Incoterms and Marine Insurance: Who Insures the Cargo
Insurance follows risk. The Incoterm in the sale contract tells you where risk passes, so it tells you who should insure.
Incoterms are the International Chamber of Commerce's trade terms (FOB, CIF and the rest) that fix, among other things, the point at which the risk of loss passes from seller to buyer. Marine insurance follows that point. Whoever bears the risk at a given stage of the journey has the insurable interest at that stage, and is the one who loses money if the goods are damaged.
Only two of the 11 Incoterms 2020 rules oblige anyone to insure: CIF and CIP, where the seller must buy cover for the buyer's benefit. Under every other rule, each party insures its own risk if it wants to, and a sensible party does.
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Who Insures Under the Main Incoterms 2020 Rules
EXW (Ex Works)
Risk passes to buyer
At the seller's premises
Who insures the main transit
Buyer, for the whole journey
FCA (Free Carrier)
Risk passes to buyer
On handover to the buyer's carrier
Who insures the main transit
Buyer, from handover
FOB (Free on Board)
Risk passes to buyer
When goods are on board at the port of shipment
Who insures the main transit
Buyer, from loading; seller covers its own risk up to loading
CFR (Cost and Freight)
Risk passes to buyer
On board at the port of shipment
Who insures the main transit
Buyer, although the seller pays the freight
CIF (Cost, Insurance and Freight)
Risk passes to buyer
On board at the port of shipment
Who insures the main transit
Seller must insure, at least Institute Cargo Clauses (C), for the buyer's benefit
CPT (Carriage Paid To)
Risk passes to buyer
On handover to the first carrier
Who insures the main transit
Buyer
CIP (Carriage and Insurance Paid To)
Risk passes to buyer
On handover to the first carrier
Who insures the main transit
Seller must insure, at Institute Cargo Clauses (A) level
DAP, DPU, DDP
Risk passes to buyer
At the named destination
Who insures the main transit
Seller, for its own protection; no obligation to the buyer
| Rule | Risk passes to buyer | Who insures the main transit |
|---|---|---|
| EXW (Ex Works) | At the seller's premises | Buyer, for the whole journey |
| FCA (Free Carrier) | On handover to the buyer's carrier | Buyer, from handover |
| FOB (Free on Board) | When goods are on board at the port of shipment | Buyer, from loading; seller covers its own risk up to loading |
| CFR (Cost and Freight) | On board at the port of shipment | Buyer, although the seller pays the freight |
| CIF (Cost, Insurance and Freight) | On board at the port of shipment | Seller must insure, at least Institute Cargo Clauses (C), for the buyer's benefit |
| CPT (Carriage Paid To) | On handover to the first carrier | Buyer |
| CIP (Carriage and Insurance Paid To) | On handover to the first carrier | Seller must insure, at Institute Cargo Clauses (A) level |
| DAP, DPU, DDP | At the named destination | Seller, for its own protection; no obligation to the buyer |
Following One Shipment: CIF Hamburg to Nhava Sheva
A Pune manufacturer buys a machine from a German supplier on CIF Nhava Sheva terms.
- 1
Before loading
The machine is trucked from the factory to Hamburg port. The seller bears the risk, so only the seller has an interest to insure.
- 2
Loading on board
Risk passes to the Pune buyer once the machine is on board. From here on, damage is the buyer's loss.
- 3
The seller's policy passes to the buyer
The seller has bought cargo insurance (CIF obliges it) and endorses the policy or certificate to the buyer, usually through the bank under the letter of credit. Section 52 of the Marine Insurance Act lets a marine policy be assigned by endorsement, before or after a loss.
- 4
A loss in the Arabian Sea
Seawater damages the machine mid-voyage. The buyer, who held the interest when the loss happened, claims in India under the assigned policy.
- 5
The level of cover
CIF requires only Clauses (C), which would not cover heavy-weather seawater damage. A buyer who wants wider cover should agree Clauses (A) in the sale contract or buy additional cover locally.
Insurable Interest Rules That Make This Work
- Interest at the time of loss (s.8)
- The assured must have an insurable interest when the loss happens, though not necessarily when the policy is taken out. That is why an FOB buyer can insure before the goods are loaded.
- Lost or not lost
- A policy with these words lets the assured recover even if the interest was acquired after a loss had already happened, unless the assured knew of the loss and the insurer did not.
- Buyer's defeasible interest (s.9)
- A buyer who insures has an insurable interest even if it could later reject the goods.
- Seller's contingency cover
- Under FOB or CFR the seller may buy cover for the case where the buyer refuses the goods or its insurance fails. Insurers sell this as a seller's interest or contingency cover.
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How Much Cover: the 110% Rule
Incoterms set the level of cover (Clauses A or C) but not the amount. Under a letter of credit, UCP 600 Article 28 says that if the credit is silent, insurance must be at least 110% of the CIF or CIP value. The extra 10% is meant to cover the buyer's expected profit and costs.
How IC-11 Tests This
The classic question asks under which term the seller arranges insurance and includes the premium in the price (CIF). The trap is CFR, where the seller pays freight but not insurance, and the belief that under CIF the risk stays with the seller until arrival. It passes on loading. Courseware written before 2020 may still say CIP needs only minimum cover; Incoterms 2020 raised it to Clauses (A).
FAQs
Who pays for marine insurance under FOB?expand_more
The buyer, for the voyage. Risk passes to the buyer once the goods are on board at the port of shipment, so the buyer insures from that point. The seller covers its own risk up to loading.
Who arranges insurance under CIF?expand_more
The seller must insure the goods for the buyer's benefit, at least to Institute Cargo Clauses (C) level, and hand over the policy or certificate, usually by endorsement.
What is the difference between CIF and CIP insurance?expand_more
CIF is a sea-only rule where the seller needs only minimum cover (Clauses C). CIP works for any mode, including containers and air, and under Incoterms 2020 the seller must buy cover at Clauses (A) level.
Can a buyer claim under a policy taken by the seller?expand_more
Yes, if the policy has been assigned to the buyer. Section 52 of the Marine Insurance Act 1963 lets a marine policy be assigned by endorsement, and the assignee can sue on it in its own name.
Next steps
- Marine Cargoarrow_forward
- Cargo Clausesarrow_forward
- Open Policy vs Coverarrow_forward
- Insurable interest (IC-01)arrow_forward
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