When it comes to the freighting industry, the topic of insurance is one that must be addressed. The sad reality is that, although most professionals consider it an absolute necessity, cargo moves from place to place uninsured daily. Being that legislation does not require shippers to purchase insurance, if they don’t know any better, they may find themselves in a difficult spot once an unfortunate event occurs.
Yet, sometimes the sheer cost alone can scare off shippers from digging deeper. We know that health insurance and automobile coverage—particularly the premium policies—can cost a pretty penny. Respectively, wouldn’t insuring an entire shipment take a sledgehammer to a bank account? The short answer is no.
If we boil down freight insurance to a percentage of total value, you’ll be happy to know that it’s usually more cost-efficient than the insurances governing your daily life. Still, what defines the cost of freight insurance changes situation-to-situation and is dependent on a host of factors we’re going to cover in this article. Before we continue, it’s important to note that there is no one price for freight insurance, and more importantly, it can be extremely affordable.
Is there a standard?
Perhaps one of the most frustrating facets of freight insurance is that it isn’t standardized… not in the least bit. With an automobile, it’s safe to assume that you could gauge what amount you’re going to pay. If you have an old Honda Civic and a great driving record, it’s going to be affordable. If you just bought a new Ferrari and you’re one point away from losing your license, the payment may be as high as the car.
However, freight insurance is different. From general liability, freight classification, cargo, prior loss history, to a host of different factors, there are too many dynamics to generally ‘assume’ a price. That doesn’t mean there aren’t certain commonalities with freight insurance; it’s just to say that, without dissecting your specific situation, the cost is hard to speculate.
Before continuing to tackle freight insurance costs, we need to address a common theme in freighting, which is confusing liability coverage for freight insurance. While shippers are not legally required to have an insurance policy in place, freight carriers are—which makes sense, given they’re operating trucks on public roads.
However, a common mistake is to believe that liability coverage will cover cargo in the event of damage or loss. While this can be true in isolated incidents, generally, these policies are put in place to protect the carrier, not the shipper. In certain situations, the liability coverage does not insure the type of commodity being shipped, and in others, they only allow a cent to the dollar (of total value).
These policies are put in place and negotiated by the carrier. While they have insurance, it does not mean that protection is exclusive to you or the cargo they’re onboarding. Do not misinterpret this language, as their insurance is not your own. And if it does apply, there is no guarantee that your total value is insured.
Calculating freight insurance
While the below explains how to calculate freight insurance, we want to reiterate that these calculations and other factors are often dependent on the insurance company offering the policy. With that being said, this structure is quite common in the industry.
At freight insurance’s base, the value of what you’re insuring is equal to the Commercial Invoice Value. A percentage is then calculated based off a dollar value (usually in cents) to every $100 of the invoice total. We’ll give an example.
You’re looking for the most basic insurance policy that will cover your goods specifically. Your Commercial Invoice Value is $50,000. You then find an insurance company which sells their policy for $.50/$100 with a $10 minimum.
- Commercial Invoice Value = $50,000
- Insurance: $250
You can see in this situation that freight insurance is undoubtedly affordable. Still, this is a calculation for the most basic policy, which—while insuring the total value of your shipment—won’t have the bells and whistles or range of coverage of other policies.
With that being said, when it comes to the insurance offered, expect $.25-.75/$100. This rate is subject to change dependent on the company, freight class, and shipper history. Anything over $.75/$100 is considered overpriced. Anything below $.10 is considered too good to be true.
The cost we’ve just detailed is specific to the insurance of your goods. If you want to insure both your goods and the shipping charges, then you need to request the CIF value to be insured. The CIF value of your shipment is broken down into three different categories.
First, there’s the Commercial Invoice Value, the insurance costs, and then the freight. The total is then valued at 110%; the extra 10% is added to cover any additional or unforeseen charges that may arise. In which case, using the above example, it would look like this:
- Commercial Invoice Value: $50,000
- Insurance: $250
- Shipping Costs: $1000
- CIF = $51,250
You then multiply the CIF by 1.1, which raises the total value to $56,375.
Dependent on what percentage your policy is granting, you then identify your rate. To use $.5/$100 as an example, it would look like this:
($56,375/100) x .5
The insurance you pay = $281.875
From this example, you can distinguish that covering both shipping costs and ‘extra’ value doesn’t dramatically change the price of insurance. Again, this formula can be used as a standard in the industry—and you’ll see it calculated exactly as so across multiple different platforms—but at the end of the day, a host of different factors contribute to determining freight insurance cost.
What other factors are there?
