The recent US import tariff changes have created significant trade disruption in the cargo market: goods were expedited prior to expected tariff increases, or after the announcement, diverted to other destinations, or held in storage awaiting improved tariff conditions. As trade deal negotiations with major trading partners are ongoing, businesses trading goods between the US and the rest of the world need to be prepared for further sudden tariff changes. If these prompt shipping schedule adjustments, this may affect the risk profile of the transported goods and consequently, need to be addressed in the cargo policies to avoid underinsurance.
Scenario 1: Clients cancel order due to tariff increase whilst in transit
In this case, the goods may be diverted to the next best port where it will be stored while awaiting redirecting to a different destination. Potential cargo policy consequences may include:
If the new storage location does not meet the safety requirements of the policy, goods may be out of cover.
Shippers/insureds should notify their broker partners and insurers as soon as practicable to ensure that no exceptions in cover apply under the Marine Extension Clauses.
Cargo policies are intended to only cover physical losses, not financial losses. While some policies will respond for warehousing, transshipping, forwarding and other expenses incurred by the insured, there may be exceptions and applicable sub-limits.
Scenario 2: Clients cancel orders before they are shipped
In this case, goods may be stored at the production facility or an alternative storage until a new buyer is found. Potential cargo policy consequences may include:
The unexpected storing of a larger quantity of goods in one location may cause aggregation risk.
The aggregation risk may mean that if a loss event occurs at the storage location, the losses may be higher than expected, potentially exceeding the coverage limit agreed in the policy contract.
The insurance buyer may be able to adjust limits subject to the insurers’ risk appetite and capacity.
Scenario 3: The client does not cancel the order despite tariff rise
In this case, the value of the goods may be substantially higher than originally stated in the policy contract. Potential cargo policy consequences in case of a loss may include:
The policy is likely to cover the high value of goods in case of loss, but only up to the applicable limit stated in the policy.
The claim may be significantly higher than predicted by the insurer.
The insurer may apply the "average principle" and reduce the payout on a claim because the property or asset is insured for less than its actual value.
Each scenario will have different consequences for the cargo policy holder, but they will depend on the specific wording of each individual policy. It is therefore crucial that insureds stay in close contact with their broker and insurer to make sure that cargo policy terms remain appropriate following a change in the trading conditions. In most cases, insurance buyers wouldn’t be able to foresee tariff changes and therefore the insurer wouldn’t be able to argue that the values stated in the contract were incorrect. The higher values would, therefore, in most cases, be absorbed by claims payments. However, a potential risk aggregation in a specific location may need an adjustment of the limits agreed in a contract to make sure that the business is appropriately covered in case of a loss event. As and when any tariffs may affect the tax applicable to a cargo sale or purchase, cargo insurance policy holders should inform their broker and insurer in case it changes the risk profile. Shipping volumes may go down as sales slow at the same time as storage volumes go up, potentially requiring a recalibration of the policy protection.
Recommendations in case of tariff changes:
Review statement of value
Reassess the policy limits
Review your sales contracts, any penalties, and who is picking up the costs
Following a review of both values for shipment and transit assess if limits remain appropriate
Reach out to your broker to help assess the policy implications
For any questions, please contact a member of our team or visit our Cargo & Logistics page (opens a new window).
