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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Guillermo C. Jimenez
Each of the primary modes of international transport (sea, air, road/rail, and multimodal) relies on a different set of commercial practices, freight calculations, and standard documents.
Although traders in specific sectors may rely primarily on one mode of international transport, there are a number of reasons for being familiar with commercial practice in all of them.
First of all, international trade customs have derived from traditional practices in transport by sea. The letter of credit initially developed in tandem with sea shipments, so a deeper understanding of letter of credit practice is achieved with a knowledge of commercial practice in sea transport.
When there are difficulties in delivering goods through a particular mode of transport, as for example through lateness in the exporter’s preparation of a shipment, it is often necessary to have recourse to a faster, if more expensive, mode of transport, such as air transport.
Many exporters and importers continue to base their commercial practice on traditions inherited from the days of sea transport even though the bulk of their shipping is multimodal or by some method other than sea. It is therefore important to understand the reasons for using a different set of Incoterms® rules when shipping via multimodal or air transport rather than sea transport (for example, because different documents are called for).
Worldwide, maritime transport carries more international trade than any other mode. Much of international transport law and practice, even with regard to other modes of transport, is derived from long-standing practices in the carriage of goods by sea. Traders should therefore have a basic familiarity with sea transport.
A typical process begins when the shipper concludes a contract with the consignee (importer). The shipper contacts a freight forwarder to arrange the transport. The forwarder will make enquiries to determine the dates and places of sailing of suitable ships. Frequently, the forwarder will do this by contacting loading brokers, who are agents of shipowners, and who market the shipowners’ available space.
Loading brokers handle logistics from the carrier’s side. They advertise the dates of sailing, supervise loading and consult with shipowner’s cargo superintendent with regard to the stowage (packing of goods in the ship’s hold). In practice, it is not uncommon for a single forwarding firm to act as both forwarding agent and loading broker, although these tasks are usually handled by separate departments.
Commonly, the forwarder will reserve space on a particular vessel, then will appropriately fill in a set of pre-printed bills of lading (a “set” comprises from two to[Page180:]four identical originals). Most shipowners or carriers print their own bills of lading and make these freely available. The forwarder will indicate on the draft bill of lading all necessary information, including the identity of the consignee, a description of the goods — which includes shipping marks (visible identification markings on the packages) — and details regarding the payment of freight.
The shipper, with the forwarder’s assistance, will make sure that the goods are either delivered alongside the ship or into the care of a port terminal, storage shed or warehouse. When the goods are delivered, the shipper will customarily receive a receipt document such as a mate’s receipt, dock receipt, cargo quay receipt or wharfinger’s note.
The shipowner will record the details of the goods received, as well as any important defects or damages, on the mate’s receipt. This is important, because the bill of lading will be based on information from the mate’s receipt. If the mate’s receipt indicates damaged goods, then the shipowner will not issue a “clean” bill of lading which, as we have seen, is generally necessary for the shipper to obtain payment under a letter of credit.
The shipowner will compare the details of the goods as loaded (recorded by the shipowner’s clerks) with the draft bills of lading that the forwarder or shipper has provided. Provided the details match and the goods do not exhibit damage or defects, the shipowner will issue the completed and signed clean bills of lading. The information from the bills of lading is also recorded on a register carried by the ship itself, called the ship’s manifest.
Once the goods have been loaded and the shipper has, in addition, obtained a marine insurance policy (in CIF shipments, with buyer as policy holder) and prepared a bank draft, the shipper is able to assemble a set of shipping documents. This bundle of documents serves as the hub of many international payment and finance mechanisms. Control over the goods can be freely transferred by endorsement of the bill of lading. Endorsement is effected when the party holding the bill of lading and wishing to make the transfer signs the back of the bill of lading. The signature may also be accompanied by directions to deliver to a specific person.
When the goods arrive at the port of destination, the ship’s master will deliver the goods to the first party who presents an original bill of lading. Commonly, the importer will present the bill of lading to the ship’s agent, who will then issue a delivery order; the importer then uses the delivery order to obtain release of the goods.
It is not uncommon for the goods to arrive before the bills of lading have been processed through the payment system and received by the importer (the consignee). Since a delay in receiving the goods may result in penalties or storage charges, the consignee may ask its bank to issue a letter of indemnity (“LO I”) to the shipowner, which will protect the shipowner in the event that it incurs liability for delivery to the wrong person. The shipowner will then release the goods against the letter of indemnity. In some sectors, such as the oil trade, this practice is common.
