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Safeguarding shipments when going global.

Though most risk managers are familiar with the risks involved with product shipment, recent problems in the London market have caused many to take a different look at the handling of loss exposures. The London market has had to restrict terms and capacity and increase rates, and as a result, many shippers have been attracted to the U.S. market and its emphasis on cost containment. The U.S. market generally has been able to maintain standard insuring conditions and capacity because its incidence of losses is lower. Experience has proven that loss control, as part of the insurance mechanism, can limit exposures to loss and ultimately lead to lower premiums.

Loss control in the marine and transportation industry has become a competitive necessity. Between 1988 and 1991, 43 percent of all cargo losses reported were attributed to improper handling and stowage that led to breakage, leaking, crushing, contamination or infestation. Theft accounted for 21 percent of losses, and water damage another 15 percent. For this reason, many risk managers are reviewing their insurance coverage and procedures for handling the shipment of goods. This can help determine a safe and economical approach to protecting their companies. Shippers who implement state-of-the-art loss control strategies with new innovations in packaging and materials handling will see a reduction in their bottom line expenses.

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WHEN TO INSURE?

Whether you are the shipper, receiver or cargo carrier, every party involved in the shipment of goods should have an interest in the entire marine venture. Everyone will benefit from the cargo's safe arrival, or will suffer from its loss or damage.

Risk managers should understand the various bills of lading since they can differ considerably. Whether one ships by air, domestic surface transport or overseas vessel, the contract of carriage may contain limitations and a released value (the carrier's liability, which has been reduced to obtain a lower freight charge). to be sure one understands the carrier's liability in the event of a loss, apply the per-package limit or try multiplying the limit per pound to the shipment. In most cases, recovery under this formula will not be enough to cover the losses.

These types of losses can also play havoc with a company's cash flow. A major transit loss may take months to settle, months in which the company's capital is tied up. With transit insurance, reimbursement is usually immediate and the subrogation is handled automatically.

To better understand "when to insure," look at the point when title to property actually passes from seller to buyer, as indicated in the terms of sale. Remember, all terms of sale are different. But by carefully reading the definition of each term of sale (see chart on page 26), the question of who should insure and when can be determined.

TERMS OF SALE

Ex Point of Origin requires the seller to place the goods at the disposal of the buyer at the specified point of origin on the date, and within the fixed period.

Free on Board (F.O.B.) requires the seller to bear costs and charges and to assume risks until the goods are loaded on board a named carrier at a named place. It should be noted that F.O.B. sales terms, specifying named points beyond the seller's premises (for example, F.O.B. vessel), places upon the seller the risks of transit until the title passes to the buyer at the point specified. In practice, however, F.O.B. terms are often so loosely specified (i.e., the terms fail to explain F.O.B. "what?" -- a truck, ship, railcar -- or "where?" -- the ship, the dock, the warehouse) that it is not easily resolved exactly at what point the seller transfers the risk of physical loss or damage to the buyer. Therefore, the seller is advised to seek his or her own insurance protection through the use of an F.O.B. Sales Endorsement, which protects the seller from transit risks from the point of origin to the point at which title passes to the buyer.

Free Along Side (F.A.S.) requires the seller to place goods alongside the vessel or on the dock designated by the buyer and to be responsible for loss or damage up to that point. Insurance under these terms is ordinarily placed by the buyer, but the seller should protect him- or herself with an F.O.B. Sales Endorsement, as described above, for risks prior to the transfer of title.

Cost and Freight (C&F) terms provide that the seller's price includes the cost of transportation to the named point but does not include the cost of insurance. The seller is responsible for the loss or damage until the goods enter the custody of the ocean carrier or, if an on-board bill of lading is required, when the goods are actually delivered on board the vessel.

Cost, Insurance and Freight (C.I.F.) terms denote that the selling price includes the cost of the goods, marine insurance and transportation charges to the named point of destination. The seller is responsible for loss or damage until the goods have been delivered into the custody of the ocean carrier or, when an on-board bill of lading is required, until the goods have been delivered on board the vessel. Among the special risks that should be considered and agreed upon between seller and buyer are theft, pilferage, leakage, breakage, sweat, contact with other cargoes and other conditions peculiar to a particular trade.

