With a view to further opening up and promoting international economic cooperation, many countries, especially developing countries, have set up a Free Trade Zone. In a Free Trade Zone, some normal trade barriers such as tariffs and quotas are eliminated and some procedures are simplified in an effort to attract new business and foreign investment.

What follows is an example of an importer benefitting from a “Free Trade Zone”:

Usually cargo owners will store their imported cargo in the Free Trade Zone temporarily before it is sold to customers to avoid paying a huge amount of tax in one tranche. Although the period of storage will usually be less than 3 months, it is advised that cargo owners extend their cargo insurance policies to cover the risk of storage and the subsequent transit of their cargo in order to enjoy comprehensive protection.

Customers should also consider adding the tax for their cargo to the sum insured because once the cargo leaves the Free Trade Zone, cargo owners will need to pay relevant tax according to their category. In some practices, even if their cargo is stolen within the Free Trade Zone, the customer may still need to pay the tax on the stolen cargo. Furthermore, when part of the cargo is sold, the sum insured under the cargo insurance policies extension is lower, so customers are advised to extend their cargo insurance policies for a month at the beginning and review the sum insured monthly in order to save on the premium.

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Due to the complicated procedures and documentation required for cargo shipment, cargo owners usually appoint a forwarding agent to handle these matters on their behalf. The appointed forwarding agent will then arrange a carrier to ship the cargo to the destination.

Although a forwarding agent can conclude a forwarding contract as an agent, or a carriage contract as a carrier, he can never act as both the forwarding agent and carrier for the same shipment. If he did so, he would be going against a basic principle of general agency law that states that an agent should not make deals with himself on behalf of his principle. In other words, as a forwarding agent, he can act on behalf of the cargo owners to appoint a carrier for the transportation of cargo, or he can act on behalf of a carrier to be entrusted with the transportation of cargo. However, a forwarding agent can never act as the carrier for the same shipment.

If an infringement of this basic principle occurs, arguments usually arise when there is claim. Bound by the contract of carriage, the carrier is responsible for the loading, handling, stowage, carriage, custody, care and discharge of the cargo entrusted to them. The entity acting as the forwarding agent is covered by marine cargo policy. However, in a situation where the forwarding agent is also acting as the carrier, if there is any loss of or damage to the cargo caused by the negligence of the carrier, it is self-contradictory that the marine cargo policy covering the forwarding agent will not cover the loss of or damage to the cargo due to his own negligence.

Customers are advised that they should take great care when appointing a forwarding agent. They should ensure that their chosen forwarding agent is not also acting as the carrier by asking the forwarding agent to declare his relationship with the carrier.

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Mr. Chan sold 10 cartons of plastic beads to Mr. Lee, a CD producer, and then shipped them to him by sea. On receipt of the goods, Mr. Lee found that the surface of one of the cartons was water-damaged and refused to accept receipt of that carton for the reason that the plastic beads inside may have become contaminated. Mr. Lee then made a claim for his loss with his marine cargo insurer.

Will Mr. Lee's claim be successful?

As the plastic beads that are used to produce CDs require a high degree of purity, the producer will not take the risk of using raw materials which may be contaminated. But the plastic beads may not, in fact, have been contaminated as only the carton was water-damaged. In Mr. Lee's case, according to the marine cargo insurance cover ICC (A), if wet was covered, such damage falls into the definition of constructive total loss and Mr. Lee could be entitled to compensation from his marine cargo insurer.

Damages caused by insured perils leading to constructive total loss, as discussed above, often provoke arguments. It takes time and effort for the insured to prove exactly why the goods are damaged or contaminated. Because of this, if the goods or raw materials required must be of only the highest quality, you are advised to inform your insurance company to take all necessary steps to avoid any arguments.

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Hong Kong's food and beverage industries are large and the demand for meat and vegetables has grown rapidly over recent years. However, as the supply of local meat and vegetables is limited, most of these products are imported from mainland China or overseas.

In this issue, we will discuss the difference between the transportation of frozen meat and frozen food in relation to marine cargo insurance.

According to Lloyd's Survey Handbook, meat refers to "whole carcasses covered with cotton stockinette, as for lamb, or in part carcasses as for beef." This type of meat is usually transported in a frozen or chilled state. For transporting frozen meat, whether as carcasses or boned-out in cartons, the meat should have been thoroughly frozen and properly spaced out in equipment designed for the purpose before consigning to cold storage or transportation. Exporting and importing frozen meat is controlled by stringent regulations, such as obtaining certificates of quarantine etc.

However, if the cow is already cut into pieces, such as veal tenderloin, and packed properly for sale, this type of meat is treated as frozen food. Regulations for exporting and importing frozen food are far less stringent because this type of food has already passed strict regulations when it was in the form of carcasses.

As such, insurance companies will impose the more complicated Institute Frozen Meat Clauses (A) in marine cargo insurance when transporting frozen meat, and when transporting frozen food, they will impose Institute Frozen Food Clauses (A) on the policy which is relatively less complicated and strict.

Taking out marine cargo insurance with appropriate clauses will ensure comprehensive protection in the most economical way.

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The Gulf of Aden and Indian Ocean, two of the world's busiest shipping lanes, are also notorious for pirate attacks. A Chinese bulk carrier, De Xin Hai, carrying about 76,000 tonnes of coal from South Africa to India, was hijacked in the Indian Ocean by pirates from Somalia.

Unlike past pirate attacks, the pirates did not ask for ransom immediately after the attack. In a case like this, if the buyer of the cargo is unwilling to receive the goods as a result of delay, what can the shipper do to minimise his loss if he was selling goods on FOB term and had not yet received payment?