> Conferences, Tramps and Outsiders
Conferences are groups of shipping companies serving specific ocean routes and ports. They fix and publish common freight rates and adhere to quality standards and regular shipping schedules. Because they function much like cartels, which are prohibited by the anti-trust or competition law of many countries, conferences have obtained specific exemptions from such laws.
Shipping companies that are not members of conferences are called outsiders. Outsiders are not obliged to adhere to conference freight rates nor observe their quality standards and shipping schedules. However, certain large outsiders are able match the quality and regularity offered by the conferences. Outsiders tend to offer lower freight rates than conference members.
Tramps are vessels for hire. Their services are marketed through brokers, and freight is negotiated on a case-by-case basis.[Page181:]
Since the 1990s, there has generally been a trend by carriers toward the use of individual confidential contracts rather than common freight rates. Carriers increasingly recognize that price fixing is no longer required in today’s market conditions, and shippers look forward to an era of customer-focused relations with carriers. The European Commission repealed the anti-trust immunity it had provided shipping conferences, with the repeal effective as of October 2008. Anti-trust immunity provided to ocean carriers is also under review in other regions. However, there are still conferences operating in other parts of the world, including in the Trans-Pacific trade, which consists of very important trade volumes.
> Freight Charges
Freight is the price the carrier charges for carrying the goods to destination. The amount of freight is most commonly calculated according to either the weight or volume (e.g., per tonne or cubic metre) of the cargo, whichever is most favourable for the carrier. Commonly, the carrier will provide alternative freight rates based on a standard ratio between volume and weight. If the goods exceed the ratio of volume to weight, the freight is charged according to volume; otherwise, freight is charged according to weight. Other possibilities are for the freight to be calculated per unit or parcel, or relative to the value of the cargo.
> Surcharges (BAF and CAF)
Sea carriers commonly levy certain surcharges on the basic freight. The most common surcharges are the Bunker Adjustment Factor (BAF), which allows the carrier to adjust freight according to fuel price fluctuations, and the Currency Adjustment Factor (CAF) for fluctuations in the exchange rate of the currency in which the freight is quoted. While the basic freight is usually fixed for periods up to six months or one year, the CAF and BAF are subject to overnight revisions. Consequently, exporters should consider including price adaptation clauses in their sales contracts for CAF and BAF adjustments. Other common surcharges are levied for cargo that is exceptionally long or heavy.
> Freight Prepaid and Freight Collect
Under CIF contracts, the price includes carriage to the port of destination. The freight may either be prepaid by the seller or paid by the buyer on arrival under a “freight collect” bill of lading.
> Cargo Handling
Charges will commonly arise when goods arriving in the port area by truck or lorry are unloaded and transferred to storage sheds or brought alongside the ship. These charges are generally not included in the freight and will therefore be paid either by the exporter or importer according to the Incoterms® rule selected (see section on the Incoterms® rules).
> Liner Terms
Before agreeing to a given freight rate, the shipper will want to know whether the loading and unloading of the goods is included in the freight. The answer will depend on the particular “liner term” offered by the shipping line. Again, since Incoterms® rules such as FOB, CFR and CIF divide the costs and risks of loading at the point at which the goods are deemed on board the vessel, it is important that the Incoterms® rule chosen in the contract of sale accord with the liner term specified in the contract of carriage (see Chapter 4 on the Incoterms® rules).
It is crucial that traders understand the distinction between liner terms, as part of the contract of carriage, and Incoterms® rules, which are part of the contract of sale. Liner terms govern the contractual relations between shipper and carrier, whereas the Incoterms® rules govern the relationship between seller and buyer. A trader that has the responsibility for carriage should look first to the contract of sale to see whether the chosen Incoterms® rule sets a clear rule with regard to loading or unloading. The trader, acting as shipper, should then make sure when procuring a contract of carriage that any liner terms in it do not conflict with the contract of sale’s Incoterms® rule.[Page182:]
There are many variations for quoting liner term freight rates. Commonly, however, particular liner terms correspond to freight which covers transport beginning and/or ending 1) on the quay, 2) under ship’s tackle and 3) on board the vessel. Each of these three variations can be found upon both loading and unloading (since these can be freely combined, there are at least nine basic variations; moreover, since port and conference customs vary widely, the practical number of variations is very high).
