The trading business usually involves large amounts of both capital and goods. As buyers may not always have enough cash flow to pay for goods, it is common practice for them to pay a cash deposit for the goods and then borrow the balance from banks.

In order to secure their interests, the banks will require buyers to take out cargo insurance, the sum insured of which is equal to the loan, so that even if the goods are damaged or lost, the buyers will still have sufficient funds to repay the loan to the banks.

In circumstances like these, many buyers will only take out cargo insurance with a sum insured sufficient to satisfy their bank. However, this may lead to a case of under-insurance as this sum insured may not reflect the total cost of the goods because the buyers have already paid part of the total cost as a deposit.

Customers are reminded to take the full cost of their goods as the sum insured for cargo insurance to avoid under-insurance. In a case of under-insurance, an insurance company may apply average when a claim arises. Compensation will be deducted in proportion to the amount of under-insurance and customers may need to bear the difference as a loss.

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