Is it a good idea to buy a transportation insurance? Are you covered, if you do not have one? Here you will find all the answers.
When you buy a transportation insurance
When you are shipping goods and buy a transportation insurance, you are covered, should anything happen. When you have a transportation insurance and something happens to your goods during transport, or it is lost completely, you are fully covered and you will be compensated in full as well. A transportation insurance is therefore a great way to eliminate risk when shipping goods. Below, you can read more about what happens when something happens during transport and you do not have a transportation insurance.
You are not fully covered without a transportation insurance
Unfortunately, not. When you buy transportation through a freight forwarder, transport company, or courier, you are not fully covered should anything happen to your cargo during shipment, if you do not have a separate transportation insurance. You can read more about why that is, and how you can be fully covered further down in the article.
Shipping companies, or freight forwarders, do not have an insurance, which automatically covers damages or loss that might occur to your goods during transport. Therefore, in order to be fully covered, you have to buy a separate transportation insurance alongside the transport itself. However, in some cases, you might be covered by your warehouse insurance (if you have one). But, that is something you have to read up on in you Terms & Services agreement in order to be absolutely sure.
Are there special rules for private persons?
Again, unfortunately not. There does not exist any special consumer rights even though you are a private individual and not a business. The same risks that apply to businesses apply to private persons too. There is, however, an exception if you are shipping private moving goods.
When is it financially a good idea to buy a transportation insurance?
If what you are shipping has a great value in relation to its weight, then it can be a good idea to buy a transportation insurance; otherwise it cannot, at least not financially. Of course, if you are shipping personal items that have a great personal value or significance to you that is a other matter.
You are getting a cheaper shipping price because you are not covered
When you look at the shipping industry from a larger and more collective perspective, you see that because people are not fully covered in case of damages or loss the transport itself actually becomes cheaper, which is a good thing. When a freight forwarder does not carry all the risks involved, he/she is able to keep the price down, which means it becomes cheaper for you to import goods from i.e. China. Another reason for this is that the profit of a freight forwarder on any given transport equals only a fraction of the value of the goods shipped. If a freight forwarder should be held accountable for all damages and loss, prices would have to be raised significantly.
So, when we once in a while get these types of questions:
“You do have transportation insurance that covers, if something happens to my goods, right?”
“When somebody transports other people’s things and damage them, then one should fully replace them. That’s only fair, right?”
In these cases, we, unfortunately, have to say, you are not automatically covered as it says above. If that would be the case then the price of the transport would be so much more expensive.
It is probably best explained with this example:
A freight forwarder has typically a contribution margin around USD 200 when shipping a 40-foot container from Asia to the US. This has to cover the freight forwarder’s costs for payroll, rent, etc.
The value of the goods in a 40-foot container average USD 50,000, which of course can be up and down a bit.
The profit is therefore roughly 0.4% of the total value of the goods.
The risk of damage or loss does not coincide with the profit if the freight forwarder has to bear full responsibility. Also, is frequently happens that container with raw materials is delayed, which means that factories have to temporally stop production. If freight forwarders were to be held responsible for these indirect consequences and costs, the risk (and thereby the price of transport) would rise quite significantly.
The same principals apply no matter whether you are shipping a lamp in a parcel, a pallet of wine by truck, or an entire ship filled with oil.
Does the freight forwarder not insure himself from things like that?
They do not, unfortunately. The reason is that it would increase their costs so much, which would raise their prices to a level where nobody would use their services.
At the same time, we are as a society interested in keeping costs on transport as low as possible. Costs for transportation is a barrier of trade the same way customs, VAT, and taxes are a barrier. On a global scale, higher transportation costs mean less trade, which is why we are interested in keeping expenses and costs on shipping as low a possible.
The freight forwarder does have a responsibility
Actually, the freight forwarder does have a responsibility, but it is limited according to international conventions. In the trade, it is called ‘Limitation of Liability’ for the freight forwarder and the limitations are dependent on whether you are shipping via air freight, sea freight, or road transport. This means that you actually can get compensation if your goods are damaged or suffer a loss during transport, however, in most cases the compensation you would receive would be quite insignificant compared to the real value of the goods. Below you can read more about which limitation applies to which type of transport.
The limitations of liability are:
Airfreight: Approx. USD 19 / kg
Road transport: Approx. USD 12 / kg
Sea freight: Approx. USD 3 / kg
If you ship a package weighing 10 kg by road transport, the freight forwarder would normally be obligated to pay you a compensation of 10kg x USD 12 / kg = USD 120. However, you can not receive compensation that is more than what you paid for your goods.
Therefore, if you have paid USD 80 for your goods you will receive USD 80 in compensation. If you have paid USD 200 you will only receive USD 120 in compensation, according to the limitation of liability.
What is the point of the limitations of liability, if you are not fully compensated?
The limitations of liability create a balance in the transportation market where the freight forwarder carries a part of the risk that is big enough for him to handle the goods in a proper fashion. Still, the risk is not so great that it becomes a barrier that becomes a hindrance for world trade.
Also, the limitations of liability is a set of rules that apply to all transport companies across the world and regardless of where their clients might be situated.
When does it pay to buy transportation insurance?
In short, it pays when the value of the goods you are shipping significantly exceeds the limitations of liability and your deductible. Below are examples of both.
If you are to have a lamp weighing 10kg shipping with a value of USD 80, then you are able to get your loss covered by the freight forwarder because the amount is below the limitations of liability (10kg x USD 12 / kg = USD 120). It is therefore not necessary to buy transportation insurance. However, one of the reasons why you might buy one anyway is that it is generally quite easier and faster to have your compensation claim approved through a proper insurance company than a freight forwarder.
All transportation insurances also come with a deductible. Therefore, if you have purchased a lamp for USD 80 it would not make any sense to buy transportation insurance with a USD 100 deductible. However, if the lamp cost USD 800 it would financially make sense to buy insurance.
Where do I buy transportation insurance?
Most transportation companies (including Transporteca) offer transportation insurance alongside each individual shipping. If you buy such insurance, you are covered in full against all damages and/or loss that might occur to your goods.
If you are shipping frequently it might be a good idea to have general transportation insurance, which would cover every shipment you make instead of just a single shipment. Many businesses do already have such transportation insurance included in their warehouse insurance without knowing it. It can, therefore, be a good idea to read your Terms & Services agreement in order to find out if that is indeed the case.