> Ex Quay
> Loading the carrier’s responsibility extends to loading goods brought anywhere within the area alongside the ship. What exactly is meant by “alongside the ship” may vary according to port custom.
> Unloading the carrier’s responsibility includes lowering the goods to the quay, sorting the goods into different consignments and, in some cases, storage under cover or in shed.
> Under Ship’s Tackle
> Loading the shipper must bring the goods directly under the crane or derrick that will hoist the goods on board; in particular, the goods must be taken out of any storage shed on the quay.
> Unloading the carrier will unstow the goods and place them on the ship’s deck; all other operations, including lowering the goods to the quay and sorting them, are for the shipper or consignee.
> On Board (also called “free in”, “free out”, or “free in and out”)
> Loading - “free in” the carrier only makes the ship available; the shipper must hoist the goods on board and stow them in the ship’s hold.
> Unloading -“free out” the carrier only brings the ship alongside the quay; the shipper or consignee pay for having the goods unstowed and lowered to the quay.
> “Free in and out” under this variation, the carrier will handle only the stowing and unstowing of the goods.
> Stevedoring
In many cases, private contractors called stevedores will take care of all cargo handling operations and will bill them, according to the particular shipment, either to the carrier, the shipper or the consignee. Stevedores will not normally split the charges between shipper and consignee. This caused problems in the past with respect to the FOB, CFR and CIF Incoterms® rules, which, prior to the Incoterms® 2010 revision, required that costs be divided at the ship’s rail. The troublesome ship’s rail was changed to the current rule, which provides that costs and risks are divided at the point when the goods have been loaded on board the vessel.
Although not all containerized transport is multimodal, and vice versa, they are so often inter-related that it is useful to consider these two concepts together. When, as is common in international trade, goods move from seller to buyer through two land legs and one sea leg, the advantages of using the container become evident. Not only is the container transferred with ease from one leg to the next, the risks of damage and theft are greatly reduced.
Containers are basically large boxes, 8 x 8 feet in cross–section, and either 10, 20 or 40 feet long. The first all–container ship came into operation in the Pacific in 1956. In 1965, the first container vessel docked in Europe. The spread of containerization throughout the world progressed with breathtaking speed. Today, each of the world’s major ports handles millions of containers per year.
Container volumes are measured in TEU’s (Twenty-foot Equivalent Units); this does not mean that all containers are 20 feet in length (many are 40 feet or more), but only that the total load is measured in 20-foot units. The standardization of containers allows for great automation of loading and transhipment, so that port operations that used to[Page183:]take days are now completed in hours. Shippers should always be careful to demand the internal measurements of the type of container they plan to use, so that the packaged or unitized goods can be prepared so as to properly fit the container.
In light of the considerable importance of containerized shipment in international trade, ICC has seen fit to adapt its Incoterms® rules to container traffic. Thus, it introduced rules which are specifically appropriate to containerized and multimodal transport:
> FCA (Free Carrier), which can be thought of as the containerized/multimodal equivalent of FOB;
> CPT (Carriage Paid To), which can be thought of as the containerized/multimodal equivalent of CFR; and
> CIP (Carriage and Insurance Paid To), which can be thought of as the containerized/ multimodal equivalent of CIF.
The importance of using these newer Incoterms® rules is linked to questions of insurance cover and division of costs. Since container shipments are frequently taken over by the carrier at the shipper’s premises or at container terminals, which are remote from the port of departure, it does not make sense to divide risk (and therefore, insurance coverage) at the ship, as is done under FOB, CFR and CIF.
If a shipper uses FOB or CIF for containerized shipments delivered to an inland transport terminal, it will have to be careful to provide for insurance cover for transport from the inland terminal to the ship’s hold. It may happen that the goods are damaged or lost after handing over at to the inland terminal and before loading in the port of departure. In such a case, a shipper that has only insured transport up to the inland terminal could find itself without possible recourse via an insurance claim.
Moreover, with regard to costs, a shipper that hands the goods over to the carrier at the shipper’s premises will prefer not to absorb the costs all the way to the ship, and will therefore prefer FCA to FOB.
As with traditional cargo shipments, container shipments are frequently arranged by freight forwarders. There is a basic distinction between shipments that fill a full container load (FCL) and shipments for a less-than-full container load (LCL).
