Standard trade terms have been developed to define seller and buyer responsibilities to each other on international sales. The most widely used set of terms, developed by the International Chamber of Commerce (ICC), are the INCOTERMS (International Commercial Terms). Originally introduced in 1936, INCOTERMS clearly outline the division of responsibilities between the seller and buyer relative to the costs to be borne by each; procurement of documents, licenses and permits; transportation arrangements; points of conveyance of the goods; transfer of risk for loss or damage to the goods; and obligations for providing insurance. INCOTERMS have been revised over the years to keep pace with changes in business and trade practices, transport practices and electronic commerce. The fifth, and current, being made in 1990. (The ICC has introduced a newer version effective January 1, 2000.) To avoid confusion, the specific version and year should be stipulated when INCOTERMS are incorporated into sale contracts.
INCOTERMS AND INSURABLE INTEREST
From a simple point of view, the transfer of most responsibilities under INCOTERMS takes place at the point of conveyance of the goods. Regardless of terms actually used, it is of paramount importance that the place, date and time of conveyance, and party to whom the goods are to be delivered be clearly shown in the sales contract and/or on invoices issued for specific shipments. Lacking specificity, INCOTERMS allow the seller and buyer to discharge responsibilities in accordance with their established practices. Practices which may be unknown, or undesirable to the other party thereby creating additional exposure to financial loss.
It should be noted that not all responsibilities transfer at the same point or time. For example, under CFR terms (Cost and Freight) the seller agrees to pay all costs and freight necessary to deliver the goods at the port of destination. However, his responsibility for loss or damage to the goods ends when the goods have been delivered onboard the overseas vessel at the point of shipment.
Another example would be CPT terms (Carriage Paid To). Similar to CFR the seller is responsible for all costs and freight to deliver the goods to a named point at the place of destination (not necessarily the port or final destination). However, his responsibility for loss or damage to the goods ends when he has delivered them to the carrier responsible for delivering the goods to the named destination. Delivery can take place at the point of origin, the port of shipment or anywhere in between. Without knowing where actual conveyance takes place an unknowing buyer may be exposed to unnecessary financial loss.
When using INCOTERMS in sales contracts it is imperative that the specific place of conveyance of the goods be shown. It is at this point that responsibility for loss or damage to the goods transfers from the seller to the buyer and forms the basis for determining the insurable interest for insurance purposes.
There are 13 individual terms incorporated into the current version of INCOTERMS. Some can only be used for vessel shipments, one (DAF) is usually only used for overland shipments and the rest can be used for any mode of transportation. Anyone involved with establishing contracts for the international sale of goods is encouraged to obtain copies of "INCOTERMS 1990" and the ICC's "Guide to INCOTERMS 1990".
INCOTERMS AND INSURANCE
With the exception of CIF and CIP terms, INCOTERMS place no obligation on the seller or buyer to provide insurance. However, depending on the actual term used for each shipment the seller or buyer bears responsibility for loss or damage to the goods at some point during transit. This exposure to loss should be insured.
An insurance policy for an ocean is the vehicle used to insure goods moving in international trade. Most cargo policies are written on an open basis which will cover all future shipments of an assured when they are responsible for providing insurance or when they are responsible for loss or damage during the "main carriage phase" of transit. That is when the assured is responsible for loss or damage to the goods from a point in the country of origin until the goods are delivered to a point in the country of destination. Most ocean cargo policies do not automatically insure the seller or buyer when their responsibility for loss or damage is solely within either the country of origin or within the country of destination. Coverage for these exposures, however, can usually be added to a cargo policy by endorsement, or under the assured's domestic transit or property insurance policies.
The following is a summary of commonly used terms of sale illustrating the point at which responsibility for loss or damage transfers from the seller to the buyer during international transit. Included are comments which should be taken into consideration when arranging insurance.
EXW- EX WORKS, named place
(This term can be used with any mode of transportation.)
The seller makes the goods available to the buyer at his premises on a specified date or within a specified time period.
Responsibility for loss or damage: The buyer becomes responsible for loss or damage to the goods on the agreed upon date, or when the goods are picked up within the specified time period, or on expiration of the specified time period.
Unless specifically agreed to, the seller is not responsible for loading the goods onto the conveyance at his premises.
Ocean cargo insurance: because the buyer is responsible for loss or damage during the "main carriage" EXW shipments would be insured under the buyer's ocean cargo policy.
