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Understanding Incoterms and their relevance to Marine Cargo Insurance
Today in times of globalization with technology, improved ways of transportation & advanced communication system people/organizations are transacting business with people/ organizations across the world. More & more people are exploring business opportunities outside their country. With international trade, seller & buyer continuously face questions like;
Where goods need to be delivered?
Who bears risk & upto what point?
Who pays for transportation?
Who pays for insurance?
Who pays for handling charges?
To answer all above questions & much more, International Chamber of Commerce (ICC) has come up with Incoterms rules or International Commercial Terms. These are a series of pre-defined commercial terms published by the ICC that are widely used in International commercial transactions or procurement processes. This is series of three-letter trade terms related to common contractual sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods.
The Incoterms rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from different interpretation of the rules in different countries.
INCOTERMS 2010 are grouped into two classes:
1. TERMS FOR ANY TRANSPORT MODE
EXW - EX WORKS (... named place of delivery)
The Seller's only responsibility is to make the goods available at the Seller's premises. The Buyer bears full costs and risks of moving the goods from there to destination.
FCA - FREE CARRIER (... named place of delivery)
The Seller delivers the goods, cleared for export, to the carrier selected by the Buyer. The Seller loads the goods if the carrier pickup is at the Seller's premises. From that point, the Buyer bears the costs and risks of moving the goods to destination.
CPT - CARRIAGE PAID TO (... named place of destination)
The Seller pays for moving the goods to destination. From the time the goods are transferred to the first carrier, the Buyer bears the risks of loss or damage.
CIP - CARRIAGE AND INSURANCE PAID TO (... named place of destination)
The Seller pays for moving the goods to destination. From the time the goods are transferred to the first carrier, the Buyer bears the risks of loss or damage. The Seller, however, purchases the cargo insurance.
DAT - DELIVERED AT TERMINAL (... named terminal at port or place of destination)
The Seller delivers the goods at the named terminal which could be a port terminal, container terminal, railway terminal, airport or any other hub. Risk transfer to buyer takes place once the goods are unloaded at the named place of destination.
DAP - DELIVERED AT PLACE (... named place of destination)
The Seller delivers when the goods are placed at the Buyer's disposal on the arriving means of transport ready for unloading at the names place of destination. The Seller bears all risks involved in bringing the goods to the named place.
DDP - DELIVERED DUTY PAID (... named place)
The Seller delivers the goods -cleared for import - to the Buyer at destination. The Seller bears all costs and risks of moving the goods to destination, including the payment of Customs duties and taxes.
Some points which need to be noticed or practiced are;
State "INCOTERMS 2010" or “INCOTERM 2000” whichever you want to use and specify the place or port as precisely as possible.
A common misconception when the Seller pays the freight is that the Seller has the risk of loss until the goods are delivered to the place or port specified on the bill of lading or airway bill. Actually, when using INCOTERMS CPT, CIP, CFR or CIF, risk transfers to the Buyer when the Seller hands the goods over to the carrier at origin, not when the goods reach the place or port of destination.
No Incoterms other than CIF & CIP obligates seller to arrange insurance on behalf of buyer.
Unless specifically asked by buyer, under CIP and CIF, the Seller is only obliged to obtain insurance on minimum cover not on all risk.
Understand who has responsibility for loading and unloading.
FAS - FREE ALONGSIDE SHIP (... named port of shipment)
The Seller delivers the goods to the origin port. From that point, the Buyer bears all costs and risks of loss or damage.
FOB - FREE ON BOARD (... named port of shipment)
The Seller delivers the goods on board the ship and clears the goods for export. From that point, the Buyer bears all costs and risks of loss or damage.
CFR - COST AND FREIGHT (... named port of destination)
The Seller clears the goods for export and pays the costs of moving the goods to destination. The Buyer bears all risks of loss or damage after goods are loaded on the vessel.
CIF - COST INSURANCE AND FREIGHT (... named port of destination)
The Seller clears the goods for export and pays the costs of moving the goods to the port of destination. The Buyer bears all risks of loss or damage after goods are loaded on the vessel. The Seller, however, purchases the cargo insurance.
Relevance of Incoterms in marine cargo insurance
One of the principle which forms basis of Marine cargo insurance is “Principle of Insurable Interest”. Insurable interest arises in cargo by virtue of pecuniary interest or contractual obligation. Each Incoterms clearly specify point in a transit at which risk gets transfer from seller to buyer. Therefore, unless otherwise agreed by the insurance company, policy arranged by the seller will only provides him coverage till the point he bears risk in transit. For eg, for exports on FOB & C&F terms, sellers gets coverage till goods are loaded on the overseas vessel or aircraft at port of loading.
For exports on CIF although risk transfers from seller to buyer once goods are loaded on vessel in case of CIF & incase of CIP once goods are handed over to first carrier but policy arranged by the seller provides coverage till named place or named port at destination. This is because as per both of these Incoterms seller is contractually obligated to arrange insurance on behalf of buyer.
Generally people make mistake of assuming that marine insurance policy arranged by them provides them coverage from seller’s warehouse to buyer’s warehouse irrespective of Incoterms & to their surprise at the time of loss or damage to cargo they find that their insurance policy does not respond as at the time of loss they did not have risk on cargo or insurable interest was not there.
Hence it is important to know your risk based on the Incoterm you have finalized & accordingly arrange insurance policy for part of transit you have risk & ask the other party to arrange for his part so that cargo gets adequately covered for entire transit.
Constitute a contract;
Supersede the law governing the contract;
Define where title transfers;
Address the price payable, currency or credit terms;
Define the remedies for breach of contract;
Apply to contract of service. Only apply to contract of goods.
First published in 1936, the Incoterms rules have been periodically updated. Latest is eight version - Incoterms 2010 -having been published on January 1, 2011. Before this Incoterms 2000 were published.
Need of regular updating Incoterms came from the changes & improvement that have taken place in the manner goods are handled & transported.
The revised rules, "INCOTERMS 2010", contain a series of changes, such as a reduction in the number of terms to 11 from 13. The Delivered at Frontier (DAF), Delivered Ex- Ship (DES), Delivered Ex Quay (DEQ), and Delivered Duty Unpaid (DDU) designations have been eliminated, while two new terms, Delivered at Terminal (DAT) and Delivered at Place (DAP), have been added.
INCOTERMS 2010 also attempt to better take into account the roles cargo security and electronic data interchange now play in international trade.
Disclaimer For complete details of Policy coverage, terms, conditions and exclusions, please refer the policy wordings.
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