Ex Dock, Named Port of Importation terms are more common to U.S. import practice than to export practice (where it is seldom used). Under these terms, the seller's price includes the cost of the goods and all additional charges necessary to put them on the dock at the named port of importation with import duty paid. The seller is obligated to provide and pay for marine insurance and war risk insurance up until the goods have been placed on the dock. If any free time has been allowed on the dock at the named port of importation, the seller is responsible for any loss or damage until the expiration of that time. Otherwise C.I.F. terms apply here as well.

There have been many instances where experienced shippers have been unaware that they were exposed to expensive gaps in coverage. For example, a Midwest manufacturer sold machinery to an overseas customer. The terms of the sale were F.O.B. (Free on Board) vessel, meaning that risk and title passed once the goods were loaded on board. Payment was to be made in 90 days. The overseas buyer said he would take care of the marine insurance.

As the machinery was being loaded onto the vessel, the cargo sling broke and the goods were badly damaged. The buyer refused to accept liability because the goods had not been "loaded" on board. When the manufacturer turned to its own domestic transit insurance, it found that the policy did not cover export merchandise. So the company was forced to absorb the loss itself. A conventional marine cargo policy would have covered the goods from warehouse to warehouse.

Since a marine cargo policy is assignable, the counter signature of the insured converts the policy to a freely transferable document providing cover to any person with an interest in the venture. It is important that there is an agreement between the buyer and the seller of the goods, establishing the responsibility for arranging insurance.

Marine cargo insurance is always written on a valued basis because it is frequently impossible to determine at what point loss or damage occurred in an overseas transit. This means that in the event of a total loss, the face amount of insurance will be paid without any quibbling over whether the loss occurred just after the truck pulled away from the seller's warehouse or just prior to delivery to the customer overseas. If only a portion of the shipment is involved, the percentage of the total shipment lost or damaged is determined. The real issue here is don't be a risk-taker -- put that burden on the insurer who can help develop a loss control program, possibly reducing the overall cost of the program.

LOSS CONTROL IS COST CONTROL

Loss control should become a natural part of the risk management mechanism. Even with the increased use of sophisticated package testing procedures, state-of-the-art material handling equipment and modern transportation methods, losses to goods in transit can still occur. Loss control efforts bring improved predictability that can help a company keep losses down and premiums at a minimum. In addition, a company can expect to experience a reduction in the hidden costs associated with most losses.

Experience indicates that approximately 75 percent of losses involving goods in transit can be prevented through careful attention to the basic principles and techniques of protective packaging, along with careful transport planning. This is accomplished when special consideration is given to such factors as: the nature of the cargo; modes of transportation and susceptibility to damage; carrier selection; and the port facilities.

NATURE OF THE CARGO

No one knows more about their cargo than those manufacturers who choose to ship their goods themselves. Nonetheless, they must realize that even non-hazardous products require strict attention once transportation begins. High-value commodities are almost impossible to conceal completely, but the prudent shipper can take some measures to protect the goods en route. Using inter-modal containers with tamper-proof seals is one way to protect products. Economies of scale and added security are offered by unitizing, storing and packing non-uniform parcels into consolidated loads, which also helps maintain shipment integrity.

As important as packaging is, the security advantage can be eroded if proper marking is not used. The primary purpose of markings is identification, which enables the carrier to forward the cargo to the consignee. Descriptive labels, illustrations, and/or prominent displays of corporate names, trademarks or logos will alert thieves to attractive cargo. Use blind or coded markings, particularly when expensive target goods are involved.

Although world trade is seen as a constant stream of goods pulsing through the international network of airports, seaports, reilheads and truck terminals, cargo spends a lot of time at rest. This is when goods are most at risk, since the likelihood of theft or pilferage is directly proportional to the length of time the cargo stays at the pier shed or cargo terminal. A U.S. Department of Transportation study estimated that 80 percent of missing goods are lost during these periods of inactivity. One of the surest ways to safeguard high-value commodities is to insist on prompt pickup and delivery, as well as strong physical and operational security at all cargo loading, discharge and storage locations.

