International trade is a risky venture as any business deal. Though, there is no law to make the insurance of property in transit a mandatory precaution, the risks of commerce can be minimized by being properly insured. In the foreign trade transactions, the contract is drawn up to give legal expression to the intention of the partners and guarantee that the obligation contained in the contract will be fulfilled. The different forms of agreements may create the disputes between the contract parties.
The insurance of transport vehicles “Casco” and the insurance of loads, which are transported by these facilities, are different terms in the insurance regulations, as the proprietors of transport vehicles and the proprietors of loads can be various economic agents. Hence, the commonly accepted terms for the international marine transactions are required. Commonly, the international consuetudes of merchant navigation are used. The report of these procedures and consuetudes is represented in the York-Antwerp Rules of 1974 (August, Mayer & Bixby, 2009).
Cargo insurance is a section of Marine insurance that protects property against loss or damage in the air or sea transit, inland waterways and subsequent land. The merchandises or goods are the things of trade. Almost everything can be the subject matter of the marine cargo policy: the assured or finished products as well as the raw materials and components.
The aim of marine cargo insurance is the removal of the financial burden associated with the damage or loss risk of goods transportation between the importers and the exporters. The insured party gets the right to obtain the compensation from the insurer by paying the insurance premium. In this case, the losses are repaid by the insurance policy.
The insurance of foreign trade operations includes the property insurance and the insurance of responsibility. The responsibility part can be divided between the exporter and the importer or carried out by the one side only. Such apportionment of liability must be registered in the foreign trade contract. If the sides do not determine the clear distribution of insurance duties in the contract, they can take advantage of the terms accepted in the international point-of-sale practice.
The oldest type of insurance, which accompanies the international point-of-sale operations, is the insurance of cargo (Marine Insurance). This type of insurance covers the losses that arise as a result of damage or loss of export or import load during the transportation. For instance, the losses will be recovered, when the load is damaged or destroyed, as the ship submerged or was badly damaged by fire during a trip (Kouladis, 1994).
On the other hand, trade insurance covers risks that arise during the realization of point-of-sale operations and foreign investments and mostly are not covered with the insurance of cargo. This type of insurance is also called the Export Credit Insurance or the Export Credit Guarantee.
Investment insurance covers risks that accompany the international investments. Compared to trade insurance, it is relatively the new type of cover risks.
The terms of cargo insurance are determined by the rules of insurance, which are developed individually by every insurance company. Mainly, the difference between the rules of different insurance companies consists in the extent of liability. The terms of cargo insurance, which are transported by air and surface means of transport, are based on the rules of marine insurance that were formed before. The difference lies in the determination of risks that arise during the exploitation of these facilities.
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Marine insurance has three types of cargo clauses: “A”, “B”, “C”. The first type gives the highest insurance coverage. The second category is the middle insurance coverage, while the last one is the lowest. “A” is true for all three types of warnings for cargo insurance. “B” and “C” additionally take the next events: the intentional damages or intentional spoilage of the insured load or any its part as a result of wrong actions; the capture, the arrest, the confiscation of load and the piratic actions (Goode at all, 2004).
The extent of responsibility in the agreement of insurance can be increased due to the additionally covered risks. Accordingly, it will influence the growth of tariff size and the insurance bonus.
The terms of cargo insurance that are transported by the air transport coincide with “A” warnings of marine insurance, in obedience to the Institute of cargo clauses (Air) (Zylicz, 1992). The exceptions are made only by the circumstances that are inherent only for the marine transportation (gross average, the washing off of load by a wave etc.). The standard of Lloyd’s goods in transit policy is widely used in the world practice. It can also include the insurance of carrier’s responsibility by the request. Thus, the loads are ensured against the losses “with responsibility for all risks” on the period of transportation and the warehousing by 72 hours.
The Insurance Policy
Marine Insurance Act of 1906 is still the basic source of naval insurance law in the insurance of international transportation by the marine type of transport (Kendall & Buckley, 2001).
The attributing of the ship to the certain class is the necessary condition of insurance marine agreement. Therefore, the ship must be classified according to the requirements of the insurers. In its obedience, all ships, except the ships of the coastwise swimming, can accept the classes of International association of classification societies (IACS) only. If the register of the ship does not belong to IACS, there can be difficulties in their international insurance. It is worth mentioning that the operating class must be present not only at the moment of insurance agreement, but also during the whole period of its action.
The necessity of additional insurance at the contract execution is determined by events that are considered to be the insured accidents. Consequently, the contractors can additionally insure themselves depending on the terms of operation. The insurance policy is given out by the insurer (insurance company) only on its own behalf. It is the certificate of insurance contract (DiMatteo, 2009).
