Cargo Insurance: Institute Cargo Clauses A, B and C Explained

Marine cargo insurance explained: Institute Cargo Clauses A, B and C (2009), exclusions, the 110% CIF and CIP rule, general average and how to claim.

Every year containers fall overboard, ships run aground or catch fire, pallets are stolen from yards, and cartons are crushed during transshipment. When that happens to your cargo, the carrier pays little or nothing: its liability is limited per kilo or per package, and it has a list of defences, from navigational error to fire. Cargo insurance is what actually pays for the goods.

This lesson explains the Institute Cargo Clauses (2009) used worldwide in marine cargo insurance: what clauses A, B and C cover and exclude, how long the cover lasts, how much to insure and what the Incoterms® 2020 rules require under CIF and CIP. It then covers premiums, general average and the claims procedure, with a worked example of a shipment of olive oil from Béjaïa to Genoa.

Why carrier liability is not enough

Sea carriers operating under the Hague-Visby Rules are liable for at most 666.67 SDR per package or 2 SDR per kilogram, whichever is higher, and are exonerated for losses caused by navigational error, fire (unless caused by their own fault), perils of the sea and other listed causes. Air carriers under the Montreal Convention pay up to 26 SDR per kilogram; road carriers under the CMR, 8.33 SDR per kilogram. Claims must also be notified within short deadlines.

The transport modes lesson shows how these limits play out. For goods worth more than a few dollars per kilo, they cover only part of the loss, and sometimes nothing. Cargo insurance, by contrast, pays the insured value whatever the carrier's liability, then pursues the carrier itself.

What do Institute Cargo Clauses A, B and C cover?

The Institute Cargo Clauses, published by the London market (latest version 1 January 2009), are the international standard. They come in three levels:

• ICC (A): "all risks" of loss or damage, except the listed exclusions. The insurer must prove that an exclusion applies to refuse a claim.
• ICC (B): a list of named perils, wider than (C).
• ICC (C): a short list of major casualties. The insured must prove that one of them caused the loss.

What is excluded under all three?

The general exclusions apply to (A), (B) and (C):

• wilful misconduct of the insured;
• ordinary leakage, ordinary loss in weight or volume, ordinary wear and tear;
• insufficient or unsuitable packing or preparation, when done by the insured or its employees or before the cover starts (this includes stowing a container you pack yourself);
• inherent vice or nature of the goods (fruit ripening, rust on unprotected steel, self-heating);
• delay, even when caused by an insured risk;
• insolvency or financial default of the shipowner or operator, where the insured knew or should have known of it;
• nuclear and radioactive contamination;
• unseaworthiness of the vessel or unfitness of the container, where the insured was privy to it;
• war and strikes, riots, civil commotion and terrorism.

War and strikes risks are added by the Institute War Clauses (Cargo) and the Institute Strikes Clauses (Cargo), usually for a small extra premium. Specialised clauses exist for air cargo, frozen and chilled food, commodities and other trades.

When does cover start and end?

Clause 8 of the 2009 clauses gives "warehouse to warehouse" cover. It starts when the goods are first moved in the warehouse or place of storage for immediate loading into the carrying vehicle, continues during the ordinary course of transit, and ends at the first of:

1. completion of unloading at the final warehouse or place of storage at the named destination;
2. completion of unloading at any other place the insured chooses for storage outside the ordinary course of transit, or for allocation or distribution;
3. the moment the insured uses a vehicle or container for storage outside the ordinary course of transit;
4. 60 days after discharge from the ocean vessel at the final port.

Under F and C Incoterms, each party is only interested in the goods while they are at its risk, so the policy should cover the seller until delivery and the buyer from then on. Under CIF and CIP, the seller buys cover for the buyer's benefit from the point of delivery to the destination.

How much to insure: the 110% rule

The standard insured value is the CIF or CIP value plus 10%. The extra 10% compensates for costs and expected profit not recovered by a refund of the invoice price. Under Incoterms 2020:

• CIF: the seller must insure at least under ICC (C) or similar clauses, for at least 110% of the contract price, in the contract currency, unless the parties agree otherwise.
• CIP: the seller must insure at least under ICC (A), on the same 110% basis.

