Key takeaways
- The Incoterm decides who arranges cover, but the buyer still carries the risk of a loss that is poorly insured.
- Institute Cargo Clauses A, B and C cover different perils; A is the widest and C the narrowest.
- Insure the delivered value, including freight and duty where appropriate, not just the supplier invoice.
- Most failed claims come from inadequate packing, late notice or missing documents, not from the clause set.
Who buys the cover
The Incoterm sets the point where risk passes and the party responsible for insurance. Under EXW and FOB, the buyer generally carries the risk from the named place or once the goods are on board, so the buyer should arrange cover. Under CIF, the seller must arrange minimum cover, but the buyer can ask for more. Under DAP and DDP, the seller carries more of the route.
The minimum cover under CIF is not the same as the cover a buyer needs. It is usually Institute Cargo Clauses C, the narrowest set, at 110 per cent of the CIF value. That may be enough for a low value, stable cargo. It is rarely enough for high value electrical parts, precision components or a shipment that cannot be replaced quickly.
The practical rule is to insure the party that carries the risk, at the value that party would lose. If the buyer has paid for the goods and is waiting for delivery, the buyer has an insurable interest even before the goods arrive. Waiting for the seller's certificate to arrive is not a plan.
A, B and C: what each set covers
The Institute Cargo Clauses are the standard wording used in most marine cargo policies. Clause A is an all risks cover, subject to the exclusions in the policy. Clause B and Clause C cover named perils. The difference is not a matter of degree. A loss that is not listed in B or C is not covered, even if it was caused by something that feels like an accident.
Clause C covers the major catastrophes: fire or explosion, a vessel that is stranded, grounded, sunk or capsized, overturning or derailment of a land conveyance, collision, discharge at a port of distress, general average sacrifice and jettison. Clause B adds earthquakes, volcanic eruption, lightning, water entering the vessel or container, washing overboard and loss of a package overboard or during loading.
Clause A covers theft, non-delivery and handling damage that B and C exclude, unless a specific exclusion applies. That is why A is the usual choice for manufactured parts. A container of machined components can be damaged by a forklift, a dropped pallet or a rough transhipment without any of the catastrophes listed in C.
| Event | Clause A | Clause B | Clause C |
|---|---|---|---|
| Fire or explosion | Covered | Covered | Covered |
| Vessel stranded, sunk or capsized | Covered | Covered | Covered |
| Collision or contact | Covered | Covered | Covered |
| Earthquake, volcanic eruption or lightning | Covered | Covered | Not covered |
| Sea or river water entering the container | Covered | Covered | Not covered |
| Washing overboard | Covered | Covered | Not covered |
| Theft or non-delivery | Covered | Not covered | Not covered |
| Delay | Excluded | Excluded | Excluded |
| War or strikes | Excluded, separate cover | Excluded, separate cover | Excluded, separate cover |
This is a summary, not the policy wording. Exclusions and conditions in the actual policy take precedence.
The exclusions that matter
Every clause set excludes delay, even where the delay is caused by a covered peril. If a machine is held at port for three weeks and the buyer loses a customer because of it, the delay itself is not a cargo loss. The physical damage may be covered. The commercial consequence usually is not.
Inherent vice is another common exclusion. This covers a loss caused by the nature of the goods, such as a chemical change, corrosion that develops from the goods themselves, or a material that settles in transit. Inadequate packing is excluded too. If a pallet collapses because the cartons were not stacked or strapped for sea transit, the insurer may decline the claim even though the damage looks accidental.
War and strikes are excluded from the standard clauses and need separate cover. So are ordinary leakage, ordinary loss in weight or volume, and losses caused by the insolvency of the carrier. Read the exclusions before the shipment, not after a loss. The cheapest premium often sits on a clause set that will not respond to the most likely failure.
The cheapest premium can be the most expensive cover
A Clause C policy may save a small amount on freight and leave the buyer exposed to theft, water damage and handling loss.
