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Topic 7: Logistics & Physical Distribution

Introduction to Logistics & Physical Distribution
The Exporter
International Freight Forwarders
Other Carriers and Operators
Customs Inspectors & Brokers
Packing Methods
Cargo Insurance
Introduction to Logistics & Physical Distribution
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Competence in logistics and transportation is an important component to the overall export process. Assigning responsibility to a staff member to evaluate the various weights and measurements of potential shipments in different modes of transport is a good place to start understanding the quoting and shipping process.

Analyzing the different services of freight forwarders, airlines, steamship lines, inland carriers, packing companies and marine cargo insurance providers is a task which should benefit the company greatly, whether it be for the first-time exporter or one that is considering expansion into the overseas marketplace. Working together with export assistance agencies and export service providers will aid the progress and profits of the exporter.

This section discusses:

  • The parties involved in an international shipping transaction
  • The importance of weights and measures in the metric system
  • The proper packaging of goods for export and information on marine cargo insurance

Physical Distribution & Export Strategy

Export distribution involves the physical act of moving products and is an integral part of international trade. Companies of all sizes should become familiar with the distribution systems between the origin manufacturing location and the targeted markets.

While many aspects of international marketing allow an exporter to be creative and unique, there is little room for error in export mechanics. The role of service providers in international logistics and transportation cannot be underestimated. Exporters should not operate in the “Do It Yourself” mode on these highly volatile and crucial procedures. It is best to leave this process to the experts, who make their living by learning the most efficient and ethical transportation methods available.

Numerous variables impact shipment logistics and distribution. Transportation modes impact the total cost of the goods, which may fluctuate between nations in regards to requirements on packaging, labeling, transit times, perishability, and damage or loss of cargo. Mistakes in this process lead to increased labor costs. Many hours of work can go into solving problems that could have been avoided by taking the time to learn the process in the first place. Familiarizing yourself with how a market imports its goods and how the goods reach the consumer before actively marketing is a gesture that potential buyers appreciate.

Parties to the International Shipping Transaction

Often a number of businesses have temporary control over cargo and therefore have responsibility for its processing, handling, integrity and/or movement. The following parties are often involved in an export shipment:

  • Exporter
  • Freight Forwarder
  • Non-Vessel Operating Common Carrier (NVOCC)
  • Inland Carrier
  • Terminal Operators
  • Ocean Carrier
  • Air Carrier
  • Customs Inspectors
  • Customs Brokers

Note: In order to learn the international trade terms used in this and other sections, you may wish to access the export glossary from the USDA, Foreign Agricultural Service section on "Recipe for Export Success: A Brief Tutorial for New Exporters."

The Exporter
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The exporter, also known as the shipper or consignor, is responsible for accurately describing the details of the merchandise being transported. When the exporter contacts any carrier, freight forwarder or consolidator, he/she must relay a detailed description of the products in order to obtain the correct prices and information for the handling, stowage, insurance and transit time, among other details. These details include:

  • Description of the cargo
  • Origin and destination of the shipment
  • Origin of manufacture of the goods
  • Gross and net weight of each package
  • Cubic measurement (in cubic feet or cubic meters)
  • Marks and numbers on the goods for identification
  • Type of quotation required based on the term of sale: EXW, FOB, CIF
  • The material value of the goods
  • Type of marine cargo insurance required (also depending on the term of sale)

In some cases, the exporter may arrange for inland freight to the port of export and prepare the inland bill of lading, dock receipt and shippers export declaration, but these services are usually provided by the freight forwarder. The exporter also usually prepares the commercial invoice, packing list and other regulatory documents to submit to the freight forwarder. Depending on the country of destination and the existence of a Free Trade Agreement, they may also prepare a certificate of origin. In the case of exports to NAFTA partners, only the exporter or the manufacturer of the goods can prepare the Certificate of Origin.

Weights & Measures

Most active exporters spend time creating pro forma invoices in order to offer their goods for export, in a given amount and at a specific location. This requires contacting service providers in the business of moving cargo within the U.S. or between the U.S. and the foreign destination. This includes trucking companies, logistics providers, freight forwarders, steamship lines and airlines. Their immediate interest is not just in the product itself, but also in the physical displacement of the goods, measured in the metric system for export.