Signing a contract between the insurer and the insured party is one of the most frequently used instruments in the marine insurance, according to which the former is obliged to provide insurance and the accompanied services to the latter in the mutually agreed manner, extent and form (Marine Insurance Act 1906, Section 1).
The policy, which regulates the relationships between the insurer and the insured in the marine insurance sphere, is based on the “uberias fides” principle. It is identified to be a basic rule, violation of which leads to the breaking of the insurance agreement (Marine Insurance Act, Section 17). However, the standard agreement’s form represents only the outline of the marine insurance contract. Therefore, it is primarily used to establish the basic terms and conditions of the contract between the insured and the insurer.
Currently, most of the marine insurance contracts provide the similar insurance cover and other conditions on the marine insurance market. “Institute Cargo Clauses”, established in Great Britain, were adopted on the other markets.
The key types of cargo insurance policy are identified, including floating policy (“Open Cover policy” or “Declaration policy”) and facultative policy (“Voyage policy” or “one-off policy”) (Wilson, 2004).
“Voyage policy” provides the insurance coverage only for the particular types of shipment. This policy type is also known in the marine insurance as “one-off policy”. The insurance coverage starts, when the insured goods begin their journey, and it is over, when they reach the destination point. Sometimes, the insurance agreement provides the extended coverage of the insurance till the warehouse, where the goods are stored. According to the “Voyage policy” conditions, every risk of the agreement is discussed individually with the further settlement of the premium (McKendrick, 2010).
In the framework of the “Open” marine cargo policy, the agreement is developed for the traders, whose business includes the consistent incomings of goods in transit. It is aimed at the omission of potential troubles associated with every separate shipment of goods.
Another type of marine insurance is “Valued policy”, when there is a requirement of value renewal of the insured amount. It is considered to be a permanently open policy that allows any number of shipments to take place during the period of insurance coverage.
The International Chamber of Commerce
The International Chamber of Commerce (ICC), the nongovernmental business regulatory body, is responsible for investment and trade promotion in a worldwide perspective. During the last years, the piracy activity has become a global trade concern. On the subject of piracy, the ICC has contributed to the effort on the Maritime Bureau in order to stop this criminal activity. The Commission for Transport and Logistic attached to ICC judges the high rate of violence at the number of water vessels that were taken by the pirates. Thus, the ICC has called for the increase of the governmental efforts in the campaign (ICC, 2010). To curb this criminal activity, the ICC has also called the international communities for the regulation, required by the United Nations Security Council (1950).
After the recommendations of the UNCTAD, the ICC rules (Incoterms) on multimodal Transport were enacted and documented by the ICC and UNCTAD in cooperation. Nowadays, they are widely applied by the international trade, containing the regulation of the maritime transport and logistics. Nevertheless, the Incoterms do not have the force of law and, thus, must be incorporated in the contract of carriage.
The main objective of the Incoterms determines the following issues: transportation and delivery of goods, costs and risks reduction and explanation of communicative subject. Therefore, their integrated objective can be stated as the reduction and removal of uncertainty, which may happen on account of the dissimilar contract interpretation in different countries. The purpose of these rules is the provision of two parties with trustworthy and equal terms. Though, they do not protect the parties from their own risk or loss.
When these regulations are integrated to the contract, they prevail over the conflicting contract terms, apart those, which are above the accountability of the MTO. The obligations and the responsibilities between the seller and the buyer are regulated by the Incoterms in the delivery process (Ramberg, 2000).
The last version of the Incoterms has been issued in 2011. The Incoterms 2010 (ICC, 2010) is the eighth version of the document, which was first published in 1936. The rules are divided in two categories. The first group includes all transportation procedures, while the second one covers only the Sea and Inland Waterway Transport cases. That is why the second part is examined in detail. It consists of the following four rules:
1. “Free on Board” (FOB)
Under this regulation, the goods must be placed on board of the vessel by the seller. The buyer indicates which board of the vessel should be selected. The risks and the costs will be divided between the buyer and the seller, when the merchandises are, in fact, on board of the vessel. The goods ought to be cleared for export by the seller. For a second time, this directive may be applied just to the maritime transport. The seller should be informed by the buyer about the vessel and the port of delivery. There is no obligation for involvement of the forwarder or the carrier to the conveyance process.
2. “Free Alongside Ship” (FAS)
In accordance with this rule, the seller is required to deliver the goods on board at the mentioned port. The goods must be prepared for export by the seller. This guideline can be practical just to the maritime transport, not including the multimodal container shipping. It usually takes place in case of bulk cargo or heavy-lift.
3. “Cost and Freight” (CFR)
In conformance with this directive, the costs are paid by the seller. He/she is also responsible for freight and the delivery of merchandises to the destination port. The risk comes to the purchaser, when things are weighed down on board of the vessel. This term may be applied to the marline transportation only. Moreover, the insurance is not comprised into this rule.
