Terms of Sale and Transfer of Risk

Many a times we come across questions as to what is incoterms and what are it's implications on Marine Claims. If we understand the basic concept in Marine Insurance, one requires insurable interest, in Marine Insurance, during the time of loss. Thus, this aspect is of utmost importance.

Incoterms, standardized international terms of sale actually, clearly defines what are the sellers & buyer's responsibilities and when does the risk transfer.

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Now that we know what incoterms are and how it affects the contract of marine insurance, lets see what can different terms of sale, transfer of risk and choice of cover can do and the consequences can be dire!

The most widely used covers today in the market are undoubtedly FOB (Free on Board) and CIF (Cost, Insurance and Freight). And number of times we have received question on how to calculate indemnity in such covers. The cover has to be compared with terms of sale on the invoice as well. 

Example: A policy covered cargo ’warehouse to warehouse’ from Ranchi to Libya. However, on FOB (!) cover. The cargo was damaged at JNPT en-route from CFS (container freight station) to JNPT port.

While FOB cover takes care of the goods up to the point when the goods cross the rails of the ship, includ-ing 14 days storage risks at CFS premises; the twist in this case is “Warehouse to Warehouse”. When a shipment is covered on FOB, the risk terminates when the cargo reaches the CFS (warehouse) from its hin-terland warehouse/factory premise. So even if cargo is damaged in the warehouse during its 14 days stor-age period, the claim would fall beyond the scope of the policy.  

The best way to cover: we should refrain from extending covers beyond ‘destination port’, especially in African, middle eastern and some of the European countries. FOB cover should not be attached along with the ‘warehouse to warehouse clause’. The best bet is to cover import consignments on CIF cover and ex-port consignments on FOB (for FOB and C&F terms of sale) cover.