In an educational video, Trade Risk Guaranty explains how Incoterms affect your cargo insurance, particularly in the case when a claim arises.
Incoterms define the responsibilities between the buyer and the seller throughout the supply chain of an international transaction. However, an aspect of these terms that is not often defined is how Incoterms affect your cargo insurance.
Understanding this aspect can determine the difference between a recovery of loses in the event of a claim or the outright denial of that claim. This is due to the fact that a Marine cargo insurance policy can only legally pay out on goods that the policyholder has an insurable interest in. If the Incoterm specified on your sales contract says that the other person owns and is responsible for insuring the goods, then your marine cargo insurance policy cannot pay that claim.
What is Insurable Interest?
Each of the 11 Incoterms define which party is responsible for insurance, but in reality, only two Incoterms actually require the responsible party to purchase insurance; CIF and CIP. The others are actually defining which party has the insurable interest up to a certain point in the transport of goods.
An insurable interest is a stake in the value of an entity or event for which an insurance policy is purchased to mitigate risk of loss. Entities not subject to financial loss from an event do not have an insurable interest and cannot purchase an insurance policy to cover that event. Whether or not an entity stands to suffer a financial loss depends on who owns the goods, or ‘bears the risk’.
Knowing your Incoterms and using them correctly reduces the likelihood of disputes, misunderstandings, or hedging on either side. If an agreement of responsibilities is not in writing, it is harder to substantiate a claim on a marine cargo insurance policy. In fact, if there are no written agreements, you are asking your insurance provider to take your word as truth at a time when you are financially motivated to stretch the truth. It decreases the credibility of your claim which is weighed heavily during a cargo claim’s review.
Discover How Incoterms Rules Affect Your Marine Cargo Insurance
Watch the following video to learn how Incoterms Rules affect your marine cargo insurance and why you need to be deliberate about which one you selected.
Did you like that video? Check out the first video in the series explaining the basics of Incoterms.
