All insurance contracts are subject to the principle
of utmost good faith. The insured must truthfully inform the underwriter of
every material fact that may influence the insurer in accepting, rating or
declining a risk. This duty of disclosure continues throughout the life of the
policy. Insurance is in effect a partnership between the owner of the commodity
who wishes to avoid or minimize the risk of loss or damage, and the insurance
company that will take on that risk against payment of a fee. The owner of the
commodity must practice risk avoidance, just
as the insurance company must make good legitimate losses.
Insurance is the most obvious and the oldest form of
risk management, and has been practiced since long before futures markets and
other risk management instruments came into being. It is beyond the scope of
this guide to go into the precise detail of what constitutes a good insurance
policy - there are almost endless variations on a very basic theme: if the loss
was unavoidable then the cover should stand.
But insurance cover is only as good as what is
stated in the policy document. One view is that only what is expressly included
is covered. Another and more attractive view is that anything that is not
specifically excluded is covered.
The risk trail to
To judge the need for insurance cover one first
needs to analyse the type of risk that exists, how prevalent it is and what
potential loss it represents. Only then consider whether or not cover should be
purchased. Always look at the monetary value of coffee when considering risk. As
coffee prices fluctuate, so does the value of a truck or container load. It is
not always recognized that a container load of coffee can be more valuable than
a load of television sets or other electronic goods.
See 05.05.02 through 05.05.08 for a review of
the risk trail between purchase and delivery