Since most ocean cargo policies attach on individual shipments when they leave the warehouse of origin (i.e. The Warehouse To Warehouse provisions of the Open Policy), the buyer may not have insurance for the period of time the goods may be on the premises of the seller, or during loading onto the conveyance, or after loading while awaiting transit even though he is responsible for loss or damage. Therefore, when purchasing goods EXW the buyer should seek an insurer that will provide coverage during these situations. Chubb's Open Cargo Policy automatically insures these exposures.
FCA- Free Carrier, named place (This term can be used with any mode of transportation.)
The seller agrees to deliver the goods into the custody of the carrier selected by the buyer at a named point or place, or to a party acting on the carrier's behalf (a freight forwarder or freight terminal, for example). The actual point of conveyance can be anywhere in the country of origin, including at the seller's premises. The contract of sale must clearly state to where and to whom the goods are to be delivered.
Responsibility for loss or damage: The seller is responsible for loss or damage until the goods are delivered to the carrier at the named point or place. The buyer becoming responsible thereafter.
Ocean cargo insurance: Because the buyer is responsible for loss or damage during the "main carriage" FCA shipments would be insured under his ocean cargo policy. Insurance would attach at the time the goods are delivered to the carrier as agreed.
When buying goods FCA it is important for the buyer to understand that in allowing delivery at a place other than the port or airport of shipment he is extending his exposure to loss or damage to additional hazards of transportation which may be unique to the country of origin, such as: additional storage, additional handling exposures, exposure to the elements and exposure to theft, hijack or pilferage. Depending upon the country the goods are being shipped from these additional hazards can be severe and loss or damage can adversely affect the placement and costs of insurance. Before agreeing to FCA terms it may be in a buyer's interest to review the country exposures with their insurer.
One advantage to a buyer in using FCA terms is when he uses FCA Seller's Warehouse versus EXW. As commented on in EXW, the buyer is responsible for loss or damage during loading of the goods onto the conveyance at the place of origin, an exposure not usually covered by ocean cargo policies. By selecting FCA Seller's Warehouse the responsibility for loading is placed on the seller.
FAS-Free Alongside Vessel, named port of shipment (This term can only be used for vessel shipments.)
The seller agrees to deliver the goods alongside the vessel at the port of shipment ready for loading onto the overseas vessel; or until loaded onto lighters if customary to the port.
Responsibility for loss or damage: The seller is responsible for loss or damage until the goods are delivered to the port as agreed. The buyer being responsible from that point on.
Ocean cargo insurance: Because the buyer is responsible for loss or damage during the "main carriage" FAS shipments would be covered under his ocean cargo policy. Insurance would attach either at the time the goods are place alongside the vessel, or after being loaded onto lighters if customary to the port. Quite often insurance companies use the date of issuance of a Dock Receipt or a Received For Shipment Bill of Lading, or similar document issued by the carrier, to determine when risk of loss passes from the seller to the buyer.
FOB-Free On Board Vessel, named port of shipment (This term can only be used for vessel shipments.)
The seller agrees to deliver the goods on board the overseas vessel at the named port of shipment, including during lighterage and during loading onto the vessel. (NOTE: INCOTERMS use the phrase "until the goods pass the ship's rail".)
Responsibility for loss or damage: The seller is responsible for loss or damage until the goods "pass the ship's rail". The buyer being responsible from that point on.
Ocean cargo insurance: Because the buyer is responsible for loss or damage during the "main carriage" FOB shipments would be insured under his ocean cargo policy. Insurance, under INCOTERMS definition, would attach once the goods "pass the ship's rail". In practice most insurance companies use the date on which the On Board bill of lading is issued.
CFR-Cost and Freight, named port of destination (This term can only be used for vessel shipments.)
Although the seller agrees to pay all costs and freight to the named port of destination, his responsibility for delivery ends when the goods "pass the ship's rail" at the port of shipment.
Responsibility for loss or damage: The seller is responsible for loss or damage until the goods "pass the ship's rail" at the port of shipment. The buyer being responsible from that point on.
Ocean cargo insurance: Because the buyer is responsible for loss or damage during the "main carriage" CFR shipments would be insured under his ocean cargo policy. Similar to FOB shipments, insurance, under INCOTERMS definition would attach once the goods "pass the ship's rail". In practice most insurance companies use the date on which the On Board Bill of Lading is issued.
CPT- Carriage Paid To, named place of destination (This term can be used with any mode of transportation.)
