What it means
Marine insurance protects against losses at sea such as sinking, collision, fire, storms and, depending on terms, theft or piracy. A voyage policy is the traditional form for cargo, because the owner usually cares about one shipment at a time.
The policy names the starting port, the destination and often the vessel. The insurer prices the policy based on the risks of that particular trip.
These include the route, the season, the type of vessel, the nature of the cargo and the length of the journey. A fragile or high-value cargo on a long route in stormy conditions will cost more to insure than sturdy goods on a short, calm route.
The insured amount is normally based on the value of the goods, plus freight and often a small margin for expected profit. The premium is charged as a percentage of this value, so an $800,000 cargo at a rate of 0.25% costs $2,000.
The rate reflects the insurer's view of the odds of a loss. Voyage policies include conditions that the insured must respect.
Deviating from the agreed route without good reason can end the cover, and delays can matter. The vessel should also be seaworthy at the start, and a failure on that point may allow the insurer to refuse a claim.
The alternative is a time policy, which suits shipowners who operate a vessel across many routes over a year, or an open cover for companies that ship frequently. Many exporters use an open policy that covers all shipments over a period, with each voyage declared to the insurer.
A single voyage policy is better for an occasional shipper. For a business, the practical steps are to compare the policy terms with the trade terms in the sales contract.
Under some terms, the seller must insure the goods, while under others the buyer must, and a gap in responsibility can leave the goods uncovered during part of the journey.
In practice
Real-world examples.
Example
A furniture exporter sends one container of goods worth $150,000 to a customer overseas and buys a voyage policy covering the trip from its warehouse to the customer's port. The cargo arrives in good condition and the policy expires on delivery. The premium is recorded as a cost of the sale.
Example
A buyer of coffee beans purchases goods on terms where the seller's responsibility ends when the goods are loaded on the ship. The buyer arranges a voyage policy for the sea journey, because otherwise the cargo would be uninsured if the ship ran into trouble.
Example
A shipping company needs cover for an old vessel making one delivery. It asks for a voyage policy, but the insurer sets a higher premium and requires a recent survey, as the age of the vessel increases the chance of a loss.
Formula
Calculation
Premium = Insured value x Premium rate
An exporter ships machinery worth $800,000 from one port to another. The insurer quotes a rate of 0.25% for the voyage. Premium = $800,000 x 0.0025 = $2,000. If the ship were lost and the policy paid in full, the exporter would recover $800,000, so the $2,000 premium is the cost of protecting against that outcome.Case study
Seen in the real world.
Tidewater Spices is an illustrative, fictional importer that ships a cargo worth $400,000 from a tropical port to its warehouse once a quarter. The finance manager used to buy a voyage policy each time at a rate of 0.30%, costing $1,200 per shipment, or $4,800 a year.
An insurance broker suggested an annual open policy at a rate of 0.22% for declared shipments. Over four voyages the cost would be 0.22% of $1,600,000, which is $3,520, a saving of $1,280 a year. The broker noted that the open policy had a limit per vessel and required each shipment to be reported promptly.
The manager switched, set a calendar reminder to declare each shipment and kept the voyage policy for any one-off trip outside the usual route. The fictional case shows how the type of policy should match the pattern of shipping.
Watch out
Common mistakes.
- Assuming that the policy covers the goods from door to door, when it may cover only the sea voyage unless extended.
- Changing the route or delaying the voyage without telling the insurer, which can invalidate cover.
- Insuring only the value of the goods and forgetting freight and other costs that would be lost.
Questions
People also ask.
What is the difference between a voyage policy and a time policy?
A voyage policy covers a named journey, while a time policy covers a vessel for a fixed period, such as twelve months, whatever route it takes.
Who needs a voyage policy?
Mostly businesses that ship occasionally or one-off, or that need cover for a single high-value cargo.
What happens at the end of the voyage?
Cover usually ends when the goods are safely delivered at the destination named in the policy, though the exact point depends on the wording.
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