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What are Incoterms in Marine Insurance?

May 30, 2024

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Marine Insurance

What are Incoterms in Marine Insurance?
Contents

What are Incoterms in Marine Insurance?

What are Incoterms?

Incoterms stands for International Commercial Terms. Incoterms are standard terms of an international trade contract which determine the costs, responsibilities and risks of both parties ie. the buyer and the seller, related to transportation of goods.

Incoterms were created by the International Chamber of Commerce (ICC) in 1936 and they underwent changes depending on the nature of business happening. The latest iteration of Incoterms was released in 2020 which replaced Incoterms 2010. There are 11 Incoterms now.

Incoterms determine the following:

  1. Which party i.e. the buyer or the seller is responsible for various costs, such as the cost of Transportation, Packaging Costs, Loading and Unloading Costs etc.
  2. Who is responsible and pays for loading and unloading of goods?
  3. Who bears the risk of loss at any given point during an international shipment and where does the risk transfer take place?
  4. Who is responsible for customs clearance for Exports and Imports?
  5. Who purchases Marine Insurance? Incoterms are applicable only to international trade and do not apply to domestic trade. Incoterms thus determine the costs and responsibilities of the buyer and seller in an international transaction.

Incoterms and Marine Insurance

Incoterms, except for the CIF and CIP Incoterm, do not mandate the buyer or the seller to purchase Insurance. However, Incoterms determine where the risk transfer takes place and who will bear the risk of loss or damage to the goods in transit. Accordingly, the buyer or the seller, whoever has an Insurable Interest in the cargo purchases a Marine Insurance Policy.

Incoterms 2020

The list of Incoterms 2020 are mentioned below:

Incoterms in Marine Insurance

1. Ex-Works Incoterm

Ex-Works Incoterm is the most beneficial for the seller because the seller has to just manufacture the goods and keep the goods ready and available at his premises. The buyer picks up the goods from the seller’s premises, completes the export formalities, loads the goods and the buyer takes the goods wherever he wants. Delivery: The Seller has to deliver the goods at the nominated place, which is usually the seller’s premises. The seller does not need to load the goods on the buyer’s vehicle nor does he need to clear the goods for exports. Risk Transfer: The Risk Transfer happens when the seller places the goods at the nominated place. From that point onwards, the buyer is responsible for damage to the cargo. Insurance: Since the buyer is responsible for damage to goods once they are placed at the nominated place, buyer is also responsible for purchasing a Marine Insurance Policy to insure the goods.

2. Free Carrier (FCA) Incoterm

Under the Free Carrier Incoterm, the seller Clears the Goods for exports, takes all the clearances and does the documentation but the buyer chooses the carrier, whether it is a Freight Forwarder, Vessel Operator, or any other Carrier. Delivery: The Seller has to deliver the goods into the custody of the carrier nominated by the buyer at a named place. The contract of sale must specify where and to whom the cargo has to be delivered. Buyer assumes all the risks and costs associated with delivery of Goods to Final Destination including the Transportation after delivery to the carrier. Risk Transfer: The Risk Transfer happens when the seller delivers the goods into the custody of the carrier nominated by the buyer at a named place. From that point onwards, the buyer is responsible for damage to the cargo. Insurance: Since the buyer is responsible for damage to the cargo once the goods are delivered to the carrier, the buyer is responsible for insuring the cargo for the Ocean Voyage (International Transit).

3. Free Alongside Ship (FAS) Incoterm

Free Alongside Ship Incoterm is used only in case of Ocean Movements. Under the FCA Incoterm, the Seller completes all the Export formalities and documentation and takes the Cargo to the Port and keeps the Cargo alongside the Vessel. So, FAS Incoterm is more extensive than the Ex-Works Incoterm from the Seller’s Standpoint, because the seller must carry and deliver the Cargo to the Port alongside the ship. Delivery: The Seller has to deliver the goods alongside the vessel. The seller does not load the cargo onto the ocean-going vessel under the FAS Incoterm (eg: a quay or a barge). Loading is the responsibility of the buyer. Risk Transfer: Risk Transfer happens when the seller delivers the cargo alongside the vessel (eg: a quay or a barge). The buyer bears all the cost and risk associated with the cargo once the cargo is placed alongside the vessel. Insurance: Since the buyer is responsible for damage to the cargo once the goods are placed alongside the vessel, the buyer is responsible for insuring the cargo for the Ocean Voyage (International Transit).