When it comes to freight insurance, it’s always important to discuss the gamut of other reasons that could be factored into the total price. The above provides an example of insurance at its base, without any other additives. However, similar to the other insurances we have in our lives, there’s always more to it. We sound like a broken record here, but again this is dependent on the company providing the policy. While one may require a background check, another may not.
Some insurance companies will vet your ‘shipping record.’ In which you may ask, if losses accrued, then wouldn’t that be the fault of the carrier? In some cases, yes, in others no. Take packaging for example. What if a shipper was trying to obtain insurance only for the insurance company to discover that, within the last year they had multiple incidents due to poor packaging? Or, if they were extremely claim-heavy?
Just like a driving record, an insurance company will dig into the past to identify how much of a liability the shipper is going to be—or already has been. If they find that there is a large stack of prior loss cases, this can dramatically affect the price of the policy.
The National Motor Freight Truck Association (NMFTA) has a long list of freight classifications that they assigned to different types of cargo. The reasons are rather commonsensical; some materials are harder to transport than others, thus changing both the price and manner in which they’re to be transported. Essentially, freight classifications create a reference point for two things; pricing and difficulty of transport.
You could imagine that transporting bricks might be easier than extremely rare, old china. Or that transporting wood wouldn’t be as dangerous as loading your truck with an explosive substance. Thus, these freight classifications create a standard when it comes to shipping, helping the shipper, intermediaries, and freight carrier understand the parameters of the shipment.
Based on your freight classification, the price of your insurance can dramatically fluctuate. Back to our previous example, insuring wood—a material that is both durable and easy to handle—is going to be less expensive than insuring explosive or combustible materials. That’s why it’s paramount that as a shipper—before embarking on your quest for freight insurance—to know your correct freight classification. You don’t want this factor to sneak up on you.
Aside from the insurance itself, when it comes to finding the best policy that fits your needs as a shipper, know that there are professionals available to guide you through the process. Freight insurance is a complex, dynamic, and non-standardized part of the freighting industry. These companies rarely have the shipper’s best interest in mind and can hide sneaky language into a contract that, once a claim has been filed, renders it denied.
It’s commonly recommended that an intermediary, one who has experience with freight insurance, is hired to be at the very least, a consultant. From freight brokers, freight advancers, to simply employing an insurance agent well-versed in the industry, utilizing these professional services can be the difference of a policy that only protects you half the time, to one that will approve nearly every claim filed.
You don’t want to be victim to the horror stories of freight insurance, like your claim being denied because the wrong freight classification was submitted, meaning your cargo is not ‘technically’ covered by your policy. You want to be on the upside of the deal, and without any experience or technical know-how, a professional can ensure you’re adequately insured.
How do I file a claim?
If you’ve gone ahead and hired an intermediary to handle your freight insurance, then all claims should be handled by them. Submitting a claim properly is somewhat of an art within the freighting industry and these experienced liaisons will know how to do it properly. However, we do want to make an important note here:
Be sure to know exactly how much time you have to file a claim. One of the principal reasons a claim is denied is because it wasn’t timely. This can arise from the massive differences between liability coverage (what legislation makes a requirement for freights) and freight insurance. As a rule of thumb, freight insurance claims must be submitted within 30 days of any given incident. Liability coverage, on the other hand, can be filed within 9 months.
Do I need to insure total value?
Technically, no. There is no requirement that states a shipper must insure the entire value of their shipment. But there’s also a reason that CIF insurance goes as far as to insure 110% of all costs. While you can certainly drop the price of insurance by only insuring half your total value, it is not recommended. Damage and loss aren’t partial. A natural disaster or weather-driven issue typically isn’t only going to affect a few select freights.
Nonetheless, you are allowed to insure whatever value you’d like, given the insurance company is willing to honor your request.
Keep your records
Another cost that can be tacked along with freight insurance occurs internally. If you’re going to move forward with freight insurance and purchase a policy, then you should know how vital it is that your bookkeeping is flawless. Another principal reason that claims are denied is that there is no viable proof your goods or cargo were in ‘good condition’ before an incident took place. You want to build out infrastructure to mitigate this risk, which could mean hiring someone to handle oversight.
This, again, should be handled by the intermediary that you hire—but you’re always going to want to build safety walls internally, outside of any middleman that might be guiding you through the industry.
While the current legislation does not enforce shippers to have freight insurance, as a shipper it’s vital that a policy is put in place. Don’t let the idea that freight insurance costs are going to burn a hole in your budget drive you away from protecting yourself against damage or loss. From the breakdowns we provided, you should know that there should be no reason you can’t find a policy—one that provides ultimate protection—which is affordable for your business.