Incoterms and risk transfer: where the goods stop being the seller's problem

Cost and risk are separate questions

An Incoterm does two jobs. It allocates tasks and costs between buyer and seller, and it fixes the point at which risk in the goods passes. Buyers often read the first job and assume the second follows the same line. It does not always.

A CIF price includes freight and insurance to the destination port, so it feels like a delivered price. The risk, however, passes when the goods are loaded on board at the port of shipment. If the vessel sinks in the Channel, the buyer owns the loss, subject to the insurance claim. The seller has already performed its delivery obligation.

That gap is the most expensive misunderstanding in the terms. It changes who claims on the carrier, who deals with the insurer and who carries the delay while a replacement is arranged.

Where risk passes under the common terms

The table uses Incoterms 2020. It assumes the named place is written correctly in the contract. A term without a place is an incomplete instruction.

The on board line

FOB, CIF and CFR all pass risk when the goods are on board the vessel at the port of shipment. Before that point, the seller carries the risk. After it, the buyer does, even though the goods are still at sea and the buyer has no control over them.

The on board line is why the bill of lading matters. An on board bill of lading is evidence that the goods were loaded, and it is the document a bank usually wants under a letter of credit. A received for shipment bill is not the same thing, because it can be issued before loading.

For containerised cargo, the practical handover often happens at a terminal rather than over the ship's rail. That is one reason FCA is a better fit for many container shipments. Under FCA, risk passes when the seller delivers the goods to the carrier at the named place, and the Incoterms 2020 on board option can still support an on board bill where the credit requires it.

The on board line also decides who deals with the carrier after a loss. If the goods are damaged in transit, the buyer is the party with the claim, even though the seller arranged the carriage under CIF. The buyer may have no contract with the carrier and no direct relationship with the insurer. That is why the documents and the insurance certificate must be passed on promptly, and why a claim can take longer than the buyer expects.

Insurance has to match the risk point

Under CIF and CIP, the seller must arrange insurance. The minimum cover under CIF is stated in the term, and it is not full cover for every loss. The buyer should check the cover, the deductible, the exclusions and the insured value before assuming a claim will be paid.

Under FOB and FCA, the buyer arranges insurance. The buyer needs cover from the moment risk passes, which may be before the goods are loaded. A policy that starts when the goods arrive at the destination port leaves a gap exactly where the exposure sits.

Insurable interest is a separate requirement. A buyer cannot insure goods it does not yet own an interest in. In practice, the contract and the risk point establish that interest, so the policy and the Incoterm must be read together. Ask the broker to confirm the attachment point in writing.

The inspection gap

When risk passes at the port of shipment, the buyer may never see the goods before they are at sea. Any damage that happened during loading or inland transport is the buyer's loss. A pre-shipment inspection becomes the only practical protection, and it has to happen before the risk point.

Under DAP or DDP, risk stays with the seller until the goods reach the named place. That is a different problem: the seller carries the transit risk, and the buyer may still need to inspect on arrival before unloading. The risk point is at the buyer's disposal, so damage found after unloading can be harder to attribute.

The lesson is to place the inspection where the risk sits. Under FOB, inspect at the supplier or at the port before loading. Under DAP, inspect at arrival before signing for the delivery. The document trail should show when the inspection happened and what was found.

A third party inspection can be useful, but the report has to be specific. A statement that the goods were visually checked does not prove the dimensions, the material or the function. Agree the inspection plan and the acceptance criteria before the visit, and make the report part of the payment or shipping release.

Title and payment do not follow the risk point

Incoterms do not deal with title. They do not say when ownership passes, and they do not set payment terms. A contract can pass risk at the port and title on payment, or the other way round. The two are separate clauses.

That matters when a shipment is damaged or delayed. The party carrying the risk may not yet own the goods, and the party that owns them may not be the one insured. The bill of lading, the payment term and the sale contract decide who has the right to claim and who bears the loss.

Write the title clause explicitly. If payment is against documents, state when title passes and what happens if the documents are rejected. If the buyer arranges insurance, confirm that its interest exists at the attachment point.

The unloading question

DAP and DDP place the goods at the buyer's disposal ready for unloading. The buyer unloads. That sounds minor until the goods arrive on a vehicle the buyer cannot unload, or the driver refuses to wait. The cost and the risk of the unloading operation sit with the buyer, and the seller's delivery obligation is complete before the pallet is on the ground.

Under FCA at the seller's premises the seller loads, and under FOB the seller delivers on board. The loading obligation moves with the term. A buyer that assumes the seller will always unload is adding an obligation the term does not give.

Write the unloading point and the equipment into the contract. If the buyer needs a tail lift, a crane or a forklift, say who provides it. If the delivery is to a site with restricted access, confirm the vehicle size before shipment. A failed delivery can cost more than the freight, and the risk of that failure sits on the party that chose the delivery point.

A practical review before you accept a term

Read the term as a set of four answers: who arranges carriage, who clears export, who clears import and where risk passes. Then check that the price, the insurance and the payment documents all assume the same answers.

It helps to draw the route on one page and mark the handover points. The drawing exposes gaps that a clause list hides, such as a leg with no insurance or a terminal charge that nobody has priced. A simple line with the risk point and the cost point marked is more useful in a review than a page of definitions.

• Name the place precisely, not just the country.
• Confirm the risk point and the insurance attachment point.
• Check who files the export and import declarations.
• Match the transport document to the letter of credit.
• State when title passes, separately from risk.
• Check the unloading obligation at the named place.