12 Jun 2015

DEFINITION of ‘Open Cover’
A type of marine insurance policy in which the insurer agrees to provide coverage for all cargo shipped during the policy period. Open cover insurance is most commonly purchased by companies that make frequent shipments, as the blanket coverage keeps them from having to purchase a new policy each time a shipment is made.

INVESTOPEDIA EXPLAINS ‘Open Cover’
Open cover policies are commonly used in international trade, specifically by companies that are involved in high volume trade over a long period of time. Companies purchase this type of coverage because it precludes them from having to negotiate the terms of a new policy each time a shipment is made. Since the insured is agreeing to purchase a longer-term contract, it may be able to realize lower premiums. This is because the insurer does not have to spend time on repetitive negotiations, and because the insurer benefits from a having a guaranteed premium over a longer period of time.

Insurance regulations for international shipping are managed by individual countries, rather than through an international organization. Scandinavian countries and Britain are well-known marine insurance policy providers, though China is also a growing underwriter.

Marine insurance is typically divided into two types: facultative and open cover. Facultative insurance gives the insurance company the option of covering cargo. The insured and the insurer must negotiate the terms for each shipment, including the type of coverage, cargo, and ship. Open cover insurance differs in that the insurer is obligated to provide coverage, provided that the cargo falls within the boundaries outlined in the insurance policy document. This makes open cover insurance a form of treaty reinsurance.

Open cover insurance often involves the use of certificates that are filled out by the insured to track the value of the cargo, with the aggregate value of the cargo over the policy period only being covered up to the policy limit.

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