> Full Container Loads (FCL)
In the case of FCL shipments, an empty container is taken out of a stack in a container park and sent to the exporter’s premises, where it is loaded or “stuffed” with the goods. After the container has been stuffed, it is closed with the carrier’s seal. Theft or pilferage of the goods in transit will normally be indicated by a broken seal. Sophisticated electronic seals on containers have become available to help protect valuable goods.
> Less Than Full Container Loads (LCL)
In the case of LCL shipments, the exporter delivers the goods to a container terminal, where the cargo is grouped together with other cargo sufficient to stuff a container. At a terminal near the destination point, the cargo is unloaded from the container and broken down into separate consignments.
There are two separate cost elements — the rental of the container and the freight. Frequently, the rental of containers provided by the carrier is included in the freight. In other cases, however, the shipper will lease the container. Shippers are advised to take care as to the time period allowed under the lease contract, because these contracts often provide for liquidated damages in the case of containers returned late.
Container freight charged by shipping lines in conferences is generally linked to the type of goods shipped, whereas outsiders tend to charge a flat rate per box.[Page184:]Containers are usually delivered in the port area to a terminal that charges a fixed amount for handling the container and moving it to the ship’s side. At the port of departure, the terminal charges are often referred to as container service charges, whereas at the port of destination they may be called terminal handling charges; in practice, the terms are employed interchangeably.
Air transport has profoundly accelerated the pace of international business. Indeed, international trade in certain kinds of merchandise would not exist were it not for the rapidity of air transport. Highly time-sensitive goods or highly perishable goods (such as fresh flowers or seafood) would not be available at all in many markets if it were not for air transport. The speed of air transport also reduces exposure to risk so substantially that goods of great value (such as jewelry, pharmaceuticals and medical supplies, prize livestock, art works or manuscripts) will usually move by air.
Air freight is said to account for only 1% by weight, but 10% by value, of all goods transported. However, even with regard to products for which distribution is not so time-sensitive, air transport is deceptively competitive.
Although air freight rates are much higher than ocean rates, air shipments can provide savings with respect to other crucial costs:
> Insurance premiums are generally less than half those for sea transport (e.g., 0.3% of cargo value as opposed to 0.7%);
> Customs duties may be charged on gross weight, which is generally lower for air shipments (less packaging) than for sea shipments;
> Packaging much lighter and cheaper for air transport;
> Inventory costs in many cases, air transport can greatly reduce and even eliminate the need for warehousing, which would be necessary with sea transport; since warehousing costs include, not only the leasing of warehouse space at either end of transit, but also related tax and insurance costs, as well as the cost of goods which become obsolescent while stored in the warehouse. This cost factor can be decisive in favour of air transport;
> Financing costs for shipments in which the buyer’s payment obligation is triggered by delivery to the buyer’s premises, the seller will receive payment much sooner with air transport.
Even in those cases where the cost of sea transport is lower, for competitive reasons the seller may prefer to use air transport. Thus, an export seller of spare parts may find that it cannot compete against domestic sellers unless it matches their delivery speeds, which can only be done with air transport.
Air freight is either shipped:
> Along with luggage in passenger planes;
> In hybrid aircraft with special compartments for cargo, known as combis; or
> In cargo aircraft.
In the past, many shippers quoted “FOB Airport” prices for air shipments. This often caused misunderstandings with respect to airport handling charges and the extent of insurance coverage. The FOB (free on board) rule was developed in maritime trade, and the application of principles derived from sea transport was not appropriate. Consequently, ICC discontinued the FOB Airport rule in 1980. ICC recommends that shippers use the FCA Incoterm® rule instead, with the specified point of delivery being the named air freight or consolidator’s terminal.
The International Air Transport Association (IATA) oversees a worldwide cargo agents’ organisation, to which many forwarders adhere. Appointment as an IATA air cargo[Page185:]agent allows a forwarder to market air cargo services, knowing that IATA airlines will carry the goods for a fixed price and with a commission for the forwarder. IATA agents must demonstrate certain financial and cargo-handling resources, and must agree to remit to the air carrier freight billings according to fixed schedules.
Air carriers may provide forwarders with air waybills (AWBs) featuring the airline’s logo. As with other non–negotiable transport documents, the AWB is both a receipt for the goods and a contract of carriage. In some countries the AWB system is computerized, and the air carriers only issue AWB numbers to forwarders, leaving the forwarder to print out the AWB number and airline logo on a form known as the Neutral AWB.