In order to arrive at a correct price for shipping, an exporter needs to convert all measurements into metric units. The following link is a helpful tool in accomplishing this task, although there are a variety of resources available.

Click here to access the “Convert it” website.

Dimensions & Density

Once you have the applicable conversions for your products, you can determine both the chargeable weight of your potential shipment and its density. Most transportation charges are based not only on the actual weight of the shipment, but also on the chargeable weight, which is the volume of space the shipment takes up in any given container. (This is most sensitive to air cargo, but applies to other modes of transport as well.)

For air cargo, you need to multiply the length, width and height of each piece of freight to get a total amount of cubic inches. Divide that amount by 166 cubic inches, which is known as the “Dim Factor” for dimensional weight. If the amount is lower than the actual weight, you pay on the actual weight. If it is higher, you pay on the “Dim Weight” and it will cost you more in freight charges. Exporters should do this prior to requesting quotations from service providers.

For an illustration of this process, click here.

Density is expressed in pounds per cubic foot. The higher the density, the more attractive the freight rates should be. The volume is calculated by multiplying the length, width and height of the cargo, but in this case you would divide that by 1728, which is the amount of cubic inches in a cubic foot (12x12x12 = 1728). Average density is 10.4 pounds per cubic foot, which is 1728/166 (the dim factor). Anything less than 10.4 pounds per cubic foot will be charged on volume and anything more should begin to lower your price because of the density of the freight, which allows for some negotiation in pricing.

For an illustrated look at this process, click here.

Even with ocean freight, these formulas are good to know. For “less than container load” (LCL) ocean freight rates, the price is based on weight or measure of the cargo. It’s based on one metric ton or one cubic meter, whichever is greater. An example would by $125.00 W/M Philadelphia to Rotterdam. The W/M stands for weight or measure.

If your cargo volume has a density of lower than 10.4 pounds per cubic foot, you will be charged in cubic meters rather than actual weight. For example, if you have 2 tons of goods and 3 cubic meters of volume, you will be charged:
3 x $125.00 = $375.00
Instead of
2 x $125.00 = $250.00
Knowledge of these formulas is helpful to negotiate lower freight rates and make competitive pro forma quotations.

International Freight Forwarders
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International freight forwarders handle both direct and consolidated shipments. A direct shipment is sent on its own without being co-loaded with other goods. This could be an entire container, truckload or airfreight shipment. Consolidated shipments are those where goods from two or more parties are shipped together, adding weight and security to the shipment, and usually lowering the cost of freight.

Services of an International Freight Forwarder

Freight forwarders facilitate shipments by air, vessel or other common carrier. Their services may include, but are not limited to:

  • Ordering cargo to the port of export
  • Preparing export declarations
  • Booking, arranging for and confirming cargo space
  • Preparing delivery orders or dock receipts
  • Preparing ocean bills of lading
  • Preparing consular documents or arranging for their certification
  • Preparing and processing letters of credit
  • Arranging for warehouse storage
  • Clearing shipments in accordance with U.S. government export regulations
  • Preparing and sending advance notifications of shipments or other documents to banks, shippers, consignees or agents as needed
  • Handling freight or other monies advanced by shippers
  • Remitting or advancing freight, monies or credit in connection with the dispatching of shipments
  • Coordinating the movement of shipments from origin to vessel
  • Obtaining the best possible ocean freight rates on the exporters’ behalf
  • Giving expert advise to exporters concerning letters of credit, export documents, licenses, inspections or complications with the cargo’s dispatch

Organizational Structure of Forwarders

Twenty years ago, companies specialized in direct air shipments, ocean shipments, air consolidations, ocean consolidations or other distinct services based on product, market and industry. Today, many international freight forwarders provide a complete logistical solution for exporters, from door to door. There are still exceptions which require a brief review of how forwarding services are organized.

The International Air Freight IATA Agent

International Air Transport Association, or IATA, is a governing body that allows forwarders to collect a modest commission from the airline based on the freight rate applied to the cargo. IATA certification is based on the forwarder meeting specific financial and credit requirements, having a presence of physical facilities and possessing professional qualifications and ethical business practices. In turn, they are permitted to issue airline air waybills and represent the shipper to the airline and vice versa.