Aside from the risk of theft, these periods of inactivity can cause shipping containers to be crushed by the weight of superimposed packages if they are not properly packaged. Stacks must remain plumb. Fiberboard cartons, for instance, must be able to withstand the pressure of cargo stacked 8 ft. high, and survive considerable lateral forces. Regardless, virtually no package will withstand long-term storage unless it was designed with that in mind.

Fragile products and those that contain highly sensitive components must be protected against shock and vibration by sturdy exterior packaging and cushioning that gradually increases resistance against item movement. The selection of the correct cushioning material depends on the item's size, weight, shape, surface finish and its built-in shock resistance.

Those physical and chemical properties unique to a product must also be kept in mind. Goods susceptible to moisture are of particular concern since they are likely to absorb it from the atmosphere, adjacent cargo, dunnage and even their own packaging material. Commodities such as foodstuffs, textiles and most organic goods are subject to attack by microorganisms. These commodities fall under attack when placed in a "desirable" environment consisting of moisture, nutrients, optimal temperature (10 to 40 degrees Celsius) and oxygen. Carriage/storage under refrigeration, in a vacuum, or in an atmosphere of carbon monoxide or nitrogen, can effectively inhibit the growth of mold or other bacteria and fungi. But commodities such as coffee, cocoa beans, wheat and other grains can also be adversely affected by infestation of certain beetles, moths and mites.

Other damage can result from corrosion, which is one of the most basic forms of damage to metal products. Rust is the term we normally use, but losses have resulted from "white" rust deposits on galvanized goods, galvanic corrosion (electrolysis) due to the presence of dissimilar metals or manufacture-generated mill scale. Certainly rain, fresh water, seawater and condensation must be avoided. Remember that chemicals used in the treatment of the cargo, present in the cargo's packaging or sharing the same storage/stowage area can also be detrimental.

MODES OF TRANSPORTATION

The means by which goods travel to their ultimate destination should be of prime concern to the shipper. Each method of transportation (via land, sea or air) offers its own unique hazards, and given today's inter- and multi-modal transportation systems, cargo must be adaptable. For example, there continue to be substantive changes in the size, appearance and overall characteristics of ships. The advanced design and construction technology has spawned the development of new vessels that satisfy the growing economic demand for greater capacity, faster speeds and more rapid loading/discharge rates. Yet, regardless of these developments, there are still many risks that accompany transit on the sea. Rain, high humidity, condensation and seawater, separately or in combination, reduce otherwise stable cargo into a ruin of soggy, stained, mildewy, rusty or delabeled merchandise. Salt spray driving across the deck of a vessel, a rainswept storage yard, an open trailer, the insidious dripping of condensation from the interior of a ship's hold or inter-modeal container, or "sweat" forming on the cargo itself are all common hazards.

Another frequent but less publicized form of water damage results from the flooding of cargo stored on inadequately drained surfaces. If cargo is subject to wetting damage, it must be appropriately protected. This can be accomplished by such means as the use of preservatives, corrosion inhibitors or waterproof wrapping, along with equally resistant external packaging and interior lining.

As an alternative to ships, many transporters use aircraft. This form of transportation offers incomparable speed along with ease and flexibility for handling and distribution. The type of commodities best suited to this mode of transport includes time-and handling-sensitive products such as high-value goods, perishables and emergency/replacement items. Be advised that cargo transported by air can be subjected to various environmental forces, including fore and aft pressures during takeoff and landing, turbulence, and atmospheric changes. Apart from these in-flight conditions, limited carrying capacity in cargo bays and doorway restrictions of certain aircraft may encourage improper stowage and rough handling, which can result in breakage, leakage and crushing damage due to equipment failure, inadequate material handling or inexperienced labor.

Goods must be protected not only against stress normal to air and ocean cargo moves, but also against the strains met during incidental rail and truck carriage. Movement via rail systems involves acceleration and deceleration coupled with severe impacts during car humping operations. Significant shock and vibration loadings can be caused by the conditions of the rail and/or roadbed. Truck traffic presents similar exposures and is also highly affected by weather conditions.

COST CUTTING HAZAROS

Once all of these perils have been guarded against, only one hurdle remains, which is perhaps the greatest obstacle -- misguided attempts to attain greater cost efficiency. A few pennies saved on packaging, cushioning or other related decisions may make a company look good in the short run. However, if it results in the long run in a damaged product that cannot perform its intended function, then the cost can be significant.

