In brief - Importing and exporting businesses' success and survival may depend on marine insurance

When considering the terms of sale or purchase for imports and exports, think about the best terms to allow control over the insurance risk and cost. Failure to do so could bring about the demise of your business.

Going without marine insurance carries major risk

Many small business owners have asked their insurance brokers if they need marine insurance and have received the inevitable answer: "Of course you do". But have they been really convinced that it is money well spent? As a maritime lawyer, I believe that it is foolish to do without it and I've sketched a typical scenario to show why.

You are the producer of leading edge widgets. A falling Australian dollar means that you are now able to match the price of your leading foreign competitor with a superior product. The Australian market is too small for the potential of your widget, so you investigate marketing overseas. You find an agent in Germany who wants to sell your widgets into Europe. You agree to send the first container load of widgets to this agent as a test shipment to see how the initial sales interest goes. 

The loaded container of widgets (valued at $100,000) is dispatched from Melbourne aboard the ship "Good Luck", owned and operated by Wishmeluck Shipping. This shipment was arranged for you by Fast Freight Forwarding, which issues you with shipping documents. 

One week after dispatch, you hear from Fast Freight Forwarding that "Good Luck" struck very bad weather on its voyage to Hamburg and your container was lost overboard. It is suggested that you contact your marine insurer. But you don't have one! You had decided that the cost of marine insurance was a bit high and, as this was a trial shipment, it was something you would look at again once you had established whether exporting was a "goer" for your business.

Freight forwarder and carrier deny liability

You send an email to Fast Freight Forwarding demanding compensation for the loss of your container. Fast Freight Forwarding denies all liability and says you need to address your claim to Wishmeluck Shipping. You do that. Wishmeluck Shipping denies liability, saying the vessel encountered extreme weather conditions and that, under the Hague-Visby Rules, they have no liability for loss caused by a "peril of the sea". 

You are left to carry a loss of $100,000 and your export plans are in tatters. Your agent in Germany loses interest in marketing your widgets. The loss ultimately leads to the winding up of your company. 

Marine insurer settles claim, maritime lawyer seeks compensation from carrier 

If you'd had marine insurance, your insurer would have been immediately notified by your broker and, once satisfied that the loss had occurred as advised, would settle your claim for the full value of the goods, plus freight and insurance costs, plus a further 10% (if agreed).

Your marine insurer would then instruct a maritime lawyer to deal with the freight forwarder or shipping company and to seek compensation, with a view to minimising its loss on your account. 

The likelihood is that any recovery from the shipping company or forwarder would be severely limited, by the argument regarding the "perils of the sea" defence and by the monetary limitations that apply. 

Limitation is generally based upon either the weight of the cargo or the number of packages set out on the shipping documents. The limit for shipments from Australia is currently the higher of approximately AU$3.50 per kilo of the gross weight of goods lost or damaged or AU$1,170 per package or unit. Accordingly, if you have either a very light cargo or very few packages in your consignment, the limitation will seriously affect your potential recovery of compensation. 

Carriers exclude liability under applicable international conventions

There are numerous other defences available to carriers under the applicable international conventions that exclude their liability. You no doubt assume that if a carrier's Master runs the vessel aground or collides with another ship, you will be fully compensated for your loss. Wrong. Error in the navigation or management of the ship will normally provide a complete defence to the claim, even though it would seem that these are precisely the circumstances in which the carrier should be liable. 

You are far better to claim on your marine insurance and leave your insurer to worry about seeking compensation from the carrier.

The same applies for both imports and exports. If you sell CIF (cost, insurance and freight) and buy CFR (cost and freight) or FOB (free onboard) and arrange your own marine insurance for the purchased goods, you have control over the insurance arrangements. You can deal directly with an Australian marine insurer. This is often easier than dealing with an overseas marine insurer in, for example, China, India or South America. Your marine insurance broker will be keen to assist you. 

Protect your import or export business with marine insurance

So, the next time you consider the terms of sale or purchase for imports and exports, you should also think about the best terms to allow you to control the insurance risk and cost. After all, you wouldn't risk not insuring your home. Why wouldn't you take the same care to protect your business?

Take it from a maritime lawyer who deals with these situations for a living. Marine insurance is an essential element in the success and survival of a business involved with imports or exports.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

Related Articles