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Insurance in International
Trade
Insurance was originally applied to losses at sea. Every shipment
runs the risk of a long and dreary list of hazards: fire, storm,
collision, theft, leakage and explosions. Insurance is now provided
to cover almost any kind of occurrence that may result in loss.
Its purpose is to provide compensation for those who suffer from
loss or damage. In other words, it is a contract of indemnity, a
contract to restore to his original position a person who suffer
loss.
A contract of insurance is one between a party who agrees to accept
the risk (the insurer) and a party seeking protection from the risk
(the insured). In return for payment of a premium, the insurer agrees
to pay the insured a stated sum or a proportion of it should the
event insured against occur. Premiums are quoted as a percentage
of the sum insured.
If the proposal is accepted, the insurer is required by law to
issue a policy, which sets out the terms of the contract, including
the risk to be covered, the sum insured and the premium to be paid.
The basic instrument in insurance is the policy. A policy is a contract,
a legal document, and its principal function is to serve as evidence
of the agreement between the insurer and the insured. A policy must
be produced to press a claim in a court of law. An exporter also
must put up a policy as collateral security when he gets an advance
against his bank credit.
Below are the standard terms with comments on how they affect insurance
arrangement:
Ex Warehouse (or Ex Works, etc.):Buyer responsible for all
charges to destination and has to arrange insurance to cover the
goods from the time they leave the warehouse at the place of shipment
until their arrival at final destination.
FAS (Free Alongside Ship): Seller responsible for all charges
up to alongside ship. Buyer is responsible for all charges incurred
thereafter. Seller should insure to point "alongside ship";
buyer insures from that point to final destination.
FOB (Free on Board): Seller responsible for all charges
incurred and all loss and damage until goods placed on board the
vessel or other named carrier. Buyer responsible thereafter. Seller
should insure goods to point "FOB"; buyer must insure
from there to destination.
C&F (Cost and Freight): Seller responsible for charges
incurred up to port of final destination, but responsible for loss
or damage only until he delivers goods to custody of shipowner at
port of shipment or point FOB. Seller should have his own insurance
up to this point. Buyer insures goods from this point to final destination.
CIF (Cost, Insurance, Freight): Same as C&F, except
that seller provides insurance on the goods on terms current in
the trade up to final destination.
EST (Ex Ship's Tackle, or Ex Ship): similar to CIF in many
respects, but seller is responsible for loss and damage until he
delivers goods on deck at port of destination. Seller has to insure
goods up to this point.
FRC (Free Carrier): This term has been designed to meet
the requirements of modern transport, particularly such "multimodal"
transport as container, it is based on the same main principle as
FOB except that the seller fulfills his obligations when he delivers
the goods into the custody of the carrier at the named point. If
no precise point can be mentioned at the time of the contract of
sales, the parties should refer to the place or range where the
carrier should take the goods into his charge. The risk of loss
of or damage to the goods is transfered from seller to buyer at
that time and not at the ship's rail.
DCP (Freight or Carriage Paid to...): Like C&F, "Freight
or Carriage Paid to..." means that the seller pays the freight
for the carriage of the goods to the named destination. However,
the risk of loss of or damage to the goods, as well as of any cost
increases, is transferred from the seller to the buyer when the
goods have been delivered into the custody of the first carrier
and not at the ship's rail. It can be used for all modes of transport
including multimodal operations and container or roll on roll off
traffic by trailers and ferries. When the seller has to furnish
a bill of lading, waybill or carrier's receipt, he duly fulfills
this obligation by presenting such a document issued by the person
with whom he has contracted for carriage to the named destination.
CIP (Freight Carriage and Insurance Paid to...): This term
is the same as "Freight or Carriage Paid to...", but with
the addition that the seller has to procure transport insurance
against the risk of loss of or damage to the goods during the carriage.
the seller contracts with the insurer and pays the insurance premium.
Ex Quay means that the seller makes the goods available
to the buyer on the quay (wharf) at the destination named in the
sales contract. The seller has to bear the full cost and risk involved
in bringing the goods there. There are two "Ex Quay" namely
"Ex Quay (duty paid)" and "Ex Quay (duties on buyer's
account)" in which the liability to clear the goods for import
are to be met by the buyer instead of by the seller. Parties are
recommended always to use the full descriptions of mended always
to use the full descriptions of these terms, namely "Ex Quay
(duty paid)" or "Ex Quay (duties on buyer's account)"
DAF (Delivered at Frontier): This term means that the seller's
obligation are fulfilled when the goods have arrived at the frontier,
but before "the customs border" of the country named in
the sales contract. The term is primarily intended to be used when
goods are to be carried by rail or road but it may be used irrespective
of the mode of transport.
DDP (Delivered Duty Paid): While the term "Ex Works"
signifies the seller's minimum obligation, the term "Delivered
Duty Paid", when followed by words naming the buyer's premises,
denotes the other extreme the seller's maximum obligation. The term"
Delivered Duty Paid" may be used irrespective of the mode of
transport. If the parties wish that the seller should clear the
goods for import but that some of costs payable upon the import
of the goods should be excluded such as value added tax (VAT) and/or
other similar taxes-this should be made clear by adding words to
this effect (e.g. "exclusive of VAT and/or taxes").
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