One should not buy the most expensive packaging either, for misguided cost efficiency can work both ways. For example, a manufacturer of pumps and compressors was experiencing handling damage and shortages on many of his export shipments. This was particularly surprising since the firm had gone to considerable expense in utilizing wood boxes for its export pack. So, the firm's cargo insurer had a qualified marine surveyor conduct a packing survey, which revealed that the rigid wood boxes were unable to withstand the shifting weight of the cargo and ultimately broke apart.

At the surveyor's recommendation, the company properly braced the pumps and compressors inside the package. By doing this, the company was able to change its form of packing to triple-wall, fiberboard cartons, reinforced with steel bands and properly skidded. The result was a dramatic reduction in losses, plus the additional bonus of significantly reduced packing costs.

As exemplified above, getting goods from point A to point B requires a fair amount of planning and knowledge of the myriad loss exposures. Because of this, an even greater degree of confidence in the carrier is needed. Some of the best results in controlling cargo loss and damage are obtained when reputable carriers are selected. Rate competitiveness, cargo capacity, frequency of sailings/flights, network of locations served and handling facilities must be coupled with the ability to provide suitable equipment and adequate protection for cargo. The key indicator, however, should always be performance.

PORT FACILITIES

A prodent shipper must be concerned not only with the transportation environment, but also with conditions the goods may encounter at their destination. Limited facilities, bad weather, seasonal commodities and other local factors can cause congestion at a port. Cargo may be forced to remain in a vessel's hold for weeks awaiting discharge. Once off-loaded, it may be delayed 30 to 60 days as the shipment is processed for clearance. It is not unusual for cargo to spend much of this time in open storage compounds where goods are exposed to many risks. Choosing to reschedule a shipment or selecting an alternate port are two useful contingencies to consider.

Overcrowded, overtaxed facilities can also contribute to handling irregularities. There may be poorly equipped or improperly trained cargo handlers. Special instructions and caution -ary markings in English and the language of destination will make it easier for them to do their jobs. Also, use international pictorial symbols that provide universal handling information.

Furthermore, make sure the air and seaport terminal have a segregated security area for high-value cargo, and cold storage rooms for perishables, so that the cargo is not subject to theft/pilferage or deterioration losses. In addition to these stumbling blocks, less obvious impediments, such as local laws and customs, trade regulations and documentation requirements must be tended to.

SURVEYORS -- AN EFFECTIVE TOOL

So how does a risk manager avoid these pitfalls? One effective tool is to use marine surveyors to supervise the loading and discharge of cargo. Through their knowledge and experience, a risk manager can get a perspective of the existing port environment, as well as an overall assessment of the shipment's prospects to survive transit.

Although the services of a marine surveyor are not required by law or regulation, the surveyor occupies a special place in the maritime industry. He or she is regarded as part detective, part diagnostician, part scientist and part seer. The surveyor, whose job is to observe, evaluate and report on shipments, is often described as the underwriter's "eyes and ears" and the marine adjuster's conscience.

Due to the nature of the profession and the high contact with world trade parties, a surveyor possesses the appropriate knowledge and skills to develop a global loss control program. The surveyors should be able to perform the following technical assignments: cargo packing assessments; cargo load and stow surveys; cargo out-turn and delivery surveys; air cargo loss control program analysis; motor cargo legal liability evaluations; storage site surveys; bulk liquid cargo surveys; trip-in-tow assessments (where suitability of vessel and cargo are examined); and draft (determination of tonnage loaded on board the vessel).

If a surveyor has this experience, then the risk manager can have confidence in that person's ability to provide suitable recommendations to avoid risk. Suitable recommendations should be practical, cost-effective and technically appropriate.

Surveyors can also represent a risk manager's interest in those "less than successful" shipments that result in cargo damage. Lessons learned from these losses can be applied to future shipments to help improve both quality and customer service. Most people learn from their mistakes, but with the assistance of a marine surveyor, one can actually benefit from the mistakes of others.

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Title Annotation:includes definitions of terms of sale
Author:Tarnef, Barry M.
Publication:Risk Management
Date:Sep 1, 1993
Words:3408
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