Forwarders acting as consolidators may issue AWBs in their own name as carriers, in which case their role can be likened to that of NVO CCs (Non-Vessel Operating Common Carriers) in sea transport. By consolidating — grouping — several consignments together, forwarders are able to obtain the lower freight rates offered by carriers for large shipments. In this, the air consolidators perform a groupage function like that of container shipping terminals. Consolidators may provide highly efficient warehouse services upon departure, and upon arrival may handle the notification of the consignee by telephone. In addition, consolidators often offer a door-to-door service, which includes customs clearance and insurance coverage.
Air cargo containers corresponding to the shape of the plane’s cabin are known as unit load devices (ULDs). There are various shapes and sizes of ULDs (some are called “igloos”), each designed to be stored in a different part of the airplane. Cargo is handled primarily by pushing or pulling of pallets and ULDs, which move over systems of rollers. Since ULDs are usually stuffed in terminals at or near the airport, it is possible for cargo delivered to an air terminal to be shipped on a departing flight within two hours. The actual loading or unloading of cargo can take less than one hour.
Some airlines offer “guaranteed shipment times” or dates, which eliminate the risk to the shipper that its cargo will be delayed as a result of being forced off a particular flight to make room for special high-priority items. Although the extent of the guarantee varies from airline to airline, it is generally useful for the shipper to request one, in particular because some airlines make such guarantees at no extra charge.
Since shipments of hazardous goods can, in some cases, jeopardize the safety of the entire aircraft, regulations on restricted articles are strictly enforced. IATA publishes an annual update of these regulations. In many cases, cargo is allowed, provided that it is appropriately packaged and “hazard” labels are affixed. Both shippers and forwarders must be quite careful in assuring that all declarations relating to potentially hazardous cargo are complete and correct; failure to do so can result in the application of heavy penalties.
IATA once played a major role in setting international air freight rates, but this role was progressively eliminated due to concerns that IATA or IATA members were acting as a price-setting cartel.
The total number of vehicles engaged in road haulage worldwide dwarfs the number for any other transport method. In 2014 the total number of commercial vehicles in service worldwide was over 300 million and in the U.S. alone over 9 million people were employed by the trucking sector.
The great advantage of international road haulage is that it offers the possibility of true door-to-door service with no transhipment whatsoever. Moreover, loading at point of departure and unloading at destination require relatively little in the way of specialized equipment — a loading platform and a steel sheet “bridge” are often all that is needed. Articulated vehicles (a lorry or truck which pulls a container-trailer) are particularly well-suited to roll-on roll-off (Ro-Ro) ships, which allow for safe and simple transfer[Page186:]from land to sea and back again to land. In addition to this great flexibility, road vehicles can carry as much as 45 tonnes, although national regulations may set a maximum limit.
As with sea and air transport, specialized forwarders offer consolidation services for road transport. Their services can involve grouping small consignments, warehousing, and integrating several modes of shipment so as to offer a door-to-door price. Sophisticated integrators today offer many computerized services, including monitoring of the progress of the shipment from departure to destination. In addition, many of these integrators offer express services featuring guaranteed delivery dates.
Rates vary widely from country to country. One reason is that labour rates for drivers will correspond to the prevailing wages in the particular country.
As with sea and air transport, road freight is generally calculated by weight but subject to a volume-weight ratio. For road transport this ratio falls between the ratios for sea (1.33 to 1) and for air transport (6 to 1), generally in the area of 3. Thus, if the volume in cubic metres is more than three times the weight in kg, freight will be set according to a “theoretical weight” in kg calculated by dividing the total volume in cubic metres by three.
> International customs carnet for road haulage
The TIR (Transport International Routier) Carnet is very similar in function to the ATA Carnet “passport for merchandise”, except that the TIR Carnet was created to allow trucks or lorries carrying international cargos to pass through intervening countries (provided they are signatories to the TIR Convention) without having to go through customs control procedures.
While road and air transport have boomed for half a century, rail transport has declined. As compared with road transport, rail transport is much less flexible in terms of the total number of shippers and consignees that can be directly reached. Moreover, loading is generally not so easy. Since different countries may use different rail widths or gauges, as well as different tunnel clearances, international consignments can be complicated and require transhipment.