4. Free on Board (FOB) Incoterm

Free on Board (FOB) is a very commonly used Incoterm and is appliable only for Ocean Voyage. Under the FOB Incoterm, the seller clears the cargo for export, and delivery is completed when the cargo is placed onboard the vessel at the named port of loading. Delivery: The Seller has to deliver the cargo onboard the vessel. The Seller loads the cargo onto the ocean-going vessel under the FOB Incoterm. Risk Transfer: Risk Transfer happens when the seller delivers the cargo onboard the vessel. Anything happening to the Cargo, after the cargo is placed onboard the vessel is the responsibility of the buyer. The buyer bears all the cost and risk associated with the cargo once the cargo is placed onboard the vessel. Insurance: Since the buyer is responsible for damage to the cargo once the goods are placed onboard the vessel, the buyer is responsible for insuring the cargo for the Ocean Voyage (International Transit).

  1. Cost and Freight (CFR/C&F) Incoterm

    Under the CFR Incoterm, the seller clears the cargo for export, and delivery is completed when the cargo is placed onboard the vessel at the named port of loading. The seller also pays for the Ocean Freight upto the destination port under the CFR Incoterm. Under the FOB Incoterm, the Ocean Freight is borne by the buyer but under the CFR/C&F Incoterm, the Ocean Freight is borne by the seller. The CFR Incoterm is same as the FOB Incoterm except that the Ocean Freight is Paid by the Seller under the CFR Incoterm while the Ocean Freight is paid by the buyer under the FOB Incoterm. CFR Incoterm is applicable only for Ocean Voyage. Delivery: Under the CFR Incoterm, the Seller has to deliver the cargo onboard the vessel. The delivery point is the same as under the FOB Incoterm. Risk Transfer: The Risk Transfer under the CFR and FOB happens at the same point only ie the Risk is transferred to the buyer as soon as the seller loads the cargo onboard the vessel. So even though the Ocean Freight upto the Destination Port is paid by the Seller, the risk transfer happens as soon as the cargo is loaded onto the vessel. Insurance: Since the Risk is transferred to the buyer as soon as the seller loads the cargo onboard the vessel under the CFR Incoterm, the buyer is responsible for arranging Insurance as the buyer has Insurable Interest in the cargo after it is loaded onboard the vessel.

  2. Cost, Insurance and Freight (CIF) Incoterm

    Under the CIF Incoterm, the seller clears the cargo for export, and delivery is completed when the cargo is placed onboard the vessel at the named port of loading. In addition, the seller also pays for the Ocean Freight upto the destination port and is also responsible for arranging Insurance under the CIF Incoterm. CIF Incoterm is applicable only for Ocean Voyage. CIF Incoterm is one of the Incoterm which requires assignment. Delivery: Under the CIF Incoterm, the Seller has to deliver the cargo onboard the vessel. The delivery point is the same as under the FOB and CFR Incoterm. Risk Transfer: The Risk Transfer to the buyer under the CIF Incoterm happens as soon as the seller loads the cargo onboard the vessel. So even though the Ocean Freight upto the Destination Port is paid by the Seller, the risk transfer happens as soon as the cargo is loaded onto the vessel. Insurance: The CIF Incoterm mandates the Seller to purchase Insurance to protect against the buyer’s risk of loss or damage to goods during the ocean voyage. So, the seller purchases Insurance and in case of the loss, the Insurance Claim is paid to the buyer after the seller assigns the Policy in favor of the buyer. So, even though Insurance under CIF Incoterm is purchased in the name of the seller, any loss happening after the cargo is loaded onto the vessel is payable to the buyer and the Seller’s Insurance Policy will compensate the buyer through Assignment.

