Modern international trade involves a series of transactions among various parties such as forwarders, shipping agents, carriers, terminal operators, banks and cargo insurers. Importers/exporters have to exercise considerable care in order to ensure that the purchase/sales transaction goes smoothly. Sometimes, a minor oversight or inadvertence may result in huge loss to them!

Question:
I have ordered shipment from an overseas country. Under the sales terms of FOB (Free on Board), I have an obligation to take out cargo insurance and this has been arranged under the terms as stipulated in Institute Cargo Clauses (A). My insurance agent explains that this is in effect an "All Risks" insurance with "warehouse to warehouse" cover. If loss/damage does not fall within the exclusions, then the insurer will pay. Unfortunately, owing to the negligence of the terminal operator at the loading port, my shipment fell into the sea at the time of loading and could not be recovered. But, to my great surprise, the insurer declined to pay! Why?

Answer:
While it is generally true that Institute Cargo Clauses (A) is an "All Risks" cover, the sales terms in question play a critical role in setting out the rights and responsibilities of sellers and buyers. This is especially important for determining both the point of transfer of property risk and which parties should bear the responsibility for arranging insurance at different stages of transit. The table below gives a brief summary for reference:

Even under Institute Cargo Clauses (A) with "warehouse to warehouse" cover, a seller will only be eligible for insurance cover from "warehouse to warehouse" if the goods are sold on a CIF basis.

In the above scenario where the sales term is FOB (equally applied to CFR/C&F situation), as the buyer only needs to bear all risk of loss or damage to the goods from the time they have passed the ship's rail, insurance commences at that point of risk transfer. Since the goods fell into the sea before the property risk passed (policy inception) to the buyer, apparently his/her insurer should not be liable for the loss. Instead, if the seller has arranged insurance for the transit of shipment from his/her warehouse up to the ship, he/she should be entitled to claim under that cargo policy. In the unfortunate event that the seller did not know or has forgotten that he/she should take out an insurance policy, which is not an uncommon occurrence, he/she may have to bear the risk of an unbearable loss!

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