#1 Ultimate Freight Insurance Guide: Become Immediately Less Risky

Many parties play a role in the transportation of freight: shippers, carriers, receivers, freight forwarders, and brokers. At any point in the supply chain, someone is responsible for the cargo and making sure it's packaged, protected, and moved safely. When things go wrong, freight insurance protects shipping customers from potential losses, but the fine print from most freight insurance companies can be dizzying. 

In this article, we'll explain the importance of insuring your product, and help you decide when and what type of insurance is right for your goods.

Carrier liability coverage does not function like freight insurance, and in most cases, shipper's claims are denied or paid pennies on the dollar. - Jeremy Vrchota, CEO Cota Systems

What is Freight Insurance?

That brings us to the question at hand: what is freight insurance and is it necessary?

A freight insurance policy covers the value of damaged or lost freight if something happens to it. It is something that shipping customers elect to purchase in addition to the coverage that carrier liability may provide, because carrier liability coverage is not insurance and has many exclusions.

Many shippers assume that the carrier's $100,000 liability policy is sufficient, as long as their cargo value is within that limit. However, these policies in no way guarantee reimbursement for damaged products, and have been known to be capped at a certain value per pound, regardless of the actual value.

Types of Freight Insurance

Air

As the name implies, air cargo insurance protects goods that are damaged, destroyed, stolen, or delayed when shipped by air. Shipping by air is expensive, and so it tracks that more valuable freight is shipped this way and needs additional coverage because carrier liability doesn't come close to the value of the goods.

Marine

Marine international freight insurance protects shipments carried by sea and sometimes by air. It covers physical damage, piracy, theft, and war strikes, and can be extended to cover the other modes of transportation as well as the general average covering (see below).

Land

This is a commonly used broad term to describe freight insurance for loads shipped OTR or via rail. Rather than getting caught up in a battle of "whodunit" you can rest assured that your freight will be covered regardless of the reason.

Named Peril

Named Peril freight insurance coverage covers only damage caused by the factors listed in the policy. This coverage, because it's so specific, tends to be at a lower cost. Shippers might opt for this when another party has insurance but wants to cover the exclusions. Perils include explosion, fire, vandalism, or stranding.

All-Risk

Offering the broadest coverage, all-risk insurance covers the cost of damage or any reason other than what's specifically excluded in the policy.

General Average

Particularly useful in marine and container insurance, General Average policies apply when, in emergencies, some cargo is jettisoned or damaged to protect the vessel or avoid loss. Those whose cargo survived must pay those who weren't. In some cases, containers won't be released from the port until the requested amount is paid.

Open VS Single Coverage

Frequent shippers are more likely to keep an open policy rather than insure shipment-by-shipment. Open policies can be more cost-effective, especially when you ship the same product in the same packaging every time. Under these policies, shippers must operate in the utmost good faith and notify the insurer of any changes or associated risks. For those that ship many different types of freight or only do so sporadically, it can pay to purchase one-time freight insurance coverage.

What Does Freight Insurance Cover?

Unlike carrier liability, freight insurance can offer more comprehensive coverage, including protection against a broader range of risks, such as: 

• Theft.
• Vandalism.
• Natural disasters and acts of God.
• Handling damage.

Insurance for freight will likely not pay out in cases of:

• Inadequate packaging.
• Negligence.
• Inherent vice (the goods are prone to spoil under normal transportation conditions).

The exact coverage depends on the policy, which is why it's vital to read the fine print and understand the ins and outs of your policy.

How to Apply for a Freight Insurance Policy

1. Assess Your Needs: 

Identify requirements based on the nature of your goods, transportation mode, and destinations. For example, if you plan to ship freight via ports and dray followed by OTR, all modes must be on the policy.

2. Research Providers: 

Browse insurance providers that specialize in insurance for freight and compare reviews, reputation, and policies. Decide if you want to purchase from a broker, freight forwarder, or insurance agent.

3. Request Quotes:

When requesting an insurance quote, provide as much information as possible. Include accurate information about the type of goods, their value, the mode of transportation, and the destinations to get an accurate freight insurance cost back.

4. Compare Policies: 

When reviewing the quotes, compare the terms, coverage limits, deductibles, and any exclusions.

5. Fill Out an Application: 

Provide details about your business, the type of goods transported, and any relevant risk factors.

6. Undergo Assessment: 

The insurance provider may ask risk assessment questions about shipping practices, packaging, and previous loss history.

7. Receive Policy Documents:

Once approved, carefully review the policy documents for a complete understanding of the coverage.

8. Payment: 

As with any insurance policy, the monthly premium must be paid to ensure freight insurance coverage. For one-time policies, this may be a one-time fee or split into a few payments.

9. Document and Communicate: 

Maintain detailed shipment records, packing lists, invoices, and correspondence in case you need them for a cargo insurance claim.

Freight Insurance vs. Cargo Insurance

So, what is cargo insurance and how does it differ from freight insurance? The two terms are sometimes used interchangeably and sometimes distinguished. In this article, we're using them interchangeably, but you may see them elsewhere defined as follows:

Freight Insurance

Third-party shipping insurance (not the same as carrier liability) that covers the cost of goods if damaged or lost during transportation (in transit, loading, or unloading).

