The Incoterms rules and freight insurance

Updated Sept 12 2019.

There is now an important difference between Incoterms 2010 and Incoterms 2020

 

Only two Incoterms rules (CIF, CIP) refer to freight insurance, which is to be arranged and paid for by the seller.

For the other rules, each party makes a commercial decision as to whether to insure for the part of the journey where they are “on risk”

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Incoterms 2010
The level of cover mandated by the CIP and CIF rules is minimal, and may not satisfy the buyer’s requirements.   It is Clauses “C” of Institute Cargo Clauses – excludes many risks which many buyers want covered.

Incoterms 2020
The level of cover mandated by the CIF rule is minimal – Institute Cargo Clauses (C). However for the CIP rule, there is a higher level of cover – Institute Cargo Clauses (A)

The rationale is that in general, manufactured goods will require a higher level of insurance cover than commodities

In all cases, the parties may choose to specify a different level of insurance cover within their commercial agreement

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All freight insurance usually excludes consequential loss, e.g. the knock-on effects of buyer missing a contract deadline or a sales season.  This risk can sometimes be included by agreement with the insurer.

So the risks to be covered should be discussed and then incorporated into the commercial agreement.

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Other considerations for CIP and CIF

• Once the goods have been taken in charge by the carrier (or loaded on board the ship), the buyer is “on risk”, and so must deal with the insurance company in order to make a claim.   This has implications for the insurance document that the seller provides – it may need to be appropriately endorsed.
• Some sellers have global freight insurance policies covering all their consignments.   This often creates problems for the use of e.g. CIP .  (For a single consignment, how can the insurance be costed, and how can arrangements be made allowing a buyer to make a claim?)
• Some sellers find the requirement for the buyer to claim under the insurance policy unsatisfactory from a customer service perspective.   In such cases, the seller may agree to take care of claims. A letter of subrogation can be supplied (seller takes over right to claim under the policy)
• Even the highest of the Institute Cargo Clauses – Clauses A – excludes risks that the buyer may think are important – for example War and Strikes (for which a standard Institute clause exists)