However, for certain classes of shippers or cargo, rail remains the indicated transport choice. Railway wagons can carry cargo of tremendous weight. Certain special flat-bed rail trucks can carry up to 500 tonnes. Consequently, rail is often the preferred choice for bulk transport of industrial ore and liquids. Moreover, when both shipper and consignee have private rail sidings (direct connections from warehouses to rail lines) rail shipments can provide the most straightforward door-to-door service. Additional flexibility has resulted from the development of road-rail schemes, under which, for example, a road trailer arriving from a roll-on roll-off ship is placed on a rail wagon and transported to destination by rail.
In contrast to other modes of transport, railway freight is generally not subject to a volume-weight ratio. Railways generally offer two sets of rates for full wagons, one for express service and one for slow goods service. In terms of price per unit of weight, railway freight is quite competitive.
Almost without exception, international trade shipments are insured against damage or loss in transit by some form of cargo insurance. Depending on the Incoterms®rule chosen and any express insurance provisions in the contract of sale, either the exporter or importer may have the primary responsibility to insure. In some cases, both parties[Page187:]will have the cargo insured to varying extents. The variety and complexity of possible permutations is such that no exporter or importer should do without the counsel of an insurance agent or broker.
Many small traders have insurance cover arranged by their freight forwarder. Alternatively, the trader may have a long-term “open” or “floating” cover with the insurance company, which will cover a number of shipments over a given period of time. In other cases, the trader will directly insure a particular shipment via a marine, aviation or overland insurance policy. Despite their names, such insurance policies are generally not limited to insurance for only the marine, air or land legs of transit, but can each be extended to cover the goods “warehouse-to-warehouse”.
An initial distinction must be made between the contractual duty to insure and the commercial need to insure. Thus, under CIF and CIP Incoterms® rules, the exporter has a contractual duty to the importer to provide a minimum level of insurance to cover the goods during international transit. Under all other Incoterms® rules, there is no contractual duty for either side to provide insurance (although the parties may freely stipulate any additional insurance requirements in the sale contract).
However, in most cases the absence of a contractual duty to insure does not remove the obvious practical need to obtain insurance. The parties will normally obtain insurance coverage to protect themselves as a matter of ordinary commercial prudence. At a minimum, they will wish to be insured during that part of transit during which they are at risk. Each Incoterms® rule fixes a point for the transfer of risk from seller to buyer; before that point, the seller is at risk and will wish to be insured; after that point, the buyer is at risk and will wish to be insured.
It might seem reasonable that parties will only wish to pay for insurance coverage for that part of the transit during which they were at risk. If we take the example of an FOB shipment, transfer of risk is on board the named vessel. Since the seller is at risk up to that point, it might reasonably wish the cargo to be insured by itself up to the ship’s hold, and no further. It has no contractual duty at all to insure the goods up to the ship’s hold, but will normally do so out of self–interest. Likewise, the buyer might desire that its insurance coverage should begin at the ship’s hold, and no earlier.
However, since insurance coverage is most often warehouse-to-warehouse, it is not a common practice to split insurance coverage at the transfer of risk point. Splitting insurance coverage, each side seeking only to insure its own interest for its leg of the transport, has several disadvantages. First, there is the risk that the two insurance covers will not match up exactly, leaving a gap — a portion of the transport chain where there is no insurance cover. Second, if loss or damage is only discovered upon arrival, it may be difficult to prove where the loss or damage occurred (and therefore, under which policy), with the result that both insurers may be able to avoid payment. Finally, two separate partial insurance covers are generally more expensive than a single warehouse-to-warehouse cover for the entire transit.
Case ExampleConsider an FOB or CFR seller on open account terms who will only be paid after the goods are received by the buyer. Such a seller would be unwise to insure only the transit leg prior to the transfer of risk point (on board the named vessel in the port of shipment). If the goods are lost or damaged after the transfer point, the buyer may refuse to effect payment, leaving the seller without coverage. The seller would have to file a lawsuit rather than a somewhat simpler insurance claim.