The buyer can ask for more cover (A instead of C under CIF, war and strikes clauses) at its own cost. Letters of credit usually repeat the 110% rule and specify the clauses; the insurance certificate must match exactly. The CIF and CIP lessons explain the seller's obligations.

How much does cargo insurance cost?

The premium is the insured value multiplied by a rate set by the insurer according to the goods, packaging, route, mode, clauses, claims history and volume. For ordinary manufactured goods in containers under ICC (A), rates are commonly a fraction of one percent, higher for fragile, theft-prone or perishable goods and risky routes.

Exporters who ship regularly use an open cover (open policy): one annual contract with agreed rates, under which each shipment is declared and an insurance certificate is issued. It guarantees cover for every shipment, even one you forget to declare in time, provided you declare it in good faith.

General average: the risk most exporters forget

When a ship's master deliberately sacrifices part of the cargo or incurs extraordinary expense to save the voyage (jettisoning containers, salvage after a fire), all parties to the voyage share the cost in proportion to the value of their interests. This is general average, governed by the York-Antwerp Rules.

Even if your container is undamaged, you will have to contribute, and the carrier will not release your cargo until a guarantee is provided. An insured shipper gets that guarantee from its insurer; an uninsured shipper must deposit cash security, sometimes a substantial percentage of the cargo value, and wait months or years for the final adjustment.

Worked example: olive oil from Béjaïa to Genoa

An olive oil producer ships a 20' container to an importer in Genoa, CIF Genoa: 1,400 cartons of 12 bottles of 0.75 litres, 12,600 litres, invoice value EUR 82,000. The contract only says "CIF Genoa, Incoterms 2020".

• Minimum insured value: 110% × 82,000 = EUR 90,200.
• Minimum cover under CIF: ICC (C). Premium quoted at 0.10%: EUR 90.20.
• Alternative: ICC (A) plus war and strikes at 0.22%: EUR 198.44.

The seller buys ICC (C). At the transshipment port, the container is dropped during handling; 180 cartons arrive broken. The buyer, who carries the risk under CIF, claims on the policy. Breakage from rough handling is not a peril named in (C), so the claim is rejected. Under (A), it would have been paid: 180 ÷ 1,400 × 90,200 = EUR 11,597, for an extra premium of about EUR 108.

The buyer, unable to recover more than the carrier's limited liability, deducts part of the loss from the next payment. The seller's saving of EUR 108 has cost it a customer relationship and a dispute.

How to make a cargo insurance claim

1. Inspect on arrival and note any visible damage on the delivery receipt or the equipment interchange record ("received damaged", not "received in good order").
2. Notify the carrier in writing immediately: under the Hague-Visby Rules, within 3 days for non-apparent damage; under the CMR, 7 days (Sundays and public holidays excluded); under the Montreal Convention, 14 days for damage.
3. Call the surveyor named in the insurance certificate (often a Lloyd's agent) before moving or discarding damaged goods.
4. Limit the loss: sort, dry, resell or salvage what can be saved; the clauses require you to act reasonably to minimise the loss.
5. Gather the documents: insurance certificate or policy, commercial invoice, packing list, bill of lading, survey report, correspondence with the carrier, photos, and a claim calculation.
6. Submit the claim promptly. Suit against a sea carrier is time-barred after one year under Hague-Visby, so the insurer needs time to pursue the carrier.

Common mistakes with cargo insurance

• Relying on carrier liability, or on "the forwarder's insurance", which covers the forwarder's liability, not your goods.
• Buying ICC (C) under CIF for goods exposed to breakage, theft or water damage.
• Insuring for the invoice value only, or in the wrong currency.
• Leaving a gap between the seller's and the buyer's cover, for example during pre-carriage under FOB.
• Signing "received in good order" for damaged goods.
• Expecting insurance to cover delay or market loss.