Although the seller agrees to pay freight costs to destination, his responsibility for delivery ends when he has delivered the goods into the custody of the carrier, or party acting on the carrier's behalf, at a named point in the country of shipment. The actual place of delivery could be anywhere in the country of shipment, including the premises of the seller, or at the port of shipment, or anywhere in between.
Responsibility for loss or damage: The same as FCA terms. See comments under that term.
Ocean cargo insurance: The same as FCA terms. See comments under that term.
Insurance Notes On FCA, FAS, FOB, CFR AND CPT Terms
Although the transfer of responsibility for loss or damage is clearly defined in INCOTERMS, insurance questions often arise when loss or damage occurs before the buyer is responsible and before coverage attaches under his insurance policy. If there is any doubt in the buyer's mind about whether or not he will have proper recourse against the seller for loss or damage during his responsibility, the buyer may wish to review these doubts with his insurer and arrange additional coverage in the form of "contingency" insurance. Chubb's Ocean Cargo Policy provides automatic contingency coverage which may apply in these situations.
DAF- Delivered At Frontier, named place
(This term is usually used for overland shipments, but can be used with any mode of transportation.)
The seller agrees to deliver the goods which are cleared for export, at a named point or place at a frontier or border. This place could be at the country of origin, destination or somewhere in between. The actual place of delivery should be precisely named in the sales contract.
Responsibility for loss or damage: The seller is responsible for loss or damage until delivered to the named place. The buyer being responsible from that point on.
Ocean cargo insurance: Many ocean cargo policies do not provide automatic coverage for overland shipments, or when the assured is responsible for loss or damage solely within the country or origin, or solely within the country of destination. However, extensions can usually be added to provide the necessary coverage. When selling or buying on DAF terms you should review your specific insurance needs with your insurer.
In general terms, the seller will want to arrange coverage which will cover his interest until he has delivered the goods to the place named in the sale contract. The buyer will want to arrange coverage from that point forward, including during any storage awaiting pickup by the carrier. Depending upon the actual extent of exposure, insurance on DAF shipments may be added to domestic transit or property insurance policies.
CIF-Cost, Insurance and Freight, named port of destination (This term can be used for vessel shipments only.)
Although the seller agrees to pay all costs and freight to the port of destination, his responsibility for delivery ends when the goods have been delivered on board the overseas vessel at the port of shipment.
Responsibility for loss or damage: The same as for FOB and CFR terms. The seller is responsible for loss or damage until the goods are delivered on board the overseas vessel at the port of shipment.
Ocean cargo insurance: Although the buyer is responsible for loss or damage during the "main carriage", under CIF terms the seller agrees to provide insurance for the buyer's account. Therefore, CIF shipments are insured under the seller's ocean cargo policy. (This is one of only two INCOTERMS which contains an obligation to provide insurance. The other term is CIP.) The sale contract should clearly state the type of insurance to be provided. INCOTERMS state that "lacking agreement, minimum cover of the Institute Cargo Clauses be provided". This is essentially "named perils" coverage which is rarely adequate for the needs of the buyer. Insurance must also be in negotiable form enabling losses to be payable to the buyer or other party having an insurable interest in the shipment at the time of loss. Proof, or evidence, of insurance is required which is usually accomplished by issuance of a Special Cargo Policy or Certificate of Insurance by the seller or his insurer. Insurance should cover the shipment from the place of origin to the final destination of the buyer.
One potential area of conflict between the requirements of CIF terms and insurance coverage is when insurance actually ceases. By definition CIF refers to the port of destination. CIF also obligates the seller to provide insurance covering the buyer's risk of loss or damage which in almost all cases extends until the goods are delivered to his place of destination. Banks are usually involved in the financing of CIF shipments. If a Letter of Credit stipulates CIF port of destination and the insurance certificate stipulates another place, the bank may reject the certificate. Conversely, if the certificate shows the port of destination as the final place of insurance in order to comply with the Letter of Credit, the buyer will have no insurance for transit beyond the port of destination. Therefore, it is important for the actual place of insured destination to be shown clearly in the sales contract, invoice, letter of credit instructions and the certificate. A suggestion would be: Name of Buyer's Warehouse, Street Address, City, State/Province, Country, or other appropriately identified location.
CIP-Carriage and Insurance Paid To, named place of destination (This term can be used with any mode of transportation.)
