Sum Insured
Term Summary
Sum insured is the maximum amount an insurance company will pay for a covered loss or damage in cargo insurance. This article explains the definition and calculation of sum insured in international shipping, its importance for risk management, common calculation formulas, differences between policy types, and offers practical examples to help importers and exporters understand how to accurately protect their shipments.
Sum Insured refers to the maximum monetary limit that an insurance company will pay to the insured in the event of a covered loss or damage. In the context of cargo insurance and international shipping, the sum insured is the declared value of the goods or shipment that is specified in the insurance policy.
Key Features of Sum Insured
- Maximum Liability: The sum insured sets an upper limit — the insurer will not pay more than this amount, even if the actual loss is higher.
- Basis for Premium Calculation: Premiums for cargo insurance are usually calculated as a percentage of the sum insured.
- Policyholder’s Declaration: The insured (e.g., importer/exporter) usually declares the sum insured based on the invoice value of the goods, plus any additional charges such as freight and an agreed percentage to cover potential profit and incidental costs.
Common Formulas for Sum Insured in Shipping
In international shipping, the sum insured is often calculated as:
Sum Insured = Cargo Invoice Value + Freight + 10% (to cover profit and incidental expenses)
For example: Cargo Value: USD 50,000 Freight: USD 2,000 10% of (Cargo Value + Freight): USD 5,200 × 10% = USD 520 Total Sum Insured: USD 57,720
Importance of Accurate Sum Insured
| Aspect | Impact |
|---|---|
| Under-insurance | If sum insured is less than actual value, compensation is proportionally reduced. |
| Over-insurance | If sum insured exceeds actual value, no additional compensation; may raise premiums unnecessarily. |
| Claims Settlement | Claims are based on the lower of the sum insured or the assessed loss. |
Types of Insurance Policies by Sum Insured
| Policy Type | Sum Insured Basis |
|---|---|
| Voyage Policy | Per single shipment, declared each time |
| Open Cover Policy | Aggregate value for a set period/volume |
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