, which has been fixed, is reached and then the policy is exhausted. Each shipment is declared on special forms and the amount outstanding on the policy is reduced by the amount of that shipment. The assured is bound to declare each shipment and the insurer is bound to accept the shipment providing it complies with the agreed terms. There is, of course, one problem. Since the policy is issued when the policy is first negotiated, policies will not be issued for each individual shipment; certificates of insurance will be issued instead. It is important; therefore, that if a seller is on CIF terms he must make sure the contract allows him to present a certificate rather than a policy. The disadvantage of this type of policy is that the insurer will expect to be paid a premium deposit that will be related to the total value of the policy. An average premium will be worked out and this will be adjusted when the declarations of actual cargo carried are made known.
B – Open Covers: Under open covers there is automatic cover available for a period. This may be for a period of one year or longer or even on a permanent basis unless cancelled by either party. Under this type of agreement, the insurer agrees to cover all consignments and the premium rates are fixed. This gives the greatest flexibility and yet stability of pricing to the exporter. Open covers may be arranged on almost any terms and they may be extremely complex. They may contain a limit per bottom (the value of goods to be sent on any one ship) or limit in location (the value of goods to be in one place before shipment). They will, no doubt, also take account of certain of the Institute Clauses. On occasions, floating policies may be issued in conjunction with open cover.
C- Open Policies: These are really a type of open cover, which do not necessarily relate to a time period but will remain in force until cancellation. These policies will be very individualistic and will be drawn up to meet all the demands of modern multi-modal transport. The methods and procedure of declarations against this type of policy will be devised to meet the needs of the assured. It is also advantageous to the broker and insurer, since they receive a large volume of business, which may be dealt with in a standardized way. The Open Cover or Policy has a number of advantages :
1- As there is a continuous automatic cover in force, the insured avoids the risk of omitting to effect the necessary insurance cover. A risk, which is not quite as remote as, one might imagine.
2- The cost of obtaining insurance is known in advance and this will enable an exporter to include a precise figure for the insurance element when computing his CIF price for example. It must be remembered with some commodities that the insurance element may be very large.
3- Usually insurers are prepared to give better terms to an exporter arranging an annual policy than one who arranges cover on an individual basis only.
4- It may be, from time to time, that claims will arise which are not strictly speaking recoverable. If the insured has had regular dealings with a particular underwriter, he may well be in a better position to negotiate some form of commercial settlement than if he has arranged his insurance on a facultative basis.