IATA agents may provide additional services to their customers. They often focus on crating, packing, labeling and logistics and turn the cargo over to the airline or an air cargo consolidator. In the food business, an exporter might find an IATA agent that specializes in certain perishable items, such as produce or seafood. IATA agents do not publish their own rates or issue their own waybills, so they do not provide consolidation services directly, although they could assist in making those arrangements on behalf of an exporter.

The International Air Freight Forwarder

These companies are IATA agents as well, meaning they can handle direct shipments and prepare the airline air waybill. In addition, they issue their own air waybills, known as “House” air waybills and publish their own rates. With the issuance of house air waybills, they are transporting merchandise under their own name, with what is known as a “Master” airway bill. In a consolidated shipment there can be multiple house air waybills associated to a master air waybill.

International Air Freight Forwarders provide consolidations of air cargo shipments to destinations around the world, and in providing the airline with volume shipments, are able to collect the IATA commission in addition to commission based on performance. They usually have a network of their own offices or agents in major cities around the world and now in developing countries as well. The overseas offices can provide valuable information about regulations, duties, taxes and prices for services provided at the destination. Taking advantage of air consolidation freight rates makes your landed cost more attractive to the buyer and should be considered if the mode of transport is airfreight.

International Ocean Freight Forwarder

These companies need to be licensed by the Federal Maritime Commission (FMC). Like IATA agents, they do not publish their own rates or issue their own bills of lading, as they don’t provide consolidation services. Their services to the exporter include: coordination of cargo, booking with the steamship line, crating, packing and document preparation.

The International Ocean Freight Consolidator

This type of company is referred to as an NVOCC, Non-Vessel Operating Common Carrier, or an NVO. NVOs provide services that are very similar to the International Air Freight Forwarder. They are licensed by the FMC and can also provide the services of an Ocean Freight Forwarder. They are licensed to publish their own rates and issue their own ocean bills of lading, transporting goods under their own name. This is a very similar process as the master and house air waybills used with air freight consolidations.

If an exporter has a shipment that needs to move by sea freight and does not have enough volume to warrant the purchase of an entire container, the NVOCC is a logical choice, as they can load the shipment into a container with other cargo and provide a competitive rate for their services. As mentioned in previous sections, many value-added food importers today are asking their suppliers to send the shipment to a location near an ocean port and have the shipment consolidated into a container with similar sized shipments from other suppliers.

Many international freight forwarders provide both export services for ocean and air freight, directly and consolidated.

This means that:

  • Whatever mode of transport you need,
  • In whatever size shipment,
  • To whatever destination you need,

You are often able to use the same company to accomplish all of your export transactions.

Documentation Services

Exporters can either prepare the export documents they are responsible for or choose to use the services of a forwarder. Under normal circumstances, the freight forwarder prepares the inland bill of lading or dock receipt, but can also prepare:

  • Ocean bill of lading “master”: The forwarder provides this to the steamship line, which in turn produces its own “original” bill of lading after the departure of the vessel.
  • Consolidator bill of lading: This is issued by the NVOCC for ocean shipments which are being exported in a consolidation with other goods.
  • “Master” air waybill: This is different from the ocean bill of lading and is the airline air waybill that the carrier allows the freight forwarders to prepare on their behalf. They are used either alone on direct shipments, which cannot be consolidated due to their perishable nature or in some cases lack of other cargos destined for certain locations, or as the master of a consolidated air shipment which is accompanied by two or more “house” air waybills in a consolidation.
  • “House” air waybill: These are issued by the freight forwarders in-house and are contracts of carriage between the forwarder and shipper as the master becomes a contract of carriage between the forwarder and airline on consolidated shipments.
  • Consular invoice: When the consulate of the foreign country requires their own invoice and presentation of the export documents to them for inspection, the forwarder usually makes these arrangements.
  • Shipper’s export declaration: This document is required for all exports from the U.S. which are valued over $2500 per Schedule B number, or those on an exporter license, such as exports to Cuba or other controlled destinations. The forwarder usually submits this electronically on behalf of the exporter, although the exporter may also submit it himself.
  • Insurance certificate: When the forwarder issues a marine insurance policy, he/she can also issue a certificate of insurance for a nominal fee. If the export will be paid under a letter of credit and insurance is required, this becomes mandatory as the buyer’s bank will need proof of insurance to effect the payment.