Note that under the CIF Incoterm, the seller is obliged to arrange Insurance only on ICC-C terms. In practice, there may be an agreement between the buyer and the seller to purchase the Insurance on ICC-A or ICC-B Terms, but the standard requirement is to purchase Insurance on ICC-C Terms

  1. Carriage Paid to (CPT) Incoterm

    Carriage Paid to (CPT) Incoterm is very similar to FCA (Free Carrier). Under the FCA Incoterm, the Seller hands over the cargo to the carrier nominated by the buyer, while under the CPT Incoterm also the Seller hands over the cargo to the carrier nominated by the buyer but the Seller also pays for the Ocean Freight (Freight for Main Voyage). Delivery: Under the CPT Incoterm, the Seller has to deliver the cargo into the custody of the carrier nominated by the buyer at a named place. The contract of sale must specify where and to whom the cargo has to be delivered. Buyer assumes all the risks associated with delivery of Goods to Final Destination after delivery to the carrier. Risk Transfer: Under the CPT Incoterm, the Risk is transferred to the buyer as soon as the seller hands over the cargo to the carrier nominated by the buyer at the named place of origin. From that point onwards, the buyer is responsible for damage to the cargo. Insurance: Since the buyer is responsible for damage to the cargo once the goods are delivered to the carrier, the buyer is responsible for insuring the cargo for the Ocean Voyage (International Transit).

  2. Carriage and Insurance Paid to (CIP) Incoterm

    CIP Incoterm is the same as CPT Incoterm where the Seller delivers the cargo to the carrier nominated by the buyer and pays the freight for the Main Ocean Voyage under both, CPT and CIP Incoterm. In addition, the seller also arranges for Marine Cargo Insurance for the main Ocean Voyage under the ICC-A Clauses under the CIP Incoterm. CPT Incoterm has no requirement for the seller to arrange Insurance. Carriage and Insurance Paid to (CIP) is only the Second Incoterm where the seller is obligated to arrange Insurance. Delivery: Under the CIP Incoterm, the Seller has to deliver the cargo into the custody of the carrier nominated by the buyer at a named place. Buyer assumes all the risks associated with delivery of Goods to Final Destination after delivery to the carrier. Risk Transfer: Under the CIP Incoterm, the Risk is transferred to the buyer as soon as the seller hands over the cargo to the carrier nominated by the buyer at the named place of origin. From that point onwards, the buyer is responsible for damage to the cargo. Insurance: The CIP Incoterm mandates the Seller to purchase a Marine Insurance Policy for the Ocean Voyage under the Institute Cargo Clauses (A). However, since the Risk Transfer from the Seller to Buyer happens when the Seller delivers the cargo to the carrier nominated by the buyer, any loss which happens on the ocean voyage (main voyage) is the responsibility of the buyer. The Buyer thus has to claim Insurance which is achieved when the seller assigns his Insurance Policy to the buyer under the CIP Incoterm.

  3. Delivered at Place (DAP) Incoterm

    Under the Delivered at Place (DAP) Incoterm, the Seller has the responsibility for all expenses incurred including Ocean Freight, till the goods are delivered on the arriving vessel at the named place of destination. Any loss which happens on the ocean voyage, the claim is payable to the Indian Exporter (Seller) in Indian Rupees. The Seller clears the goods for Exports under DAP. However, the seller is not responsible for Unloading of Goods at the Destination Port. Unloading Expenses and Connected Expenses at the destination port have to be paid by the BUYER. The Buyer also has to pay for Custom Duties, Taxes and Clearance Charges. Delivery: Under the DAP Incoterm, the Seller has to deliver the cargo at the nominated place of destination port. Buyer assumes all the risks associated with delivery of Goods to Final Destination after delivery to the destination port. Risk Transfer: Risk Transfer from the Seller to the Buyer happens when the cargo is delivered at the named place of destination. So, the seller will be responsible for loss on the Ocean Voyage under the DAP Incoterm. The Buyer bears the risk from the time of the ship docking at the destination port and the goods being available for unloading. Insurance: Since the Risk is transferred to the Buyer from the Seller on Delivery of the Cargo to the Destination Port under the DAP Incoterm, the Seller bears the risk during the Ocean Voyage and will have to arrange a Marine Insurance Policy to secure his risk.