Under FOB trade term, the shipper's insurance coverage ceases once the cargo is loaded on board the vessel. Also, as cargo delay is not covered by marine cargo insurance, if the consignee refuses to collect the cargo and refuses to pay the balance, the shipper not only suffers loss of money, but also loss of the cargo as the return date of the hijacked cargo is unknown. In the worst case, he may also need to contribute to the general average expenses.

If shippers ship their cargoes on FOB term, they are advised to consider taking out secret "seller's interest" insurance for their cargoes with their insurance company. Once their buyers violate their contract by refusing to collect the cargo, or if the buyers go bankrupt, the "seller's interest" insurance will provide coverage for the sellers. However, to be fair to both parties, this insurance should not be disclosed to the buyer because this type of cover usually ceases when the vessel arrives at the discharge port.

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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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Wine drinking is becoming more and more popular in China and the prices of wine can vary considerably from brand to brand. Today, we are going to share some tips with you for taking out cargo insurance for shipping wine. 

Due to the low import duty in Hong Kong, most wines are imported from around the world to Hong Kong and then re-exported to China. As the first leg of the shipment to Hong Kong is usually insured by the seller, Hong Kong customers only need to insure the second leg of the shipment from Hong Kong to China. It is strongly suggested that the condition of the containers and cargoes are checked immediately after they have arrived in Hong Kong to prevent "concealed damage". 

The second thing that you should take note of is the value of the wine. As brand advocacy is very common, there may be a case that the actual invoice value (import value) of the wine is much lower than the selling invoice value. Therefore, it is better to familiarise yourself with the wine market and its price differences between the country of origin and China. In the event of claims, this market knowledge of prices will help to assess their true value.

Apart from this, packing of the wine is another thing that you need to take note of. "Packing" is most important especially for land transit due to unknown road conditions in China. Sturdy packing helps to minimise the risk of breakage. Cartons for wine should be thicker and sturdier than those usually used. Expensive wines should be packed in wooden cases. A single broken bottle of wine will lead to "constructive total loss" of the whole carton or wooden case due to the label damage to the rest of the wine. This is because most consignees will refuse to accept the replacement of labels or bottles with damaged labels. 

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Due to an unsatisfactory wage increase, thousands of South African transport workers joined a national strike, which paralysed rail and port operations in Africa's biggest economy.

To avoid being stuck in the South African port, instead of heading to the original consignee's port, some ship owners considered re-routing to another port to off-load cargo for temporary storage. In cases like this, what should customers do in order to ensure coverage from their cargo insurance?

Mr. Wong is a toy manufacturer. He transported toys to his consignee in South Africa in May. However, due to the large scale strike in South Africa, the ship owner decided to change the voyage to Brazil, which is a long distance from South Africa. In this case, what should Mr. Wong do to ensure his cargo is well protected by cargo insurance?

As mentioned in previous issues, a change of voyage that deviates from the voyage originally contemplated by the policy may increase the exposure to risk. In Mr. Wong's case, he should inform his cargo insurance company immediately when the re-routing becomes known to him, so that his cargo insurance company can re-assess the risk that he may be exposed to and extend cover for his cargo.

To ensure that your customers can enjoy comprehensive cargo insurance cover, it is important to inform the cargo insurance company immediately when any changes in the conditions or voyage become known to them.

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With the rapid development of China's economic environment, more and more Hong Kong manufacturers have moved their production lines to mainland China in recent years in order to lower their production costs. However, at the same time, they have had to bear the risks of theft and burglary. Public order is not good in China and theft of cargo before and during shipment is common.

Last month, a Hong Kong handbag manufacturer, whose factory is located in Shantou, hired a shipping company to transport over 700 cartons of handbags to the container port in Shenzhen to ship to the US. However, while waiting for loading, he was informed by the Chinese Customs authorities that his cargo needed to be inspected during which it was discovered that over 400 cartons of handbags had been replaced with bags of cement. Theft cases such as this happen frequently in China with manufacturers not only losing their cargo but also having to pay compensation to buyers for late delivery. Additionally, manufacturers may face accusations from the Chinese Custom authorities that their cargo does not match their Customs declaration.

Another common scenario is theft during the packing process. Packing is part of the production process and, even if cargo owners have taken out cargo insurance, this cover will not become effective until the voyage starts. This means that loss or damage during the packing process is not normally covered by cargo insurance. It is also very difficult to prove when the loss or damage actually took place.

It is strongly advised that cargo owners employ a reliable surveyor to provide evidence of the loading of cargo into containers and to perform sampling checks to ensure that cargo has not been removed or replaced. This practice is especially important when shipping valuable items, such as watches and electronic goods. Employing a reliable and reputable shipping company will also help to minimise the risk of theft and mishandling of goods. By taking these precautions, if loss does occur, investigations and claims procedures are simplified as it can be proved that the loss did not occur before the start of the voyage.

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According to the International Chamber of Commerce, the new INCOTERMS 2010 will replace INCOTERMS 2000 starting next year. The total number of standard delivery terms and conditions will decrease to 11, of which 9 will remain unchanged, 4 will be cancelled and 2 will be new.

The following standard delivery terms will be used starting from 2011:

The following standard terms that appeared in INCOTERMS 2000 will be cancelled: DDUAs shown in the table above, the new terms will be divided into two sections: the first set of terms governs all types of transportation and the second set of terms governs sea and inland waterway transport. (Delivered Duty Unpaid), DAF (Delivered At Frontier), DES (Delivered Ex Ship) and DEQ (Delivered Ex Quay). In addition, the terms DAT (Delivered At Terminal) and DAP (Delivered At Place) will be added.

With the new INCOTERMS 2010, customers are advised to pay particular attention when negotiating new trading contracts for 2011 as these new terms may affect how they will be covered by cargo insurance.

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