There may be other documents prepared, depending on the nature of the goods, the type of shipment, the regulatory requirements of the U.S. and foreign government and requests by the banks, seller and buyer.

To review a document which illustrates the services of the freight forwarder’s coordination with other service parties and regulatory agencies, click here.

Selecting the Right Freight Forwarder

International forwarders are not all alike in size, services and capability. Some have a competitive advantage in shipments going by ocean rather than airfreight, while others have strength in cross-border trade to Mexico or Canada. Some might have more volume in business; therefore better pricing for certain destinations worldwide. If an exporter has shipments to completely different areas of the world or of different sizes, he/she may want to employ more than one freight forwarder. It is always important to choose the right forwarder for your type of business, unless the buyer has selected a forwarder and is paying for all or most of the charges on a collect bases. (This is known as “routed” cargo in the international freight forwarding business, but is usually more common with airfreight than sea freight shipments.)

When choosing a freight forwarder, consider your own level of experience in international trade. Your experience will dictate how dependent you will be on their advice, support and handling of cargo. If you are new-to-export, your level of dependence will be greater. Some general guidelines for selection include:

  • FMC or IATA licensing,
  • NVOCC or airfreight consolidation services
  • Knowledge and experience with products similar to yours
  • Capability to work with your mode of transport
  • An office or agent in the destination market and good communication with the office
  • The ability to provide reference from other customers, carriers and banks
  • Properly located facilities with adequate equipment
  • Patience in explaining terms and procedures so you can understand them

This link will take you to the database of forwarders from the Agricultural Marketing Service’s Transportation Services Branch.

Other Carriers and Operators
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Inland Carriers

Inland carriers are independent companies that perform services for shippers or freight forwarders. Because the U.S. has such a large interior, inland transit time and costs play a crucial role in competitive export pricing and service. Inland carriers usually provide the following services, with prices based on origin, distance to port and type of merchandise:

  • Pick up shipment from exporter
  • Receive delivery instructions
  • Deliver cargo to port of export (or other location)
  • Obtain signed dock receipt
  • Notify forwarder or exporter of delivery to port (or other location)

There are a couple of other names used for inland carriers, based on the mode of transport for the export and the distance from pick up to delivery. “Cartage” agents are usually involved in local pick up and delivery within a 50-mile radius of a metropolitan area. They handle pick-ups for either air cargo shipments or for ocean freight that is to be consolidated locally. “Drayage” agents work at a local trucking company that “spots” (drops off) and picks up containers once they are loaded for export. They either deliver the container to the port of export or to a rail line for further inland transport. Rail carriers are also integral to the export business, as they can deliver ocean containers or truck trailers from an inland location to the port of export.

It is a good idea to evaluate the costs and services of all carriers in order to determine the most efficient method of inland transport. Freight forwarders will also provide this service.

A Note on the Inland Bill of Lading

Although not considered an export document, the inland bill of lading is an important document used to communicate the pre-main carriage details of the shipment. This “B/L” as the industry says, is used by a variety of service providers in order to place the goods at the right location at the correct time to take the appropriate action in the processing of the export. The following companies are the ones with direct interest and responsibility for acting on the information provided in the inland bill of lading:

  • The carrier which picks up the shipment at your facility
  • The terminal of the carrier at the port of export (or other location)
  • The workers in the warehouse where the shipment is delivered
  • The cartage agent who delivers the shipment from the terminal of the carrier to the airport or pier
  • The terminal operators who position the shipment according to the instructions
  • The freight forwarder who is handling the shipment
  • The exporter or forwarder responsible for paying for the inland carriage

Terminal Operators

Terminal operators control the logistics of the port on behalf of the steamship lines and the port authorities. Their main task is to coordinate the flow of goods into and out of the port. They are usually involved in the following procedures:

  • Controlling truck or rail traffic
  • Checking delivery orders or dock receipts
  • Assigning a “checker” for loading and unloading
  • Loading containers at the container freight station
  • Controlling the parking location of containers
  • Assigning stowage allocations
  • Coordinating movement of containers to vessels
  • Loading and securing the containers on the vessel

Ocean Carriers

Ocean carriers provide the main carriage from port of export to port of import, but also may be involved in the pre-main carriage or post-main carriage transport. Exporters should obtain multiple quotations for these services, as rates vary among service providers. Their services include the following:

  • Accepting cargo bookings from shippers or forwarders
  • Dispatching containers to origin locations (known as “drayage”)
  • Processing bills of lading (not “master” but original)
  • Preparing freight invoices, manifests, arrival notices, delivery receipts and stow plans
  • Filing export declarations with customs (if not done by shipper or forwarder)
  • Notifying consignees (buyers) of arrival and availability of cargo
  • Arranging inland transportation at destination (if required)

To review the types of containers used by steamship lines click here.

