News and Articles
CIF Sales & Cargo Insurance
In this article we’ll cover some grey zones regarding one of the most prominent seaway trade incoterms: CIF (Cost, Insurance, and Freight).
If you are looking to insure your cargo in transit there are chances that you’ll be offered a marine cargo policy based on institute cargo clauses by your underwriter or broker. These are set of terms for cargo insurance adopted as standard terms by many international marine insurance organizations, including the Institute of London Underwriters. In order to insure cargo under a marine policy you will need to have an insurable interest. Most likely this marine policy will be a subject to the English law and practice, meaning that the following definition by the Marine Insurance Act 1906 (as revised by the Insurance Act 2015) will apply:
- Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure.
- In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.
Sales agreement would be a logical place to see who stands in this legal or equitable relation to the adventure or to any insurable property at risk. Most commonly used terms of trade for the sale of goods are published by International Chamber of Commerce and are called ICC’s Incoterms (2010). These terms provide a standard set of terms that spell out the respective rights and obligations of the parties to a contract of sale, including definition of the critical point during transportation of goods when the risk of loss or damage is transferred from the seller to the buyer.
Here are three main points to be noted by the buyer under CIF Incoterms.
1. SELLER ORGANIZES, COVERS THE COSTS AND CONTRACTS FOR TRANSPORTATION OF THE GOODS
You as a buyer will have a nearly complete lack of control of your precious cargo in transit. Your supplier is responsible to arrange for transportation of the goods and, unless you have specifically agreed, they might understandably select a carrier who will just meet the minimum requirements at the cheapest possible price. After the cargo is delivered to a container freight station, even the seller won’t have any control over the goods after that point.
2. BASED ON CIF TERMS THE RISK OF LOSS OR DAMAGE TO CARGO TRANSFERS FROM THE SELLER TO THE BUYER FROM THE MOMENT THE CARGO CROSSES THE SHIP’S RAIL AT THE NAMED PORT OF SHIPMENT
CIF buyer’s cargo policy does not cover the buyer as assured in respect of loss of or damage to the goods prior to loading on board the ship, as he has no insurable interest. When goods are stolen or damaged at the container www.underwriting.lv freight station, prior to loading, the risk remains with the seller, as the insurable interest had not yet transferred to the buyer via crossing the ship’s rail. In this case it is important to note that Incoterms deal with passing of risk of loss or damage to goods, as opposed to passing of title. In a contract of sale, the title or ownership of goods may not rest
with the party bearing the risk of loss or damage. Although the risk of loss or damage has passed to the buyer, seller, whilst holding the b/l, retains property and title and possession. When the buyer obtains documents, he acquires title and technical possession, which permits him to deal in the goods on the evidence of documents of title. In this case he becomes the owner of damaged or stolen goods, however without an ability to claim under the marine insurance policy. In most likely chain of events your supplier will receive the payment if your product is damaged. And, since damage is usually discovered when the freight is unloaded at your warehouse, you probably have already made the final payment on the shipment and now have to hope your supplier will reimburse you from the insurance payment they receive.
3. SELLER IS RESPONSIBLE TO ARRANGE FOR INSURANCE FOR THE BENEFIT OF THE BUYER AND PAYS THE INSURANCE PREMIUM FOR A MINIMUM COVER
Are you actually well protected by the cargo insurance provided by your supplier? Are you aware of the insurance cover provided, special conditions and exclusions, provided by the other party? It is important to insist on all risk cover – ICC A including War & Strikes, as opposed to a more narrow and cheaper cover provided by the ICC B or ICC C. Does the arranged insurance policy cover you as a buyer from the original place of origin until arrival at my premises? Are the limits sufficient? As discussed before, if you purchase goods on CIF vessel port of loading, insurance under your open policy starts when the goods have been loaded onto the overseas vessel at the port of loading. Loss which may occur prior to that time would be for the seller’s account. You should review your actual insurance needs with your insurance broker and the seller.
Please note that the new Incoterms 2020 are being drafted by the International Chamber of Commerce (ICC). By the January 1st, 2020 transportation industry will see significant changes that will affect importers and exporters across the globe.