Cargo insurance in international transport is one of the most difficult and complex types of insurance applied in foreign trade transactions. This is due to, among other things, the fact that:
1) There is a need to precisely determine, based on the performance of contracts applicable in international economic turnover (sales contracts, supply contracts, or other disposal contracts), which of the parties to these contracts (seller/supplier-buyer/recipient) bears the risk of damage to the shipment during transport, or from what moment they bear it. The assumption of transport cargo risk is therefore linked to the very important issue of transport management (gestia transportowa) and the often closely correlated insurance management (gestia ubezpieczeniowa), i.e., determining who has the right to decide whether the goods should be insured for the duration of transport, in which insurance company, and under what conditions.
2) The international transport process usually involves many entities, both directly (e.g., freight forwarders, carriers) and indirectly (e.g., customs agencies, logistics companies, and other specialized firms). This is linked to the very important issue of the civil liability of these entities for damages in transport and the problem of the quality of insurance protection under civil liability (CL).
3) The multitude of forms and means of transport that can be used for cargo carriage (water, air, road, multimodal transport).
4) The complex problem of adjusting the scope of insurance protection to the terms of the contract for a given transaction and the contract(s) of carriage (transport risk), taking into account the specificity of the form and means of transport used to carry the given cargo.
Transaction risk – transport management – insurance management
In general, it is difficult to define the scope of liability for shipments among participants in the transport process. In the case of the sender (seller) and the recipient (buyer), the scope of their liability limits cannot be rigidly defined, as in their case, the contracts concluded between these two parties will be of key importance, and it is based on these contracts that liability for damages occurring during transport will be shaped. Most often, this is related to transport management, i.e., the right and obligation reserved in the contract to organize the transport of goods and cover its costs. Closely related to transport management is the issue of insurance management, i.e., determining which party has the obligation to insure the goods that are the subject of the contract of carriage. The initiative to insure the goods (if not specified in the contract) for the duration of transport is usually taken by the cargo manager, the carrier’s service user, because the party insuring the goods can be the one among the involved entities that has a financial interest in it, i.e., the one that bears the risk of damage to the cargo during transport. Generally, the risk of transport damage lies with the owner. The transfer of risk is not always dependent on the transfer of ownership, and the parties to a sales contract retain the freedom to regulate this in a way that suits their needs. Legal provisions regulating this matter are also not unambiguous. For example, in Polish civil law – in accordance with the provision of Art. 548 § 1 of the Civil Code – upon the delivery of the sold item by the seller, the benefits and burdens associated with the item and the risk of its accidental loss or damage pass to the buyer. According to the provisions of Art. 544 § 1 of the Civil Code – if the sold item is to be sent to a place indicated by the buyer, it is assumed that in case of doubt, “delivery has been made at the moment when the seller entrusts it to a carrier engaged in the transport of items of this kind” (i.e., from that moment, the risk of damage to the goods during transport rests with the buyer, i.e., the recipient of the goods). The example provided, which may apply under the conditions of Polish legal regulation, indicates that there can be significant doubts in this regard, hence business practice has developed a number of typical patterns, accepted particularly widely in international trade, the so-called standard trade contract formulas. The most common and accepted in international trade are the International Rules for the Interpretation of Trade Terms, the so-called Incoterms, developed by the International Chamber of Commerce in Paris (last revision from 2000).
Incoterms regulate the terms of delivery (containing 13 terms of delivery of goods) between the seller and the buyer, as well as their relations between the carrier and the freight forwarder. For a specific Incoterms formula to apply to the regulation between an exporter and an importer, it is sufficient to refer to it in the contract by making an appropriate entry. The fundamental issues in “Incoterms” are: transport management (i.e., who is responsible for transport to a specific place and insurance of goods and liability for their damage or loss during delivery). These formulas clearly show who bears the delivery costs and from what place the risk of loss or damage to the goods is transferred to the other party. The buyer and seller, when entering into negotiations, must decide under what conditions they would like to conclude the contract, with their own or foreign (i.e., the contract partner’s) transport management, and which of the trade formulas to apply. Each party to the contract, when making a decision on the choice of delivery base, should take into account, on the one hand, the costs and risks, and on the other hand, the benefits associated with accepting transport management. Undertaking the organization of transport requires specific forces and resources, but at the same time gives the right to choose the mode of transport and the entities carrying out the transport process.
As for the benefits associated with accepting transport management, we can list, among others:
1) the possibility of deciding on the mode and conditions of transport, and thus influencing the reduction of transport costs;
2) the possibility of using one’s own means of transport;
3) the possibility of using one’s own connections with the carrier or other implementers of the transport process, ensuring favorable transport conditions, e.g., special discounts; 4) the possibility of creating consolidated shipments.
Unlike transport management, the obligation to insure the goods does not have to be settled in the contract of sale of goods. Among the Incoterms 2000 formulas, only two – CIF and CIP – regulate this issue. When using these formulas, the risk of damage or loss of goods during transport is borne by the buyer, and the party obligated to insure the goods against this risk is the seller. They have the obligation to conclude a contract with an insurer, pay the insurance premium, and provide the buyer with an insurance policy or other proof of the conclusion of the insurance contract so that the latter can pursue any claims directly from the insurer. In this case, the policyholder is the seller, and the insured, whose interests are protected by the insurance contract, is the buyer.
The CIF and CIP formulas specify that the insurance contract should be concluded with an insurance company enjoying a good reputation. This requirement is important from the buyer’s point of view because it is they who bear the transport risk and will pursue any claims from the insurer. However, it is necessary to point out a certain inconvenience of the importer’s situation that may occur when purchasing goods under CIP and CIF terms. This applies in particular to trade with partners from countries where the insurance market is not developed. In this case, the insurance of goods by the exporter in an insurance company in their own country (and in some countries, this is a requirement imposed on the exporter by administrative decision) may make it difficult for the importer, in the event of damage or loss of goods, to pursue claims and obtain compensation from a foreign, often unknown to them, insurer. For the importer, it is important whether, in the event of loss or damage, a given insurer, through so-called average agents and their representatives abroad, is able to provide fast and efficient service. If not, the buyer should consider whether it would not be more beneficial for them to conclude a contract under CFR or CPT terms, when insurance management is in the hands of the buyer. When using these formulas, they will be able to take out insurance on their own, in a solid domestic or foreign insurance company known to them. This issue is all the more worth considering because, when using CIF and CIP formulas, the seller only formally bears the cost of insurance, as in reality, they include it in the price of the goods paid by the buyer.
As for the scope of insurance, the CIF and CIP formulas provide that it should cover the risk specified in the contract. If a detailed scope is not specified, the seller has the obligation to cover the insurance protection with the minimum scope of risk coverage according to the Institute Cargo Clauses, developed by the Institute of London Underwriters, or other similar ones. The insurance should cover the price agreed in the contract plus 10%, i.e., the value of the contract (this includes the potential profit of the importer). Any additional insurance is at the request and cost of the buyer.
The remaining 11 Incoterms formulas do not specify whether and who should insure the goods and cover the cost of insurance. The parties to the contract can therefore determine this freely during negotiations on the contract. However, it should be remembered that the party interested in insurance is the one who bears the risk associated with transport. The party bearing this risk makes the decision about insuring the goods or leaving the goods in transport without insurance.