  4. Delivered at Place Unloaded (DPU) Incoterm

    The DPU Incoterm came into being only in 2020. DPU Incoterm is same as DAP Incoterm, except that under the DPU Incoterm, the seller bears the risk of UNLOADING at the named place of destination (destination port). Under the Delivered at Place Unloaded (DAP) Incoterm, the Seller has the responsibility for all expenses incurred including Ocean Freight, till the goods are delivered at the named place of destination, while under the Delivered at Place Unloaded (DPU) Incoterm, the Seller has the responsibility for all expenses incurred including Ocean Freight, till the goods are UNLOADED at the place named in the destination. The Seller bears the costs and risk of unloading at the named place of destination while the Buyer has to pay for Custom Duties, Taxes and Clearance Charges under the DPU Incoterm. Delivery: Under the DPU Incoterm, the Seller has to UNLOAD and deliver the cargo at the nominated place of destination port. Buyer assumes all the risks associated with delivery of Goods to Final Destination after delivery to the destination port. Risk Transfer: Under the DPU Incoterm, the Risk is transferred to the buyer from the Seller when the cargo is SAFELY UNLOADED at the named place of destination. So, the seller will be responsible for loss on the Ocean Voyage under the DPU Incoterm. The risk rests on the seller till he safely UNLOADS the cargo at the place named in the destination while after the cargo is unloaded, the Risk is transferred to the buyer. Insurance: Since the Risk is transferred to the Buyer from the Seller on safe unloading of the Cargo at the Destination Port under the DPU Incoterm, the Seller bears the risk during the Ocean Voyage and will have to arrange Insurance to secure his risk.

  5. Delivered Duty Paid (DDP) Incoterm

    Delivered Duty Paid Incoterm has the widest possible obligation for the Seller. The Seller has to bear all responsibilities and expenses under the DDP Incoterm. The Seller clears the goods for exports, pays the Ocean Freight, unloads the cargo at the destination port, pays the custom duty at the destination port and then takes the cargo at the named destination but Unloading at the named destination is the responsibility of the buyer. Unloading the cargo at the port is the responsibility of the seller, but when the seller delivers the cargo to the named destination after paying the duty, the seller is not responsible for unloading at the named destination. Delivery: Under the DDP Incoterm, the Seller has to UNLOAD and deliver the cargo at the named place of destination. The Seller is responsible for all expenses till delivery INCLUDING customs duty, taxes and customs clearance at the destination port under the DDP Incoterm. Risk Transfer: Under the DDP Incoterm, the Risk is transferred to the buyer from the Seller when the cargo is delivered at the named place of destination. The risk rests on the seller till he safely delivers the cargo at the place named in the destination. So, the seller will be responsible for loss on the Ocean Voyage under the DDP Incoterm Insurance: Since the Risk is transferred to the Buyer from the Seller on safe delivery of the Cargo at the Named Destination under the DDP Incoterm, the Seller bears the risk during the Ocean Voyage and will have to arrange Insurance to secure his risk.

Conclusion

Incoterms are an important concept which determine how the risk transfer takes place between the buyer and seller and consequently which party has an Insurable Interest for the goods in transit. Incoterms thus determine which party needs to purchase Marine Cargo Insurance. Qian is an experienced Insurance Broker for Marine Insurance Policy and if you wish to purchase Marine Insurance, please reach out to via email at insurance@qian.co.in or call us on 022-35134695. We would be glad to assist you.

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