Cargo Insurance     

A policy that protects cargo while in storage (as opposed to on the road). Cargo insurance covers things like fire, moisture, and natural disasters, so long as customer negligence is not the cause.                                        

Real-World Example

Let's consider a load of paper products. It gets packed and shipped to a storage facility where it sits for a few weeks while the product that it'll be used for is finished. Because the pallets looked normal, they were accepted and signed for. After those few weeks, the pallets are unwrapped to discover that the paper was exposed to moisture, and some are damaged.

Cargo insurance, as defined by a policy that covers damage accrued in storage, would compensate the customer regardless of whether the moisture was introduced in storage or the trailer.

Because the BOL was signed and accepted, freight insurance would no longer apply.

Freight Shipping Insurance Vs. Carrier Liability

Now to the essential part. 

Carrier liability coverage sets the maximum amount that a carrier can be held liable for in the case of a claim. Policies typically sit at $100,000 for a dedicated truck and split the coverage up among LTL loads according to freight class.

Liability covers the cost of a claim IF the carrier is proven to be at fault (irresponsible driving, not securing the freight properly, reefer malfunction, etc.). In the previous case of the paper products, the carrier's liability policy would cover none of the loss.

These policies don't always cover the total amount of the loss, and they exclude circumstances listed in the Carmack Amendment:

• Acts of God (natural disaster, driver illness, or anything out of human control).
• Shipper default.
• Public authority.
• Acts of war.
• Inherent vice.

Carriers are meticulously careful to cover all the bases of securing freight, and the majority of the time, claims are denied on their front.

You can see that carrier liability and cargo insurance are totally different, and if you want freight insurance to cover the accidents listed above, you'll need to get your own policy.

Real-World Example

Let's revisit the hypothetical load of paper products. The customer initially noted that the carrier had a $100,000 liability policy and chose not to purchase additional insurance freight coverage. While in transit, a wind storm sweeps through the area, toppling the truck and causing damage to the pallets and the product on board. However, when the customer files a claim, it's swiftly denied because there was no way for the carrier to anticipate the occurrence of a freak storm.

A Note on LTL Freight Insurance

In the case of carrier liability for LTL, a certain amount of coverage is allotted to each shipment on the truck. Customers can ask how much coverage they would be assigned when requesting a quote.

Cargo liability is usually calculated by weight X max liability per weight class. Let's look at an example using our paper products:

• Class: 55
• Coverage: $2.00/lb
• Total Weight: 8,000 lb
• Value: $9,000
• 8,000 x $2.00 = $16,000

Let’s break down the equation:

• Cargo Liability = Total Weight × Coverage per Pound
• Applying the numbers from the example:
• Cargo Liability = 8,000 lb × $2.00/lb
• Therefore: Cargo Liability = $16,000

This amount of coverage is more than enough, given the carrier is at fault for the damage. Based on the value of your freight and the LTL company, you can calculate whether LTL freight insurance is necessary. Note that third-party shipping insurance is still necessary to cover those Carmack Amendment cases.

The Cost of Freight Shipping Insurance

How much does freight insurance cost?

There are so many policy options involved and companies that there's no way to ballpark a cost. In general, insurers use the commercial invoice value to calculate the cost of insurance for freight.

Let's say your commercial invoice value is $20,000, and the insurer sells policies at 1%. Your policy would cost $200.

Some shippers want to insure the entire movement, or the CIF (cost, insurance, freight). In this case, you'd add all the charges up, multiply them by 10%, and multiply them by that same 1%:

Insurance Based on Commercial Invoice Value

• Invoice Value: $20,000
• Insurance Rate: 1% of invoice (value)
• Equation: $20,000 x 0.01 = $200
• Total Cost: $200

Insurance Based on CIF (Cost, Insurance, Freight)

• Invoice Value: $20,000
• Insurance Cost: $200 (based on above scenario)
• Freight Charges: $1,000
• Total CIF: $21,200 ($20,000 + $200 + $1000)
• Adjusted CIF: Multiply CIF to account for additional charges. $21,200 x 1.1 = $23,320
• Insurance Cost for CIF: $23,320 x 1% = $233.20

In this example, CIF coverage costs $233.20. In the real world, expect rates around $.25-.75/$100, or 2%-7%.

Factors Affecting Freight Insurance Cost

As demonstrated above, freight insurance cost varies depending on the amount of coverage. Other factors include:

• Evidence or pattern of prior loss.
• Commodity and value.
• Risk of theft (electronics, pharmaceuticals, and valuable foods are common targets).
• Fragility or perishability (fragile freight like berries, glass, or hazmat).
• Packaging method or materials.
• Freight class or NMFC code.
• Insurance company rates.

Because cargo insurance providers have their own policies and rates, it pays to get multiple quotes.

Understanding Limitations and Fine Print

The insurance freight fine print will outline cargo exemptions, requirements, and stipulations. For example, if the fine print mentions all cargo must be properly secured, shipped in bulk form, or cardboard protected, not doing so will void your claim.