Air Carriers

Air carriers, such as FedEx and UPS work with shippers directly. However, in the export business, most work with freight forwarders on consolidated cargos. Chilled, frozen, perishable or other controlled goods cannot be consolidated and a direct shipment is required. In this case, an exporter might work with the air carrier directly. The airfreight business moves at a much more rapid pace than that of sea freight and involves fewer steps.

In some cases, you might get a better overall price if you ship your goods in an air container rather than in a consolidation. This depends on the carrier price, the size, weight and dimensions of the cargo and the destination. Often your air shipment may move in an air container that has been tendered by the freight forwarder if part of a larger consolidation.

To review the types of containers used by airlines click here.

Customs Inspectors and Brokers
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Customs Inspectors

The word “customs” is generally associated with imports, but export shipments must clear customs as well. The shipper’s export declaration includes a customs evaluation prior to export from the United States. If the shipment is suspicious in any way, customs may call for a document inspection. If there is still concern, the cargo may be inspected and the exporter may be charged for the inspection time. Customs inspections may also delay the departure of the shipment.

In both the U.S. and abroad, customs enforces import laws and regulations and collects duties and taxes. Customs uses the Harmonized System (HS) codes, the declared value of the goods and the country of origin of manufacture, among other more specific details, such as complete documentation, for regulation.

An exporter should know the tariff number of the goods before shipping them in order to assist the importer and the customs broker. Accurate invoicing, complete shipment details and providing the correct country of origin help to simplify the import process.

Customs Brokers

A customs broker represents the importer to customs in order to admit the goods into their country. Brokers can help the exporter understand the regulations and documentation required for successful customs clearance. If an exporter is in doubt regarding shipment requirements, it is appropriate to have the buyer check with their customs broker, or to contact the broker directly.

Many overseas offices or agents of U.S.-based freight forwarders employ customs brokers and can provide on-the-ground information about customs requirements. If the exporter maintains title to the goods at the destination and is responsible for clearing and delivering the goods, he or she will probably use the services of this office as well. At a minimum, customs brokers provide the following services:

  • Evaluate exporters’ documents for accuracy
  • Prepare required customs entry forms and file with customs
  • Pay customs duties and taxes on behalf of the importer
  • Effect customs and freight release
  • Verify information on bill of lading and prepare delivery orders
  • Coordinate with the inland carrier for pick up and delivery of imported cargo

Packing Methods
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In addition to obtaining competitive freight rates and services, a shipper should ensure that the product will arrive in excellent condition. Of particular concern are products of a perishable nature, such as frozen and chilled foods as well as processed and packaged foods, drinks and juices. Important considerations include:

  • Effective packaging and labeling
  • Temperature, humidity and other environmental controls
  • Well-maintained transportation equipment
  • Proper loading, in-transit monitoring and unloading

Products must be protected from:

  • Rough handling during loading and unloading
  • Compression from the overhead weight of other product containers
  • Impact and vibration during land, ocean and air transportation
  • Rolling, pitching, yawing, heaving, swaying and surging during ocean transportation
  • Loss or gain of moisture due to the surrounding air
  • Higher or lower than recommended temperatures
  • Cross-contamination or odors from other products or residues

By using top-quality packing products, shippers can help ensure good arrival condition of their goods. Effective packaging, environmental controls and proper transportation equipment are essential. The complexity of packaging often calls for specialized responsibility within a company or the use of third party experts who can evaluate and design specific solutions for any given situation.

Packaging materials should be chosen based on product and environmental considerations. Factors to be considered include: method of packing, temperature, humidity and desired atmosphere around the product, packaging strength, cost, availability, buyer specifications, graphics, labeling, freight rates and government regulations. Packaging manufacturers, foreign buyers, wholesale markets, retail stores, packaging magazines and consultants are important sources of information on current packaging trends and desires.

