Marine Insurance in International Trade
Insurance follows the risk. Here is who must buy it, at what level, and what the bank checks on the document.
Marine cargo insurance pays for physical loss of or damage to goods in transit. In trade finance it matters twice: the sale contract decides who must buy it, and an LC often calls for the insurance document as one of the documents the bank examines. In India, marine insurance contracts are governed by the Marine Insurance Act, 1963.
The insurance follows the risk. Whoever bears the risk of loss on a stretch of the journey has the interest in insuring it. Incoterms decide where risk passes; only two rules, CIF and CIP, oblige the seller to buy insurance for the buyer's benefit.
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Who Insures Under Incoterms 2020
CIF
Seller must insure?
Yes, for the buyer's benefit
Minimum level
Institute Cargo Clauses (C), unless the parties agree more
Practical position
Buyer often buys extra cover itself
CIP
Seller must insure?
Yes, for the buyer's benefit
Minimum level
Institute Cargo Clauses (A)
Practical position
Wider cover by default since 2020
EXW, FCA, FAS, FOB, CFR, CPT
Seller must insure?
No
Minimum level
None set
Practical position
Buyer insures from the point risk passes; seller insures its own leg if it wants
DAP, DPU, DDP
Seller must insure?
No
Minimum level
None set
Practical position
Seller bears risk to destination, so it usually insures the whole journey
| Rule | Seller must insure? | Minimum level | Practical position |
|---|---|---|---|
| CIF | Yes, for the buyer's benefit | Institute Cargo Clauses (C), unless the parties agree more | Buyer often buys extra cover itself |
| CIP | Yes, for the buyer's benefit | Institute Cargo Clauses (A) | Wider cover by default since 2020 |
| EXW, FCA, FAS, FOB, CFR, CPT | No | None set | Buyer insures from the point risk passes; seller insures its own leg if it wants |
| DAP, DPU, DDP | No | None set | Seller bears risk to destination, so it usually insures the whole journey |
Terms an Officer Needs
- Institute Cargo Clauses (A), (B), (C)
- Standard cargo insurance wordings. (A) is the widest, covering all risks of loss or damage subject to listed exclusions; (C) covers a shorter list of major named perils; (B) sits between them. ISBP accepts Clauses (A) where a credit calls for "all risks".
- Insurance policy and certificate
- A policy is the contract. A certificate is issued under an open cover for each shipment. UCP 600 Article 28(d) accepts a policy in place of a certificate or declaration under an open cover.
- Cover note
- A broker's note that cover has been arranged. Not accepted under an LC (Article 28(c)).
- Open cover
- A standing arrangement under which an exporter's shipments over a period are insured, each one declared and certified as it goes.
- Excess or franchise
- The part of a loss the insured bears itself. An insurance document may show one (Article 28(j)).
What the Bank Checks on an Insurance Document
Under UCP 600 Article 28 and ISBP section K, when the credit calls for insurance.
- checkIssued and signed by an insurance company, an underwriter or their agents. A broker may sign as agent for a named insurer.
- checkAll originals presented if the document says more than one was issued.
- checkDated no later than shipment, or showing that cover is effective from a date no later than shipment.
- checkIn the credit's currency, for at least 110% of the CIF or CIP value if the credit states no amount.
- checkCovering the risks the credit names, from the place of taking in charge or shipment to the place of discharge or final destination stated in the credit.
- checkEndorsed where needed so the right to claim passes to the buyer with the documents.
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Case: Water Damage on a CIF Shipment
A Tiruppur exporter sells cotton T-shirts CIF Felixstowe under an LC. It insures through its insurer's open cover and presents an insurance certificate in its own name, endorsed in blank. During the voyage, sea water enters a container and ruins a third of the cartons.
- 1
Whose loss?
The buyer's. Under CIF, risk passed when the goods were loaded on board in India.
- 2
Who claims?
The buyer, as holder of the certificate. The exporter's blank endorsement passed the right to claim with the documents, which is why ISBP asks for endorsement where needed.
- 3
Is it covered?
It depends on the clauses. The seller's minimum duty under CIF is Clauses (C), a named-perils cover. A buyer who wanted wider cover should have contracted for Clauses (A) or bought its own top-up.
- 4
Does the LC change anything?
No. The bank paid against complying documents. The claim is between the buyer and the insurer, not against any bank.
How the IIBF Exam Tests This
IIBF lists insurance, including marine insurance, among trade documents and risks. Questions usually combine Incoterms and UCP 600: which rule obliges the seller to insure, what clause level CIF and CIP require, and what percentage cover the bank expects when the LC is silent. The trap is to confuse marine insurance with ECGC cover. Marine insurance pays for damage to the goods; ECGC covers the exporter against the buyer or the buyer's country not paying.
FAQs
Who arranges cargo insurance under FOB or CFR?expand_more
No Incoterms rule obliges either party to insure under EXW, FCA, FAS, FOB, CFR or CPT. The buyer usually insures from the point risk passes to it; only CIF and CIP put an insurance duty on the seller.
What percentage of insurance does an LC require?expand_more
Whatever the credit states. If it is silent, UCP 600 Article 28(f)(ii) requires at least 110% of the CIF or CIP value of the goods.
Is a cover note acceptable under a letter of credit?expand_more
No. UCP 600 Article 28(c) says cover notes will not be accepted. A policy, or a certificate or declaration under an open cover, is required.
Can the insurance document be dated after the bill of lading?expand_more
Only if it shows that cover is effective from a date no later than the date of shipment (UCP 600 Article 28(e)).
Next steps
- Incoterms Casesarrow_forward
- Trade Documentsarrow_forward
- ECGC Explainedarrow_forward
- Risks in Trade Financearrow_forward
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