Insurance and Types

The types of insurance that might be considered for protecting a business include:

Comprehensive cargo insurance can include all named physical losses or damage to the
cotton, seed, linters or other named goods while the business has an insurable interest.
Property all risks, which may include all named physical losses or damage to the businesss
buildings, contents and named equipment while it has an insurable interest.
Money in transit is aimed at buying agents who carry cash. Money in transit cover from the
risks of theft can be included as part of a general cargo policy.
Strike, riot, civil commotion or malicious damage cover will include physical losses to the
insurable interest.
War at sea or on land or terrorism is physical damage caused by war, whether in marine
transit or in storage, and including acts of terrorism.
Non-delivery or non-payment following political events such as embargo, cancellation of
previously valid import or export licence, confiscation of the cotton or non-contractual nonhonouring of the contract by a foreign state entity.

Figure 3.4 illustrates the options available to a cotton trader. Cover can be bought in isolation or in combination.
Insurance through the stages of the cotton production process
Through the cotton production process there are many stages at which materials or products pass from one owner to
another. Overall the risks to consider at each stage are flooding, fire, lightning, explosion, destruction or damage
following strike or riot, theft and burglary. Deterioration due to excessive moisture content, prolonged storage or
infestation should be considered, but not all those will be insurable.

In order to purchase cover, the business must have a valid insurable interest. Figure 3.5 shows a typical supply chain
for cotton. Some examples of key considerations at various stages in this process are discussed below, as well as the
application of insurable interest.

Stage 2 to 3 Ownership at inland gins or warehousing

At this stage, post-ginned cotton is often wrapped in marked bales with the owners mark stamped onto the wrapping,
which is secured by metal bands. Cotton can be stored within warehouses, or outside on tarpaulins or on pallets.
Damage by adverse weather or damage by fire are examples of recognized chance events. It is important to have
strong inventory records and controls in order to be able to show exposures.
Stage 2 to 3 to 4 Inland transit to port or warehouse
Cargo is often moved by independent hauliers or transported by railcar, and therefore shipments should be checked
for quality, weight and moisture content. The use of the businesss own personnel or designated collateral managers
for quality and quantity control should be encouraged to minimize the risk of fraud or receiving damaged cotton.
Stage 2, 3, 4 and 5 Warehousing
The better the quality of the warehouse and operator the easier it is to obtain cover and negotiate favourable terms
and conditions. When providing cover, insurance companies wish to know and understand how the insured business
operates. It is important that cotton is stored in an easily identifiable manner, using a numbered bay system in the
warehouse with the bay numbers and boundaries painted on the floor. Cotton should always be stored on dry, clean
wooden baulks or pallets, off the floor, away from walls.
Exclusions
Ginning
Usually the risk of faulty or improper ginning cannot be insured but there are some measures a trader can take to
minimize this exposure. Measures include a strong relationship with the buyer, previous knowledge of the ginner and
good quality control.
Exporting
Exporters should bear in mind that at all times the cotton travels and is stored at their risk. There is also the obligation
to deliver a particular quality and quantity at a given time and place. Poor management of the risks to FOB may ruin
any chance of claiming a mishap on force majeure.
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Depending on the terms of the contract of sale contract, the insurance may terminate at different stages of the
shipping process. This has strong implications for who will be liable for compensation, and therefore who should
arrange insurance protection for the goods.
FCA or FOT (free on truck can be either CY or CFS). The buyer or its agent nominates the place for the delivery of
the goods, pre-cleared for export by the seller, to the carrier at an inland place, probably at the sellers gin or
warehouse, or on the carriers truck. No risk of physical damage or destruction attaches to the exporter after this
point, but the exporter remains responsible for errors or omissions that occurred while the goods were under its care
and responsibility.
FOB and CFR. The buyer has responsibility for all costs and risk of loss or damage to the goods once they have
been delivered by the seller to the named port and have passed the ships rail. The seller must pay freight costs, and
under CFR, must also clear all goods for export.
CIF. In addition to paying the ocean freight the shipper must also arrange and pay for insurance that must be in
conformity with the current ICA stipulation: warehouse to warehouse, all risks including SRCC (strikes, riots, civil
commotions commodity trade) risk and war risks at a value of CIF + 5%. The seller must contract the insurance and
pay premium, but is obliged only to pay the minimum cover. If the buyer requires greater cover, it must either agree
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The importance of cover claims

It is the duty of the insured and whoever is acting on their behalf to:

Take all reasonable measures to avoid or minimize losses recoverable under the insurance,
such as:

Cotton fire in storage or whilst in transit

Wet damage to bales in storage or transit

Rioters destroy bales in storage

Theft of cotton bales.

Ensure that all rights against third parties (warehouse staff, transporters, port authorities,
etc.) are properly preserved and exercised.

Available structures for your insurance cover

Open cover
This is the most flexible structure for cover, and for those with varying and ongoing requirements it can work out lower
in cost per unit. If you have regular need for insurance, it is usual to seek a cargo insurance contract that is valid for a
period of time usually one year. Within the principal contract, all necessary stipulations are discussed and agreed
once, and they apply for the entire period. This means that within its period of validity the cover is always available
when needed, subject to the terms of the policy.
Maximum exposure or limit of liability
This cover means that you get back only what you have lost. Typically with open cover, the insurance contract will
stipulate the limit of the underwriters liability to compensate the insured for a single occurrence. The amount of
liability may vary depending on each stage of transport or storage. On a case-by-case basis (insurance per
certificate), the amount stated in the insurance certificate is the limit of liability.

Extent of insurance all risks

This cover is bought on an one-off or annual basis. If volumes covered are large enough, this may be the most cost
effective option. In reality, however, the phrase all risks certainly does not mean that all possible risks are covered.
Normal storage and transport insurance principally covers only losses due to physical damage to goods that occurs
by chance.
All risks normally covers all the physical risks stated within the policy. If an event is not stated it is probably not
covered.
Glossary of basic insurance definitions
The scope of any insurance cover is determined by the wording of the policy document. Below are some terms
frequently encountered.
Broker. Licensed, authorized intermediary acting on behalf of the insured in arranging an insurance policy, any
subsequent amendments and, where required, the negotiation and settlement of valid claims from the insurer.
Condition. Stated clauses within the insurance policy which must be complied
with by the insured and/or insurer.
Excess. Pre-agreed monetary amount for which insurers have no liability in the event of a loss. This may also be
known as a deductible or franchise, which is a pre-determined uninsured percentage.
Exclusions. Events defined within the insurance policy which are outside the scope of the policy.
Indemnity or policy limit. The maximum amount for which underwriters agree to be liable to the insured for any
number of agreed events of loss within the insurance policy.
Insurable interest. The insured must own or have an interest in what is being insured. Once a business has paid or
pre-paid for cotton or other goods this principle is established (provided that in the event of the loss of the goods the
business can show a direct financial loss).
Insured. Party with an insurable interest in the item at risk.
Insurer. The licensed and authorized provider of a pre-agreed indemnity policy, being the contract of insurance.
Loss adjuster. Specialist claims intermediary appointed by the insurer to assess the validity and quantum of any
claim amount.
Period of cover. Clear stipulation of the designated dates and times between which cover is provided or is effective;
loss experienced outside that given timeframe is not covered.
Premium. The agreed monetary sum payable by the insured to the insurer to validate the insurance policy.
Warranty. A clause within an insurance policy which, if (in the opinion of the insurer) ignored or broken by the
insured, may cause the insurance policy to be invalidated.
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