Incoterms in insurance policies

 

Marine insurance policies cover the transit of goods between the seller’s premises to the customer’s premises. Transits are either by road, air or sea involving domestic and international destinations. The internationally agreed terms of sale are called incoterms.

Incoterms or international commercial terms come into effect when two parties agree to the sale and purchase of goods, the contract between them takes care of the mode of sale, terms of sale which are legally binding on both parties. These terms are mostly used in trade of goods between the seller and the buyer.

What are incoterms?

As we mentioned earlier, these are the terms of sale, most commonly used in domestic and international contracts of sale of goods. Incoterms are recognized world over and are accepted as a legal term of trade. Incoterms elaborates the responsibilities of sellers and buyers. These are widely accepted as a common language between sellers and buyers internationally.

The International Chamber of Commerce (ICC) developed Incoterms for facilitation of trade and business. These are updated periodically to accommodate the changing trade practices.

Incoterms are 11 internationally recognized rules which define the responsibilities and obligations of sellers and buyers.

To understand incoterms, we must examine the receipt issued on sale of goods. It may be a lorry receipt or shipment receipt (bill of lading) etc. This receipt is endorsed with the following standard terms of sale.

EXW – Ex works: Seller arranges to keep the goods available at the seller’s premises. Buyer bears full costs and risks of moving the goods from there to destination. Buyer arranges insurance for transit of goods to destination.

FCA – Free carrier: Seller delivers the goods to the carrier chosen by the buyer. The seller loads the goods into the carrier’s vehicle if the pickup is at the seller’s premises. From that point, the buyer bears the costs and risks of moving the goods to destination. Buyer arranges insurance for transit of goods to destination.

CPT – Carriage paid to: If the carrier is away from the seller’s premises, seller pays for moving the goods to the carrier. From the time the goods are transferred to the carrier, the Buyer bears the risks of loss or damage. Buyer arranges insurance for transit of goods to destination.

CIP – Carriage and insurance paid to: 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: Seller is responsible for the goods until they have arrived at a named terminal. The named terminal is usually at the end destination in the buyer's country/place. It can be a godown, a warehouse, or a container yard, rail, road or air cargo terminal as specified in the terms of sale.

The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination. Seller arranges insurance for the transit.

DAP – Delivered at place: Seller delivers the goods to the buyer’s place as named. The seller bears all risks involved in bringing the goods to the named place up to unloading of the goods. Seller arranges insurance for the transit.

DDP – Delivered duty paid: 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. Seller arranges insurance for the transit

Maritime-only terms

·        FAS: Free Alongside Ship

·        FOB: Free on Board

• CFR: Cost and Freight
• CIF: Cost, Insurance, and Freight

• FAS – Free alongside ship: Seller delivers the goods to the origin port. From that point, the buyer bears all costs and risks of loss or damage. Buyer arranges insurance for the cargo.

• FOB – Free on board: Seller delivers the goods on board a designated vessel named by the buyer. The buyer assumes all the risk and transportation costs up to destination point. Buyer arranges insurance for the cargo.

• CFR – Cost and freight: Seller will deliver the goods to a designated port and load them on a specified vessel, assuming responsibility for paying all transportation and loading costs. Buyer arranges insurance for the cargo.

• CIF – Cost insurance and freight: Seller will deliver the goods to a designated port and load them on a specified vessel, assuming responsibility for paying all transportation, insurance, and loading costs. After that, the buyer assumes the cost and risk associated with transporting the cargo from the designated port to its warehouse or business.

Importance of incoterms in trade

These terms are significant in trade as they reduce disputes between the seller and buyer since the terms of sale and costs are clearly laid out. Incoterms are standard wordings and understood globally and facilitate ease of doing business. They are transparent and prevent confusion as regards the responsibilities of transits in trade.

The terms are standardized, but certain buyers and sellers prefer individual terms over others. Such terms are also clearly laid out before the transit to avoid ambiguity. Buyers and sellers are free to lay terms according to their agreement however the incoterms will help avoid ambiguity in the event of a dispute between the buyer and seller regarding their responsibilities and obligations.

 

We at Zen insurance assist in choosing the right Insurance cover to suit your needs. Please contact us for assistance.

 

 Disclaimer:   

 Zen Insurance Brokers is an IRDAI registered broker which facilitates quick & accurate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products.