Packaging should be standardized to facilitate unit loading on standard-size, reusable pallets in the United States, Europe and other countries. Pallet handling and leasing companies have been established in response to economic and environmental concerns.

Boxes should be sized and filled in accordance with the importer’s desires. Oversized boxes that weigh more than 20 kg (44 lbs) encourage rough handling, product damage and container failure. Excessive weights and damaged packaging are common complaints of importers of U.S. meat products who receive boxes weighing up to 45 kg (100 lbs).

Overfilling causes product damage and excessive bulging of the box, which leads to reduced compression strength and container failure. Under-filling also may cause product damage. The product may be bruised as it moves around inside the box during transport and handling.

Widely used packaging materials include:

  • Fiberboard: Pallets, slip-sheets, bins, boxes, lugs, trays, flats, dividers and partitions
  • Wood: Pallets, bins, crates, baskets, trays and lugs
  • Paper: Bags, sleeves, wraps, liners, pads, excelsior and labels
  • Plastic: Pallets, bins, boxes, trays, bags, containers, sleeves, film wraps, liners, coatings, dividers and slip-sheets
  • Polystyrene: Foam boxes, trays, lugs, sleeves, liners, dividers and pads

Product packaging checklist for exporters

Before shipping, consider the following:

  • The mode of shipping. Does it make sense to use air or ocean freight? Will you have to use road or rail for part of the journey? Look into the options and conduct a cost/benefit analysis.
  • Whether to ship directly or indirectly. Will your goods be sent to the buyer directly? Is there a distributor or warehousing facility involved in the process? How will this affect your costs and ability to fill the order?
  • Suitable packaging for the shipment. This will depend on the mode of shipping, the destination, the number of stops (and storage), the fragility of the goods and their sensitivity to environmental changes. It is critical to use suitable internal protection as well as a durable container. You may also want to consider shock and tilt indicators for packages that may be susceptible to overzealous handling.
  • Application of appropriate markings to the package. While they do not guarantee damage-proof shipping, handling labels may potentially minimize the abuse your shipment experiences. Of course, handling labels are most effective when the people handling the packages can understand the language or symbols used.
  • Including all relevant information on packages. This information includes port of destination, transit instructions, contact information of the consignee, package dimensions and weight, package number and invoice or order number.
Cargo Insurance
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Marine Cargo Insurance

Most food companies are very familiar with transportation insurance, where they are responsible for loss or damage in transit. Insurance that covers loss or damage to goods being shipped internationally is called marine cargo insurance.

The potential for loss to the exporter is much greater than doing business domestically. The difference is in “insurable interest.” Shipping domestically in the US, a company generally quotes FOB, Factory. Under U.S. law, when this trade term is used, a company is able to pass the risk of loss and title of the goods to the buyer, at their dock. At this point in the domestic transaction, the shipper no longer has an insurable interest in the product shipped. In international trade, the opportunity to pass risk of loss at the dock is much less frequent, and therefore, a company may have an insurable interest in the goods all the way to the port of import or beyond.

Where to Purchase Marine Cargo Insurance

Most international freight forwarders will provide marine insurance to you under their blanket policy. The cost per $100 of value may be higher due to the fact that their policy must be able to cover a multitude of products and coverage. One of the advantages of purchasing insurance through the forwarder that handles the shipment is that the transaction is well known to them and they already have most of the paperwork on file.

The second means of obtaining air cargo and ocean marine insurance is through an independent agent or marine insurance broker. The agent or broker often represents insurance companies that specialize in ocean and air cargo insurance. The insurance agent can offer a range of coverage options. Depending upon the size and scope of the shipper’s operation, the marine insurance policy will come in the form of an open cargo policy or a special marine policy.

Open Cargo Policy

Open cargo policies are used when the shipper has a continuous flow of goods being shipped over a period of time. The open cargo policy contains no expiration date and provides automatic coverage when needed. The policy is customarily issued on a warehouse-to-warehouse basis which provides the shipper continuous coverage throughout the normal course of transit. Open cargo policies can also be tailored to meet a shipper’s many specific needs, such as returned or refused shipments, warehouse exposures outside the scope of the policy, inland transit and shipments sold on terms other than under CIF/CIP.