Essentially the same as CIF except that the seller pays all costs and freight to deliver the goods to a named place in the country of destination (vs. port of destination under CIF terms), and the seller agrees to deliver the goods to the carrier, or party acting on his behalf, at a named point or place in the country of shipment (vs. on board the overseas vessel at the port of shipment under CIF).
Responsibility for loss or damage: The same as under FCA and CPT terms.
Ocean cargo insurance: CIP terms obligate the seller to provide insurance on behalf of the buyer and therefore CIP shipments would be insured under the seller's ocean cargo policy. (See CIF comments also.)
DES-Delivered EX Ship, named port of destination
(This term can only be used for vessel shipments.)
The seller agrees to deliver the goods on board the overseas vessel at the port of destination.
Responsibility for loss or damage: The seller is responsible for damage or loss until the overseas vessel arrives at the point of unloading at the port of destination. The buyer is responsible from that point on, including during unloading from the vessel and during any lighterage if required.
Ocean cargo insurance: Because the seller is responsible for loss or damage during the "main carriage" DES shipments would be covered under his ocean cargo policy. Insurance usually attaches when the goods leave the place of origin and ceases when the overseas vessel arrives at the point of unloading at the port of destination.
DEQ-Delivered Ex Quay, named port of destination
(This term can only be used on vessel shipments)
The seller agrees to deliver the goods to a named point on the quay (wharf or dock) at the named port of destination. The contract of sale must clearly show the point or place delivery is to be made to.
Responsibility for loss or damage: The seller is responsible for loss or damage until the goods are delivered to the named place, including during unloading from the overseas vessel and during lighterage if required. The buyer being responsible from then on.
Ocean cargo insurance: Because the seller is responsible for loss or damage during the "main carriage", DEQ shipments would be covered under his ocean cargo policy. Insurance usually attaches when the goods leave the place of origin and ceases when the seller's responsibility ceases upon delivery of the goods to the named place. In practice, the named place at destination used with DEQ terms is a Customs Warehouse. Duty, taxes and other import charges may, or may not, be paid by the seller. Depending upon who pay these charges, the actual wording used for this term in sale contracts and on invoices may be shown as:
DEQ (Duty Unpaid) Customs Warehouse, named port; or
DEQ (Duty paid) Customs Warehouse, named port.
DDU-Delivered Duty Unpaid, named destination
(This term can be used with any mode of transportation.
The seller agrees to deliver the goods to an agreed upon point in the country of destination. In most cases this will be the buyer's premises, but it could be any other place in the country of destination.
Responsibility for loss or damage: The seller is responsible for loss or damage until the goods are deliver to the agreed place. The buyer being responsible from that point on.
Ocean cargo insurance: Because the seller is responsible for loss or damage during the "main carriage" DDU shipments would be insured under his ocean cargo policy. Insurance usually attaches when the goods leave the place of origin and ceases when the seller's responsibility ceases upon delivery at the agreed place.
DDP-Delivered Duty Paid, named place
(This term can be used for any mode of transportation.)
Essentially the same as DDU except that the seller agrees to pay duty and taxes.
Responsibility for loss or damage: See comments under DDU which apply to DDP shipments also.
Ocean cargo insurance: See comments under DDU which apply to DDP shipments also.
Insurance Notes On DDU and DDP Shipments: The contract of sale must clearly show the place to which goods are to be delivered; especially if it is a location other than the buyer's warehouse. Consider showing the full name of the location, Street Address, City, State/Province, and Country. If left to chance, insurance coverage may cease at an inappropriate place.
General Insurance Comments
Most ocean cargo policies contain either a Warehouse To Warehouse Clause or a Warehouse To Warehouse Transit Clause. On the surface, these clauses appear to provide continuous coverage from the time goods leave the place of origin until they arrive at the final place of destination. In practice, however, insurance coverage attaches on individual shipments at the time the assured becomes responsible for loss or damage and ceases when the assured's responsibility for loss or damage ceases. The extent of each responsibility being defined by the provisions of the term of sale for the shipment in question. INCOTERMS do not place an obligation on either the seller or buyer to provide insurance (CIF and CIP excepted). Therefore, an assured may find himself "out of pocket" if goods are lost or damaged during a period in transit which is not insured by their ocean cargo policy and where the other party, or their insurer, will not make good on their obligations. Assured's faced with these potential exposures to financial loss may want to purchase contingency insurance which affords them protection when they do not have a primary insurable interest during transit.Chubb offers a full range of these additional coverages