Liability, a.k.a ‘third-party-insurance’, is the legal duty that small business owners have for the harm or losses that they cause to third parties. It’s important to know what you’re liable for when it comes to loss, damage or risk as most insurance policies don’t always cover things such as intentional damage and contractual obligations.
Incoterms are known as international trade terms. These terms help facilitate international trade smoothly and outlines the responsibilities of all parties involved. You can find out more about updates and changes of incoterms here.
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The terms and conditions of cargo insurance define the specific risks covered, like natural disasters, theft, or damage due to improper handling.
Cargo Insurance Liability
When goods are shipped internationally or domestically, several parties may be involved, including the seller, buyer, carrier, and freight forwarder. Cargo insurance liability ensures that the financial risks associated with damage or loss during transit are managed. Depending on the terms, coverage may apply from the point of origin to the destination. Two main types of cargo insurance are marine cargo insurance (for ocean or air transport) and inland transit insurance (for goods transported by road or rail).
Marine cargo insurance typically covers three levels of protection:
- All Risks Coverage: Offers the broadest protection, covering almost all perils except those explicitly excluded.
- Named Perils Coverage: Covers only the risks specifically listed in the policy, such as fire, explosion, or vessel sinking.
- Free of Particular Average (FPA): Limited coverage, protecting only against total loss or significant damage in severe circumstances.
Cargo insurance liability policies specify who is responsible for insuring the goods and at which point the risk transfers from the seller to the buyer. The terms governing this responsibility are often outlined using Incoterms.
What Are Incoterms?
Incoterms (International Commercial Terms) are a set of standardized trade terms created by the International Chamber of Commerce (ICC) to clearly define the responsibilities of buyers and sellers in international trade. These terms outline when the transfer of risk and cost occurs, as well as which party is responsible for insurance, transportation, and customs duties. Incoterms provide clarity, reduce misunderstandings, and help manage the logistics of global trade.
Key Incoterms Related to Insurance Liability
- EXW (Ex Works): The seller’s responsibility ends when the goods are made available at their premises. The buyer must bear all costs and risks from that point, including insurance.
- FCA (Free Carrier): The seller is responsible until the goods are delivered to the carrier, after which the buyer takes over the risk and insurance responsibility.
- CIF (Cost, Insurance, and Freight): The seller covers the cost of goods, freight, and minimum insurance to the port of destination. The risk, however, transfers to the buyer once the goods are loaded onto the vessel.
- CIP (Carriage and Insurance Paid To): Similar to CIF but used for any mode of transport. The seller provides insurance to the named destination, but risk transfers to the buyer when the goods are handed to the carrier.
- FOB (Free on Board): The seller bears the risk and cost until the goods are loaded onto the vessel. After that, the buyer is responsible for insurance and subsequent risk.
Practical Implications of Incoterms
Selecting the appropriate Incoterms is critical for determining cargo insurance liability. For example, a seller using CIF must arrange for insurance, but a buyer under EXW must take full responsibility for insuring the goods. Understanding these terms ensures proper risk management and compliance with international trade laws.
