Study Guide

Incoterms® as a determination of Insurance Cover

The terms of sale are recorded on commercial sales invoices and define the rights and responsibilities of each party. Ownership of goods and the risk of loss or damage can be transferred between the buyer and the seller at different stages of the export transaction. In any insurance claim, the agreed trade terms will determine which party is responsible and which party may benefit.

The most common terms for container shipments are EXW, FCA, CPT, and CIP. The table below defines each in the context of insurance liability.

Term	Definition	Insurance Policy Type
EXW	Ex Works (also known as ex-warehouse) – the buyer is responsible for loss or damage to the goods when the seller makes them available at the works or warehouse.	The buyer should insure the goods from the seller's works (warehouse) to their own warehouse.
FCA	Free Carrier (named place) – reflecting modern transport methods (e.g. multi-modal), risk transfers from seller to buyer when the goods are delivered to the carrier at their nominated consolidation point, if LCL, wharf or other location if FCL.	As risk transfers at the nominated point (not the ship's rail), insurance arrangements must follow this transfer of ownership.
CPT	Carriage Paid To (named place) – the seller delivers the goods to the carrier nominated by the seller at an agreed place.	This rule has two critical points: risk passes and costs transfer at different places. Both the place of delivery (where risk passes to the buyer) and the named place of destination must be clearly identified in the contract. Insurance policies must reflect this.
CIP	Carriage and Insurance Paid – similar to FCA but the seller must also arrange freight and marine insurance against loss or damage during carriage.	The seller should insure the goods from the seller's warehouse to the buyer's nominated location consistent with Institute of Cargo Clauses (A).

As a general rule, sellers should seek to insure as much of the carriage process as possible. If a buyer fails to insure adequately and payment under a documentary letter of credit or other contract of sale is not made, the seller may be left with goods in a foreign country or on the high seas with no insurance coverage.

In practice, sellers should quote on CIP terms and arrange insurance locally or alternatively arrange seller’s contingency insurance. An added benefit is the claims reporting service available from local marine insurers, which allows sellers to better manage their risk.