Since the policy provides automatic coverage, it usually lists the insured party’s name, the cargo covered, the insuring conditions, areas of the world that coverage is granted and the insurance rates. The shipper is required to submit a monthly report of all shipments that have occurred under the policy and pay a premium on those shipments at the agreed upon insurance rates. Depending on the shipper’s needs, the open cargo policy may offer the broadest possible insurance terms for the lowest price.

Special Marine Policy

The special marine policy is designed to provide coverage to individual shipments. This policy provides the same coverage available under the open cargo policy. However, it does not provide automatic coverage. Once the shipment has been completed and coverage has ceased, this policy automatically terminates.

When to Insure

Whenever goods leave the U.S. to a foreign country, the goods should be insured, either by the seller or the buyer. For the seller, insurance may be obtained either by using your own open policy or that of your freight forwarder. Whenever you insure the goods, make sure that coverage is in force from “warehouse to warehouse, plus 60 days.” This allows time for the buyer to discover concealed damage. An alternative to using your own policy or that of your forwarder is purchasing insurance from the carrier. The carrier’s insurance will only cover the goods while they are in the hands of the carrier and concealed damage will result in only partial recovery from the carrier’s insurance.

How Much to Insure

Typically, international shipments are insured for 110% of the total CFR/CPT value of the goods. The terms CFR and CPT include the cost of the goods and all costs of transportation, forwarders fees and export boxing, up until the time that the goods arrive at the foreign port of unloading. Some buyers or letters of credit require an insured amount of 115-120% of the goods sold, but 110% is an industry standard.

The reason for the increase is to cover the value of the insurance in the policy, as well as any unexpected increases in handling, storage or other accessorial fees during transit that add to the overall value of the invoice and the landed cost of the goods. Marine insurance can cost as little as $0.15 per $100 of value to $2.50 per $100 of value, depending on the coverage the deductibles included in the policy and the standard risk of loss normally experienced by your product.

Calculating the Value for Insurance

The following is a basic example of how an exporter might issue a pro forma invoice for a CIF or CIP quotation, which includes marine cargo insurance. This represents a “Cost, Insurance and Freight” quotation according to the Incoterms, based on the mode of transport, which is all that separates the two. This is similar to the American Foreign Trade Definition of “CIF.” It is a very common method of export quoting, especially if done by ocean freight.

The sale price of the goods, $9,200.00 is added to the packing costs, inland transport, documentation and main carriage, which brings the “Cost and Freight” or “Carriage Paid To” price to $11,500.00. (Again, the two terms are used here based on the mode of transport CFR and CIP quotations are for inland waterway and maritime shipments only; CPT and CIP are for all modes of transport.) Multiply the CFR/CPT by 110% and get a value to be insured of $12,650.00.

The insurance rate in this example is $0.55 per $100.00 of value. Take the value to be insured $12,650.00 and multiply it by .0055 to make it $0.55 per $100.00 and not $0.55 per $1.00. The insurance premium is $69.58. Add this amount to the total CFR/CPT price, not the value for insurance, which is 10% higher. The total CIF/CIP price then is $11,569.58.

Invoice Value

$9,200.00

Packing

$200.00

Inland Transport

$400.00

Documentation

$200.00

Main Carriage

$1,500.00

Total CFR/CPT

$11,500.00

Total CFR/CPT + 10%

$12,650.00

Insurance Rate

$0.55/$100.00

Insurance Value

$12,650.00 x 0.0055

Insurance Premium

$69.58

Total CIF/CIP

$11,569.58

Kinds of Losses Covered

The Standard “All Risk” marine insurance policy covers losses incurred due to perils of the sea, fire, explosion, collision, derailment, overturn, wind, earthquake, flood or collapse of docks. Additional coverage can be added such as theft, pilferage, non-delivery, fresh water damage, oil damage, damage due to sweat and condensations, breakage, leakage, etc. In addition, a clause in the insurance “free of particular average” means that the insurance will cover partial losses in addition to total losses.

“General Average” is a coverage found on most policies. It represents a loss to the carrier based on the value of the goods on board. For example, if an ocean vessel requires a tug to pull it off of a sand bar; those companies that have cargo on the ship will pay the cost of tug services. This fee will be charged against the cargo and the goods may not be claimed at the destination without presenting either evidence of insurance coverage or a cash deposit representing the proportional amount of the claim due for the goods.