Another common reason that 3rd party shipping insurance companies deny claims is the timeline. Some policies have 10, 30, 90, or 120-day limits in which a claim must be filed.

What Isn't Covered

Cargo insurance providers require shippers to be responsible for their part in the process, too. Common exclusions include:

• Damaged caused by negligence
• Faulty packaging or pallet building
• Faulty goods inside the pallet that cause further damage
• Theft from an unlocked, unattended vehicle
• Specific types of goods outlined in the policy

LTL freight insurance gets tricky because there are so many opportunities for damage between starting and stopping, multiple unloadings, and storage at the sort-and-seg facility. It can be hard to determine the cause of damage. It's recommended to always insure LTL freight because claims are long and drawn-out and often end in denials.

Best Cargo Insurance Companies

Some factors to consider when shopping for insurance and freight coverage include their claims process, reputation and reviews, claim denial rate, and scope of coverage.

We did a bit of our own research and found a few of the best cargo insurance companies as rated by consumer reporting businesses and customer reviews.

Chubb

Chubb provides insurance for small businesses in a diverse range of industries. They've earned a 4.3/5 on U.S. News and have a positive reputation. Here are a few highlights from our comparison:

• Marine and land marine policies for shippers and construction companies.
• Transportation insurance available for carriers and brokers.
• Businesses with < $1 million in revenue can purchase policies online.
• Maximum revenue is $30 million.

AXA XL

AXA XL has a Shipper's Interest Transportation Policy that covers air transport, rail, and OTR. Their Marine Cargo Insurance is available worldwide except for a handful of countries like Cuba, Yemen, and Venezuela.

Hiscox

Hiscox serves worldwide industries from cybersecurity to transportation. They've been around since 1901 and have earned a solid reputation and stable financial grounding. They've earned a 4.6/5 on U.S. News and a 4/5 on Nerdwallet. They're online capabilities are robust; they even have a cargo insights map with delay and piracy updates for their container insurance customers.

How to File a Claim

In the case of an overage, shortage, or damage (OSD), you'll be notified, along with the signed paperwork stating the issues with delivery. Have the carrier or receiver take ample photos of the damage and anything else that may be relevant to your freight insurance policy.

Notify your insurer and send them all of the relevant correspondence and paperwork. They will likely request that you fill out a claim form and send them the commercial invoice and/or customer receipt if you haven't already.

Some details on the claim form include the type of loss (damage, loss, or theft) and the expected payout. The more details and documents you have, the better. The process for international freight insurance may look a bit different from that of a simple OTR shipment, with customs and foreign handlers involved.

Who to File the Claim Against

Freight insurance companies will go after the guilty party after it's determined who was at fault. A gash in the side of a pallet will clearly be the fault of the shipper or receiver. Temperature discrepancies or toppled pallets are usually the fault of the carrier.

Brokers and 3PLs aren't usually in the running for liability unless they admit fault or there is evidence in email correspondence of their mistake. For example, in a 2021 court case, a load was received where a product fell off the pallets in transit. This was determined to be the loading facility's fault, and they agreed to cover return costs and re-package the goods. The broker, being the middleman, should have told them that the driver couldn't return until after the weekend. Because he failed to relay this info, the entire shipment was rejected, since the product could not sit on a trailer that long and still be viable. In this case, the 3PL's claim against the carrier was denied because of this lack of communication.

The Worth of Freight Insurance

As a shipper, getting 3rd party shipping insurance is the only way to ensure that you aren't just crossing your fingers and hoping nothing goes wrong with your shipment. Carrier liability isn't insurance, and in most cases, it's worth the extra investment to secure proper cargo insurance cover.

Consult with your broker, freight forwarder, or a licensed insurance agent to understand your current coverage and what your options are to extend it. If you're uncertain about the extent of your protection, they can provide insights into how coverage can enhance your overall risk management strategy.

About Cota Systems

Cota Systems is on a mission to help carriers, shippers, and freight brokers streamline their logistics and maximize revenue. Through our platform, shippers can connect with certified carriers for speedy shipments and, most importantly, peace of mind. Carriers can browse loads along their route to minimize deadhead and maximize loaded miles.

Protection from Double Brokering

Promising peace of mind in the supply chain industry is no small feat. As seasoned logistics professionals, we're all too familiar with the double brokering impact and how it degrades trust among shippers, carriers, and brokers.

We implement a strict vetting procedure for all users, so neither party has to worry about being conned.

Industry Resources

Aside from providing online freight services, our team pools combined decades of industry experience to create guides for other logistics professionals. Check out the Cota Systems Blog to get more of these expert insights.

Free Load Board Access

We've created a free load board for our select network of carriers, shippers, and brokers. Partners can post LTL, volume, or FTL loads for free. Carriers can browse and book a load from any location, right in their mobile app. Because we encourage transparency on all fronts, the driver, dispatcher, and shipper apps have streamlined communication channels that make document sharing and status updates easy.

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Shippers can agree that one of the worst parts of transportation is constantly being re-rated. At Cota Systems, we don't re-rate, ever. We also offer a price match on your first shipment, matching the lowest rate you get elsewhere, plus a $50 credit on your second shipment!

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Start working with Cota Systems today and experience the difference yourself!