The open cover is 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.

Breaking Down Open Cover

Open cover policies are commonly used in international trade, specifically by companies involved in high volume trade over long periods of time. Companies purchase this type of coverage because it eliminates the need to negotiate 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 because the insurer does not have to spend time on administrative activities and because the insurer benefits from a having a guaranteed premium over a longer period of time.

Individual countries manage insurance regulations for international shipping, rather an international organization. Scandinavian countries and Britain are well-known marine insurance policy providers, and China is also growing as an underwriter country.

Marine insurance is typically divided into two types: facultative and open cover. Facultative insurance gives the insurance company the option of covering cargo. However, 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, and the shipment happens within the policy time period. This makes open cover insurance a form of treaty reinsurance.

How Open Cover Insurance Works

In some respects, an open cover insurance policy is considered a contract of “utmost good faith,” meaning that the insured must voluntarily reveal to the insurer all information pertinent to the accepted risks. Failure to do so could void an open cover policy. To aid in this disclosure requirement, the insurance company provides certificates to be filled every time cargo is sent.

The value of the cargo, the proposed travel period, and location are recorded in the certificate. The terms of an open cover policy will set a maximum value for the cargo to be covered within a defined time period. Once the maximum value is reached, a new agreement should be signed between both parties. Since countries govern international waters, marine insurance regulations are under the control of the governments of those relevant countries, not the insured companies or their governments.