An open cover is a type of marine insurance where the assured obtains coverage for all types of cargo shipped that are stated as acceptable in the policy.
The conceptualization of these policies is a result of the changing needs of modern businesses.
While facultative insurance provides coverage for shipped goods for a specified voyage within a stated time period, open cover insurance covers covers all consignments within a longer time period.
This makes it administratively more convenient for companies to do regular shipping from warehouse-to-warehouse as they would not have to apply and obtain a new marine insurance policy for every shipment.
The types of companies that find them ideal in meeting their needs include:
- Importers and exporters
- Manufacturers and trading companies
- Freight forwarders and logistics companies for their customers
- etc
Having to buy individual insurance for each consignment can be a very inefficient way of operating such businesses.
Mechanics of open cover marine insurance
The first thing to keep in mind when understanding the dynamics of how marine insurance works, one has to come to terms that shipping requires ships to enter and exit the territorial waters of various different countries with very different laws.
In addition to that, the laws can be even more vague when a ship sails in international waters.
With these in mind, marine cargo insurance is designed to meet the special needs of shipper who want to protect their valuable consignment when in transit at sea.
An open cover is essentially a term contract with no limits to the number of shipments that begins their journey on the shipping lanes. The exception is when the goods being shipped are expressly stated in the policy contract which would not be covered.
However, an open cover policy can have a total value of cargo that would be shipped within the coverage period.
Either that, or there would be a stated maximum value of cargo per consignment.
When a consignment exceeds the value limit that is covered in the contract agreement, the assured would still have to declare the goods up to the coverage limit.
The excess, or surplus, would then be uninsured unless the company is able to secure facultative insurance for it. It is not impossible to negotiate with the insurer to accept the excess.
When the occurrence of excess becomes a frequent, it should be a signal for a company to increase it’s insured coverage by purchasing a higher plan.
To ensure that they would not be taken for a ride by the assured, it is standard practice for marine insurance companies to require clients to disclose all shipments in a declaration form that resembles one used for floating policies.
This in turn would lead to the issuance of a certificate of insurance.
This certificate can play a crucial role when third parties such as banks want to see evidence that certain shipments are insured. This can be a critical factor when assessing trade facilities applied by a company.
Because of the complexity of such policies, insurers are usually very stringent on the rules of the agreement.
For example, they might request a client to sign an exclusivity agreement where the client is not allowed to insure elsewhere without paying a penalty. Or an issue such as a failure to insure particular consignments can be deemed as a breach of contract.
They go as far as inserting clauses that limits their liability in any one location. This is in view of the possibility of container ships being held up at certain ports.
A marine insurer can get edgy when things don’t go as smoothly as they foresaw.
Such types of policies are regularly reviewed for improvement to make it fair for all parties involved.
Some open cover contracts can run for an indefinitely period. This means that the terms remain the same without an expiry date. However, insurers who underwrite such policies usually insert a cancellation clause that is heavily in their favour.
They just need to serve a notice of cancellation to the coverholder, and the policy terminates at the end of the required notice period.
In such cases, consignments that have already left port for the destination country before policy termination date would still be covered under the terms of the previous agreement.
Development of open cover
Even for a product as old as marine insurance, open cover is still a type of insurance policy that is slowly evolving and being improved upon.
For example, it used to be that the standard period would be 12 months. But the requirements of modern businesses has created indefinite policies.
Some companies are offering contracts that don’t just cover transit via the sea, but include air and land as well.
Now more and more marine policies are underwritten to incorporate advantageous terms of floating policies and open cover policies.
It does seem that the industry would be moving in this direction in the short and medium term.
