Managing risk in goods transport
The terms of sale agreed in a commercial transaction outline who is responsible for the cost of goods being transported. In other words, they clarify to what extent the buyer or seller pays for:
the procurement of documents
licences and permits
the use of a freight forwarder
The terms also cover how the risk of loss or damage to the goods will be managed. They specify cargo delivery points and at what point the risk is transferred from one party to another.
The most commonly used terms for delivery in an international sales contract are those found in Incoterms.
There are two Incoterms that require the seller to take out insurance for the benefit of the buyer:
Cost, Insurance and Freight (CIF) - under these terms the seller takes out insurance on an 'open cover' basis. They pay for the cost of the goods, cargo insurance and all transportation charges up to a named sea port (destination). Unless otherwise agreed, they also provide war risk insurance, passing on the cost to the buyer.
Carriage and Insurance Paid To (CIP) - as above except this applies to all forms of transportation to a named inland destination (CIF terms apply to vessel shipments only).
Both the above terms will continue to apply under Incoterms 2010, which applies as of 1 January 2011.
According to Institute Marine Cargo Clauses (ICC) 'A' and 'B', under these Incoterms the seller must take out insurance for 110 per cent of the value of the consignment.
Other Incoterms place no obligation on either buyer or seller to provide insurance only guarantee minimum cargo coverage if the seller is required to arrange for insurance coverage under ICC clause 'C'. However, depending upon 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. You are therefore strongly advised to insure against this exposure to financial loss.