What value to insure
The starting point is the CIF value plus 10 per cent. The 10 per cent is a conventional allowance for the buyer's expected profit and the cost of replacing the goods. It is not a rule that fits every shipment. If the buyer has paid duty, freight or inland costs that would be lost, those should be declared and added.
For a high value part with a long replacement lead time, the loss is not only the invoice value. It is the cost of the expedited replacement, the production delay and the customer penalty. Some of those costs can be insured through a contingent business interruption policy, but they are not part of a standard cargo cover. Do not assume the cargo policy pays them.
Packing is part of the cover
The insurer expects the cargo to be packed for the journey. That means the packing must withstand handling, stacking, vibration, condensation and the climate on the route. A carton that is adequate for a road journey may fail in a sea container that sweats for three weeks.
For metal parts, corrosion is a common loss. Use vapour barrier bags, desiccant and a controlled packing method where the route is humid. For precision parts, use separators and fixed locations so that the parts cannot rub. For heavy parts, use a pallet and strapping rated for the load. Photograph the packing method and keep the specification.
If the cargo is damaged, the insurer may ask for the packing to be inspected. A claim can fail because the packing was not fit for the transit, even if the carrier also handled the goods roughly. The packing record is part of the evidence, alongside the commercial invoice and the transport document.
The claims process
Notify the insurer or broker as soon as a loss is known. Many policies require immediate notice and a survey before the cargo is moved or repaired. If the buyer sells the damaged goods or repairs them without a survey, the insurer may not be able to assess the loss. Preserve the packaging and the damaged parts until the survey is complete.
Collect the documents: commercial invoice, packing list, bill of lading or airway bill, insurance certificate, survey report, repair estimate, photos and correspondence with the carrier. Keep the carrier's delivery receipt and any notation of damage. If the loss is partial, record the quantity and the value of the damaged and undamaged goods separately.
The claim is against the policy, but the insurer may pursue the carrier or the handler after paying. That is subrogation. The buyer should preserve the carrier claim and not sign a full release in exchange for a small credit. Check the time limits in the policy and the transport convention. A late claim can be rejected even when the loss is genuine.
- Notify the insurer before moving or repairing the cargo
- Photograph the packaging, the container and the damage
- Keep the delivery receipt and any carrier notation
- Obtain a survey report where the loss is significant
- Retain the damaged parts until the claim is settled
- Do not sign away the carrier claim without advice
Cover for small, high value parts
A carton of contacts, springs or machined connectors can be worth more than a pallet of castings. Theft and misdelivery are real risks, and the per kilogram value makes air freight common. The policy should match the mode and the value, not the weight.
For air cargo, check that the cover includes airport to airport handling and the final delivery. For consolidated shipments, check who is insured and at what point the buyer's interest begins. A forwarder's liability cover is not the same as cargo insurance. It usually has a limit per kilogram that is far below the value of the goods.
For repeated shipments, an open policy may be more practical than a certificate for each order. It covers all shipments within the agreed terms and removes the risk of forgetting to insure one. Declare the shipments as required and keep the declarations consistent with the invoices.
Frequently asked questions
What is the difference between Institute Cargo Clauses A, B and C?
Clause A is an all risks cover subject to exclusions. Clause B and Clause C cover named perils. C is the narrowest and covers major events such as fire, stranding and collision. B adds perils such as earthquake, water entry and washing overboard.
Who arranges cargo insurance under FOB?
Under FOB, the buyer generally carries the risk once the goods are on board and should arrange the main cargo cover. The seller may arrange export clearance, but the buyer should confirm the insurance position before shipment.
Does cargo insurance cover delays?
No. Delay is excluded under the standard clauses, even when it follows a covered event. The policy responds to physical loss or damage, not to the commercial cost of late delivery.
What value should I insure?
Start with the CIF value plus 10 per cent, then add freight, duty and other costs that would be lost. For high value or long lead time parts, consider whether a separate business interruption cover is needed.
Sources and further reading
- Institute Cargo Clauses (A), (B) and (C), 1 January 2009
- International Chamber of Commerce, Incoterms 2020
- Marine Insurance Act 1906
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