It would therefore seem preferable for one of the parties to obtain continuous coverage for the entire transit, warehouse-to-warehouse, from a single insurer. However, this is not always possible. By law, many countries require that their importers and exporters insure transport risks with domestic insurers. Also, many traders already have long-term marine cargo insurance under a floating policy or open cover (discussed further on). Moreover, some traders may be reckless enough to wish to do without insurance cover for their leg of transport.[Page188:]
Even in those cases where the other party has taken out a warehouse-to-warehouse policy, the coverage may be for an insufficient amount, or may exclude certain likely risks. The trading partner in such a case may wish to take out supplementary “gap” or “difference in conditions” or “contingency” insurance.
As can be seen from the foregoing, traders should carefully consider how much insurance coverage they need, and for what portion of the transit they need coverage. They should consider whether insurance coverage provided under minimum standard terms such as the Institute Cargo Clauses is sufficient for their purposes, and if not, they should consider amplifying or increasing the coverage. If the other party has procured insurance, they should also consider whether it is sufficient, or whether it should be complemented with contingency insurance.
Traders should review with their insurance agent or broker, as well as their trading partners, the various options for obtaining such coverage. Finally, they should stipulate precisely in the contract of sale the desired level of coverage and who must pay for it.
Regardless of who takes out the insurance policy, a party can only recover under a claim on a policy if it has an “insurable interest” in the goods at the time they were damaged or lost. Roughly, this means that a party must have ownership or some other interest (including risk) in the goods in order to claim under the policy. Generally speaking, the seller will have an insurable interest in the goods up to the transfer of risk point, and the buyer will have an insurable interest thereafter. However, there are exceptions to this rule and, in some cases, one of the parties will assign its rights under the policy to the other party.
Open cover and floating policies are intended to cover multiple shipments over a period of time, and therefore only state the general conditions of the insurance contract. In each case, the insured party notifies the insurer of the specific voyages to be covered under the policy. Open cover may also be taken out by forwarders or carriers, who then use it to cover specific consignments for their clients.
Under a floating policy, the value of the risk insured on each voyage is deducted from the total value of the insurance contracted. Under an open policy, the insurance limit is automatically renewed after each voyage.
In some cases, such as those involving payment under a letter of credit, the shipper may need to have an insurance document included in the set of shipping documents. Under an open policy, this is accomplished by the use of insurance certificates, which are issued by the insurers at the instruction of the insured party. Traders should take care, because a letter of credit that explicitly requires submission of an insurance policy will not allow an insurance certificate as a substitute.
Insurance premiums vary widely according to the mode of transport and the nature of the goods. Premiums for air shipment are generally the lowest, in the area of 0.3% of the value of the goods, while the highest are for long road or rail transport legs (especially in developing countries), which in exceptional cases may be up to 2%. Sea transport premiums are commonly in the range of 0.6%-0.7%.
Only two Incoterms® rules, CIF and CIP, specifically require insurance. Under these terms, the seller must take out an insurance policy for the buyer. The minimum amount of coverage is set at 110% of the value of the goods, and the conditions of the coverage are specifically those set out in the Institute of London Underwriters Cargo Clauses. The Institute of London Underwriters is a professional association of insurance companies; there are three standard clauses, known respectively as Institute Cargo[Page189:]Clauses A, B and C. These clauses define the risks covered by the insurance policy and were intended to replace and improve the previously common clauses known as all risks, with average (WA) and free of particular average (FPA).
Institute Cargo Clause A provides the broadest coverage; therefore, it is sometimes considered to provide “all risks” cover. However, such terminology is deceptive, because several important risks are not covered by Clause A, notably the risks of strikes or war, as well as damage resulting from insufficient packing, delay, ordinary wear and tear of transport or the insolvency of the carrier, amongst others. Clauses B and C are even more restrictive, covering only risks that are specifically referred to.
Under Incoterms® rules, the seller may choose a policy under Clause C, which provides the least coverage. Importers should therefore be forewarned that in cases where such minimum coverage is insufficient, they will need to specify in the contract the level of additional insurance they require. For example, if the importer expects to earn a high profit margin on the goods, coverage of 110% of the value of the goods may be insufficient; 120% or 130% may be advisable (although this will obviously raise the cost of the premium).
One solution is to provide a specific clause in the contract of sale setting out the scope, time and extent of insurance coverage, and particularly whether coverage will extend to risks of strikes, riots and civil commotion (called “SRCC” coverage; an example of such a clause is set out in the Chapter 4 on the Incoterms® rules).
Test Your Knowledge: International Logistics
True/False
Answers: 1. F 2. F 3. T 4. F 5. F