The manufacturer or trader may suffer substantial losses if the risks are not adequately covered by Insurance. In addition to the physical losses, in some cases they may also suffer financial losses due to economic depression, political disturbances in the country, labour unrest in their manufacturing unit etc, but such losses would not be indemnified by the Insurance policies.
If the manufacturer or trader is reluctant to control losses with an intent of cutting cost and trying to increase margin, the losses are bound to happen at a even more frequent pace and thereby ultimately reduce the margin and defeat the very purpose. The underwriters will not show interest to write the policy due to poor loss records and even if they do they will charge higher rate of premium with restricted terms and conditions of the policy. However, if reasonable precaution is taken by the prudent shippers for their goods in transit, they will be able to reduce their cost on insurance and may not suffer losses which would have otherwise happened due to wrong approach of the shippers towards lost cost control of their goods.
Moreover, there exist a risk of loss of reputation in the market due to non arrival of the goods in time at the customer’s place and additional cost may have to be incurred for return shipment if the customer has refused to accept the goods.
It is an admitted fact that, the possibility of loss cannot be ruled out even if the goods are despatched with utmost care because the transit hazards like Fire, collision , grounding, stranding of the vessel may happen during long ocean transit. Since there are many risks associated with the carriage of goods around the world, transit insurance is not compulsory but the need for it is very real.
Obstacles to Loss Prevention
It is difficult for the manufacturers or the traders to take a reasonable steps for loss prevention and incur some expenses for the same due to stiff market competition.. The expenses incurred for loss prevention will certainly increase the cost of the goods of the manufacturer or trader which may lead to a commercial loss to them.
However, cargo risk management is applying the same commercial sense of loss minimisation which the manufacturer or trader should adopt during transit to avoid a greater loss despite having some difficulties to stay in the market with the increased cost. The overall cost of the company should, therefore, be reduced to generate some revenue for loss minimisation.
Types of loss prevention
It is to be understood first as to what does loss prevention mean in marine insurance? One definition may say that it is a systematic procedure to reduce the loss of or damage to the goods during its transit to minimise the loss.. If the loss sustained by the Owner is indemnified by the underwriters, the overall loss will be reduced. The premium impact for covering the risks will be less if the losses are properly controlled which will ultimately reduce the national waste.
However, the matter is not so simple. The general perception of the shipper and the underwriters are different. According to the shippers if the loss is indemnified by the underwriters, the purpose of taking insurance is fulfilled but it is often thought by shippers that payment of premium for covering the risk will be an additional burden on them, if there has been no loss under the policy. The underwriters prefer to impose suitable deductible to minimise the losses and impose certain conditions and warranties to restrict the cover compelling the shippers to share some burden of losses on them. Although, each party will try to reduce the losses from affecting them, but unlimitedly there may not be any long term benefit to the community because the loss itself has only be shifted and not extinguished. Insurance at best is a risk transfer mechanism and is never a risk mitigating tool.
If individual person or organisation has suffered a loss, the incentive for improvement of the risks solely would be for the individual person or organisation. If an individual despatches his cargo by a vehicle with suitable tarpaulin cover to prevent the cargo from rain water damage, he will be able to avoid the losses. An employee working for an organisation may be punished by his employer due to his casual approach for not counting all the cases while taking delivery of the goods from the Carriers and may even be forced to compensate wholly or partially for the loss. Whatever may be the cause of sufferings, the burden of losses will fall upon either the individuals or the organisation if preventive measures for controlling the losses are not adequately taken.
It is a general perception or psychology of a large section of manufacturers or traders that it would not be worth taking the trouble to prevent losses since their cargo is insured and their underwriters will compensate all of their losses including trade losses without verifying the details of the claim. However, the traders or the manufacturers should consider as to whether it will be worth taking for them to adopt some measures for loss prevention otherwise losses will continue to occur at regular interval. The following are the reasons as to why loss prevention is essential since frequent losses will destroy the growth of the business and financial stability of the organisation. The nature of losses of this kind may occur due to poor management of the organisation. The details of probability of losses are as under:
- The environment effects like global warming, cyclonic storm, earthquake, excessive rain fall may be responsible for substantial losses to cargo which is beyond control of the human being
- The delay in transit due to port congestion, heavy casualty of the vessel or any other conveyances engaged for transportation
- Poor standard of packing and methods of stowage
- Intentional holding up/ storage of cargo during the course of transit
- Transportation of cargo by overloaded vehicle
- Improper handling of cargo without considering the nature of the goods
It is not difficult to ascertain the major areas of concern. It is a common phenomenon that theft and pilferage are commonly happened at the port if supervised discharge of cargo is not done by the surveyors nominated by the underwriters. If the accumulation of cargo especially rice, pulses, cement, grains are kept in open places like transit sheds, railway platforms, railway yards etc., the cargo may be severely damaged due to rain and/or theft or pilferage. The losses may be prevented if the consignment is stored in a godown covered on all sides or may be covered by double tarpaulin during temporary storage at railway platform, railway yards after off loading from the railway wagons at different stations prior to onward transit. In some cases, the purchaser of the goods may provide packing specification to their suppliers and procedures for keeping the materials in the packing cases especially for fragile goods with an instruction to handle such packages .during its movement with due care and caution. The outer and inner packing should be suitable to withstand the normal hazards of transit and overloading of cargo should not be encouraged.
Steps to be taken for loss prevention
Loss prevention can be sometime expensive but it pays dividend, if reasonable expenses are incurred for loss prevention considering the value and nature of cargo. Where over dimensional cargo will be transported for a particular project, the supervised loading/discharge of cargo by a competent surveyor is essential who will examine carrying capacity of the vehicle alongwith loading and unloading cranes/tools , lashing, bolting and securing of the machine on the vehicle bed, types of vehicle engaged ( Low bed or high bed trailer) for transportation of the machine, rout to be undertaken and details of permission obtained from National High way/State High Way. If all the parameters are scrupulously maintained, the possibility of losses will be reduced and consequential revenue loss due to delay in project for loss of cargo can be avoided. The following process may be adopted to avoid losses
- Packing materials should be sufficiently strong to carry the goods and withstand the normal hazards encountered during movement. Proper dunnage should be provided for the fragile goods to arrest movement of the goods inside the packing cases.
- Loading and unloading should be supervised by a competent person(s) of the company or surveyors nominated by the underwriters
- Selection of vessel is also important factor. The reputed lines with recognised class and financially stable should be engaged for transportation of cargo
- The consignment should be stuffed into the containers on FCL/FCL basis, if possible, to avoid multiple handling and the container should be structurally sound.
- The intermediate storage at port, railway yards, and railway platforms for a considerable period should be avoided.
- The consignment should not be kept on deck unless the nature of cargo and customs of the trade suggest to keep the cargo therein like Timber logs, container vessel
- Selection of reputed land carriers for safe delivery of cargo
- When oversized cargo of heavy load is transported, the sender of the goods should select hydro axle vehicle instead of mechanical axle vehicle which may carry substantial load with the increase of load per axle fitted with the trailer.
The above examples of loss prevention are not exhaustive and there will be enough scope to control the losses by adopting reasonable precaution.
When the extent of loss has been determined, the potential for improvement should be observed. It is also to be examined the cause of loss and cost involved to minimise the element of risk. In some cases, the cost for improvement of the risk may be insignificant but difficulties may arise to take some actions against the Carriers and/or the Warehouse keeper and/or other wrongdoers responsible for the loss due to commercial and political reasons. However, if awareness on loss prevention is developed amongst all classes of people in every sphere of life, the resulting benefits to the society will stabilise the economic condition of the country.