4. “Cost, Insurance and Freight” (CIF)
It is similar regulation to the previous parameter. However, the seller is required to provide the insurance and pay for it. This term may be also applied to the marline carriage only (ICC, 2010).
The Costs Allocation
As the other types of insurance, the insurance of foreign trade operations is carried out of one’s own accord. However, the agreements of the commodity deliveries and inferior contracts take into account the mandatory action of the treaty. Depending on the terms of delivery, which are determined on the basis ofIncoterms, any party may make the insurance costs. It elects the insurance company and the terms of insurance, being oriented on its own interests and the situation on the insurance market (Ramberg, 2000). The insurance is carried out by the importer (buyer) in case of EXW, FCA, FAS, FOB, CFR, SRT conditions, while the exporter (seller) pays the insurance costs in CIF, SIR, DAF, DES, DEQ, DDU delivery terms that are measured in the contract value.
The sale contract indicates the four significant categories of the costs allocation, containing the insurance costs. The obligations of spreading out and covering all types of carriage costs, insurance of cargo, trade compliance and transportation are allocated between the both parties, the buyer and the seller, according to the Incoterms 2010. The obligations and responsibilities are divided between the seller and the buyer in the majority of cases (ICC, 2010).
Practically, it is more convenient and efficient, when one party bears the set of responsibilities for the transportation process. It turns out to be a complicated task, when the costs are divided between the parties, especially, when the delivery process involves the ship crossing.
Additionally, the dissimilar customs in different ports can also influence the costs allocation. Thus, one more phrase to the chosen term should be added in order to control such a situation. For instance, it is possible to study the following expression: “FOB stowed, costs and risks in connection with loading on the seller”. These terms are usually covered with the bill of loading, when the contract of goods carriage is organized by the seller.
While noting the insurance, there are only several cases when one of the parties is obliged to take out insurance. It happens in case, when the risk has been already passed to the buyer, but the seller is still responsible for the arrangement and the payment of the carriage. The vendor should obtain the minimal cover under the Institute Cargo “C” Clauses. The practical application of the CIF and the CIP are the other illustrations of it. Hence, the minor changes have been introduced for the insurance protection of the parties in the Incoterms 2010.
At the same time, the purchaser may want to include more extensive requirement to the seller into the agreement, which is established under the regulations of the Cargo “A” Clauses. Thus, the new regulations of the Incoterms 2010 oblige the both parties to carry out the exchange of information, concerning the insurance issue (ICC, 2010).
The Bill of Lading
The bill of lading (BOL) is the legal document, which was developed for the regulation of the relationships between the carrier and the shipper. It fulfills three principal tasks: the confirmation of delivery on board of the ship; the transfer of rights for goods in transit to the other party by the deed of assignment; the confirmation of the haulage contract. As a consequence, its main function is facilitating and financing of the international sales contracts (Bools, 1997). It is necessary to underline that the BOL is issued only after the signing of contract between the shipper of the goods and the ship owner. In other words, the BOL is given out after the placement of goods on board, and the ship leaving the port of loading.
Furthermore, the transport contracts, the insurance policies (cargo, liability), the letter of credit and the finance contracts may be used in order to dispose of this question.
The Practical Application of Cargo Insurance
Without a doubt, the trade commerce would be extremely limited without the insurance cover. The leading traders and exporters use CIF or the similar terms that allow the arrangement of marine cargo insurance on the open cover foundation. It practically comes to free insurance, which is controlled by the exporter, as the insurance cost is legally given to the buyer, who also earns the benefit from the insurance (Proctor, 1997).
Unfortunately, many dealers do not want to be involved in this type of insurance. Some of them understand it as the needless expense involving extra administration, while others do not have enough knowledge about it. Thus, they both make a mistake by permitting the customers or the suppliers to govern this significant field of business activity. Such loss of control increases the risks of applying the effective trade strategy. Moreover, it can have the negative consequences on profitability in the future.
In summary, cargo insurance generally covers losses and damages carried by aircrafts, ships and other forms of transport. Marine Insurance Act of 1906 remains the central law in the area of international marine transference. In fact, the Incoterms are used for delivery in the international trade. The document defines the responsible party for the cost of transported goods, damage or loss during the transit as well as the terms of delivery. For instance, the accountability for protecting the goods for the voyage rests with the buyer in the FOB agreement. The vendor’s responsibility comes to an end, when the merchandises have been weighed down on board of the aircraft or ship. The CFR contract measures the insurance duty of the seller up to the endpoint. The CIP treaty also provides the pay of freight and the arrangement of the shipment with the seller. In general, cargo insurance is vital for international business and transportation.