Incoterms and who insures goods in transit

Under Incoterms 2020, only CIF and CIP oblige the seller to buy cargo insurance, and only at a minimum level. In the other nine rules neither party owes the other insurance, so each side needs to work out when risk of loss passes to the buyer and make sure someone has coverage in force at that moment. The most common marine cargo claim problem is not a denial. It is a shipment that nobody insured, or that both insured, because each side assumed the other had it covered.

What Incoterms do and do not do

Incoterms are the International Chamber of Commerce's standard trade terms for sale contracts. The ICC describes the rules as a set of eleven three-letter trade terms, and Incoterms 2020 entered into force on January 1, 2020 (ICC). They are not law and they apply only if the contract says so, for example "FOB Houston, Incoterms 2020." They allocate three things between buyer and seller: who arranges and pays for carriage, when risk of loss passes, and who handles documents and clearances. They do not decide who owns the goods, when payment is due, or what happens in a breach. The text of each rule is on the ICC Digital Library, for example the sea and inland waterway rules and the any-mode rules.

The eleven rules and when risk passes

The list of rules and the any-mode versus sea split follow the U.S. Commerce Department's summary. Container and air shipments are usually better served by FCA, CPT or CIP than by the sea-only terms, because risk under FOB, CFR and CIF passes only when goods are on board the vessel, which matters when a container sits in a terminal for days before loading.

What CIF and CIP actually require

The ICC rule text for CIF says that, unless otherwise agreed or customary in the trade, the seller must obtain at its own cost cargo insurance complying with Clauses (C) of the Institute Cargo Clauses (LMA/IUA) or similar. For CIP, it is Institute Cargo Clauses (A) or similar, covering at least the price plus 10% (110%), in the contract currency, from the delivery point to at least the named destination. The seller must give the buyer the policy, certificate or other evidence of insurance. If the buyer asks, the seller must obtain war and strikes cover at the buyer's cost, if procurable, unless it is already included.

Compare that with what the clauses cover. Clauses (C) cover only a short list of named perils, such as fire, stranding, sinking, collision and jettison, while Clauses (A) cover all risks subject to exclusions (ocean marine and cargo insurance: how shipment and vessel coverage works has the side-by-side). A CIF seller who buys exactly the minimum has not insured the buyer against many ordinary losses, such as water damage that does not come from a named peril or theft from a container. If the cargo is valuable or fragile, the buyer should negotiate Clauses (A) in the contract or buy its own policy.

Risk and insurance can sit with different people

Under CIF, the seller pays for the insurance but the buyer carries the risk once the goods are on board. The ICC's guidance on CIF and CIP makes the same point: the seller pays for the main carriage and insurance, but the buyer bears the risk of loss after the goods are delivered. That is why the policy is for the buyer's benefit, and why the buyer should do four things when it receives a CIF or CIP shipment:

1. Obtain the insurance certificate and read it. Check the insured value, the clause level, the deductible, the named destination, and who the claims agent is.
2. Confirm the certificate is in a form the buyer, or its bank, can use to claim. It usually names the seller as the insured and is assigned to the buyer by endorsement.
3. Decide whether to add the buyer's own cover for the gaps: delay-driven loss is excluded, as are inherent vice and packing defects, and the 110% floor assumes the buyer's valuation.
4. Tell the buyer's own broker so the open policy does not duplicate or conflict with the seller's.

Gaps by rule

• EXW and FCA. The buyer takes the risk early, at the seller's dock or when loading. Make sure the buyer's policy starts there, not at the port.
• FAS, FOB, CFR and CIF. The seller bears risk through inland carriage and loading, until the goods are alongside (FAS) or on board the vessel (the other three). A seller on these terms needs its own coverage for the inland leg and for loading, such as a goods-in-transit policy (inland marine insurance for tools, equipment and goods in transit).
• CPT and CIP. The risk transfers at the first handover, so the buyer's coverage should start almost at the origin. The seller's own policy covers the seller until then.
• DAP, DPU and DDP. The seller bears the whole voyage. Neither the seller nor the buyer owes the other insurance, so the seller should insure for its own account, and the buyer's property or stock policy must start at delivery.

Hypothetical example. A Texas exporter sells $200,000 of machine parts to a buyer in Chile, "FOB Houston, Incoterms 2020." The buyer holds an open marine cargo policy that attaches when goods are loaded on the vessel. The exporter's truck carries the shipment to the terminal, which is the exporter's risk. Damage while the crane lifts the crates is the exporter's loss; damage once they are on board is the buyer's. The exporter should have transit coverage for the truck and terminal stage, and the buyer's open policy should be confirmed to start at loading. If the exporter had instead sold CIF, it would have bought the Clauses (C) minimum at 110%, or $220,000, in the buyer's favor, while the buyer still carried the risk during the voyage.

Write it into the contract

The Incoterms defaults apply only where the contract is silent, so specify the details:

• The rule, the named place and the version: "CIP Santiago, Incoterms 2020."
• The institute clause level (A), (B) or (C), and whether war, strikes and terrorism cover is required.
• The insured value, such as 110% of invoice, and the currency.
• The maximum deductible, and who bears it.
• Who the policy names as insured or loss payee, and where claims are paid.
• The insurer's minimum financial rating.
• The deadline to provide the certificate before shipment.

If a bank is paying under a letter of credit, match the policy to the credit's insurance requirements before shipment, because a bank reviews documents and does not look behind them. The full claim process, including the three-day notice rule for hidden damage, is in the ocean cargo guide. Exporters who ship on open account also face the risk of not being paid; see trade credit insurance: protecting receivables from customer default. If the ship declares general average, cargo interests must contribute and post security before the goods are released; who bears that cost turns on the sales contract and the policy, as general average: what it means for shippers and cargo owners explains.

Domestic shipments and other contracts

Incoterms can be used in domestic sales, particularly the any-mode rules, but most U.S. domestic contracts rely on the Uniform Commercial Code. Under UCC 2-509, when a contract authorizes shipment by a carrier and does not require delivery at a particular destination, risk passes to the buyer when the goods are duly delivered to the carrier. When the contract requires delivery at a destination, risk passes when the goods are tendered there. The parties can agree otherwise, and the contract terms control. A trucker's liability for cargo is limited by law and by contract, and its own cargo policy (motor truck cargo insurance: how it works and where it stops) protects the carrier, not you, so shippers insure their own goods in transit.

Key takeaways

• Only CIF (Institute Cargo Clauses (C)) and CIP (Clauses (A)) require the seller to buy insurance, at a minimum of 110% of the contract price.
• Under CIF the buyer bears the risk from loading even though the seller pays the premium, so the buyer should read the certificate.
• In every other rule nobody owes the other party insurance; each party should insure its own period of risk.
• Choose the rule by when risk passes, then check that coverage on each side starts at that point, with no gap and no duplication.
• Put the clause level, insured value, deductible, loss payee and war cover into the sales contract.