Cargo insurance under CIF contracts: what should the parties to pay attention to?
Today CIF has a solid status of the most popular and convenient standard conditions applicable for international trade contracts with sea transport involved.
Traders benefit from CIF terms because:
• The risks concerning cargo shall be borne by the seller only until actual shipment on board of the vessel. So the seller is not obliged to control over cargo quality and safety directly during transportation. It is only important to make sure that cargo quality and quantity corresponds to the contractual values at the moment of shipment;
• Carriage by sea shall be organized and paid by the seller, so the buyer is not burdened with logistics issues;
• The seller is obliged to insure the cargo, so the risk of cargo destruction/damage will be covered by insurance payment, whereunder both parties to the contract may avoid direct losses.
Let us talk about cargo insurance on CIF delivery terms.
Despite the seller is obliged to insure cargo, it is obviously important to avoid risks both for the seller and for the buyer. Therefore, the parties to the contract should pay attention to potential risks in advance.
Principal function of insurance contract is to insure any item for a certain period. Unfortunately, Interlegal practice shows that sellers under CIF contract do not always remember the importance of cargo insurance term and do not pay due attention to this issue, which often causes serious losses. In practice, it is important for the seller (and this is often enough) to confirm only the fact of insurance, i.e. to fulfill formally one of its contractual obligations under CIF terms.
But you should not forget that insurance shall cover at least the cost stipulated by the contract plus 10%, i.e. 110% of the goods value. Insurance shall also cover the goods from shipment place (i.e. port of departure under CIF terms) to port of destination.
Case study: validity term of cargo insurance under CIF contract expired before the date of cargo delivery to the port of destination. The cargo arrived at the destination place in unsound quality, but the insurance company rejected reimbursement of appropriate losses in favor of the buyer, with reference to the fact that insurance agreement did not cover the whole term of the contract on carriage by sea.
Having analyzed arguments of the insurance company and terms of the insurance policy, we found out that the insurance company’s rejection is quite lawful and there is an extremely small probability of appeal against it. In order to justify claims against the insurance company, it would be necessary to prove that the cargo damage occurred during its transportation but before expiry of the insurance policy. With regards to the fact that the cargo damage was revealed only at the port of discharge, while during transportation the cargo condition was not assessed, it is extremely difficult to confirm it.
Here the parties’ risks are quite obvious. The buyer received low-quality cargo, while the insurance company rejected its cost reimbursement. The seller, who failed to fulfill its insurance obligation to the full extent (the cargo was not insured for the whole period of carriage), should expect receiving the buyer’s claim on damage recovery.
What to do?
1) While issuing insurance policy, you should always take into account the scheduled cargo delivery term. However, it is important to remember that delivery term indicated, for example, on shipping line websites are indicative and may vary even within a few weeks. It is safer to enter into insurance contract for validity term that will surely cover the entire period of carriage by sea.
2) You should remember that execution of the insurance policy and cargo shipment, although it certifies fulfillment of delivery obligations, does not negate all the seller’s risks in full. If the seller finds out that insurance term will expire before delivery of the goods to the buyer, it should take measures in advance aimed to prolong the insurance contract. It certainly will require for additional costs, however they will be much lower than the amount of potential losses to be reimbursed by the seller at its own expense.
Buyers under CIF contracts also should not expect that insurance issues are covered solely by the seller’s liability, so it is better to understand what obligations are imposed on the buyer as beneficiary under insurance policy. Ignoring insurance rules and requirements would cause rejection to pay insurance indemnity.
Any insurance agreement/policy always provides for special procedure, whereunder the beneficiary is obliged to notify on insurance event within a strictly defined period. Meantime, in order to receive insurance indemnity, insurance company should submit the required set of documents certifying occurrence of insurance event.
You should remember that even if an insurance event occurs, in case when the buyer violates, for example, deadline for notifying insurance company, it may serve as grounds for rejecting payment of insurance indemnity. Such rejection will be justified, and it will be extremely difficult to appeal against it in the absence of serious grounds.
In addition to case described above, when the policy expired before the cargo arrival at destination place, the buyer, having discovered damage to the cargo, failed to notify the insurance company thereon in a due time. In order to justify its own actions, the buyer stated that he had no actual contacts of insurance company’s representatives. Apart from expiration of the policy, late notification on insurance event is one more argument in favor of insurance company’s rejection.
Therefore, before making any decisions after identifying the goods of non-contractual quality, you should carefully read terms and conditions of the insurance contract and strictly comply with prescribed procedure.
How to secure?
Summing up, in order to avoid the above situations, the parties should agree in advance on insurance terms and should mutually take actions aimed to comply with all regulations prescribed by insurance contract.
First of all, the seller needs to monitor the correspondence of insurance period to actual period of cargo transportation by sea and, if necessary, to prolong such period in a due time.
We also recommend for the buyer to study the algorithm of actions in case of insurance event (i.e. the buyer should understand who should be notified, when and in which manner) and to apply for professional legal assistance for legal support of interacting with insurance company.
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