Other additional clauses that are generally added by endorsement are “riots and civil commotion,” and “war risk.” When you purchase your own policy or use the forwarders, be sure to determine the coverage that is included under the policy and the deductible that will apply to each coverage. The deductible or franchise is expressed as a percentage.

Several important risks are generally not covered by the marine insurance policy. These include: marring or scratching, delays, inherent vice (a condition whereby the goods were bound to be damaged or deteriorate because of the nature of the goods), losses due to insufficient or improper packaging that does not protect the goods from the risks of transportation and the physical handling and environmental conditions at the port of import.

Responsibilities of the Insured Party

The policyholder must meet certain obligations when a loss occurs, and these should be clearly understood. First, the insured must make every reasonable effort to minimize the loss. Reasonable charges incurred for this purpose are collectible under the policy, under what is known as “Sue & Labor.” For example, when a shipment of canned foods arrives with some leaking cans in each of several cartons, the leaking cans must be taken out to minimize rust and label damage. The expense incurred in this operation may be recovered under the insurance policy.

If the cargo is damaged or if any damage or loss is suspected, the insured party must immediately file a claim with the carrier to avoid filing deadlines. If the insured fails to take this step, or signs a waiver of carrier responsibility, it may result in the loss of coverage. In the case of concealed damage, a claim should be made within three days of the delivery or as soon as the damage is known.

The letter of claim to the carrier should include the following information:

  • Company name of ocean or air carrier
  • Bill of lading or air waybill number
  • Voyage (ocean) or flight number
  • Destination arrival date
  • Container number
  • Description of cargo
  • Dollar amount of claim

Filing a Claim

In the case of international shipments, the importer (consignee) will most likely be the first to discover any damage to, or loss of, a shipment. The importer must thoroughly inspect each shipment and note any signs of damage or loss on the delivery receipt. Even if no outward evidence of loss or damage exists, it is important to inspect the entire shipment as soon as possible for any hidden damage.

The consignee, or insured, must contact the nearest claim agent so that a survey of damage can be arranged. The carrier or carrier’s agent should be notified of the time and location of the survey so that he or she can be represented. When filing a claim the insurer may request some or all of the following documents:

  • Non-negotiable copy of the bill of lading or air waybill (both front and back)
  • Certificate of insurance or declaration of insurance
  • Copies of letters of claims filed with carriers
  • Correspondence or verbal advice from carriers
  • Commercial invoice
  • Packing list
  • Evidence of loss or damage
  • Delivery receipt
  • Inland waybill
  • Consignee’s receiving report
  • Customs documents
  • Confirmation of non-delivery by carrier
  • Survey report
  • Valued inventory
  • Repair estimates (if applicable)
  • Sue & labor reimbursements
  • Other (as specified by the insurer)

Carriers Limited Liability

Air and ocean carriers provide limited liability coverage while a shipment is in their possession. The bill of lading states the liability that the carrier assumes. It is critical that the shipper understand that the carrier is not responsible for such perils as “Acts of God.” When filing a claim with a carrier, the shipper must prove the cause of loss that the loss occurred while in the carrier’s possession and that the carrier is directly liable for the loss.

Airlines are liable up to $9.07 per pound or $20 per kilo on shipments to foreign destinations and $0.50 per pound on domestic shipments. Shippers have the option of declaring a higher value for the shipment and paying higher freight charges based upon this declared value. If the value of your shipment goes well beyond this amount, you can clearly see the need for increased coverage with a marine cargo policy.

Similar to the airlines, ocean carriers provide a limited amount of coverage, $500 per customary shipping unit (CSU), as stated on the back of the bill of lading. The CSU is generally interpreted as the ocean container. This coverage is rarely sufficient in covering the cost of the goods shipped, as it is not based on weight or value, but only on the container.

So what’s the next step?

For more detailed exporting information relative to your specific business please register for our Food Export Helpline™ service. There are always specific issues and questions that are unique to your company, products, and export markets. With the Food Export Helpline™, you’ll speak with an industry expert who’ll put his more than 20 years of experience to work for you. There are no canned answers, only insightful, customized advice specifically for you.
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