When shipping goods across international borders, it’s critical to understand the role of Incoterms and insurance responsibilities. These internationally recognized trade terms define the responsibilities of buyers and sellers, including who arranges shipping, who pays for what, and—most importantly for insurers and logistics teams—who holds liability during different stages of the shipping process.
If you’re involved in importing, exporting, freight forwarding, or insuring cargo, this article will help clarify how Incoterms impact your insurance responsibilities—and how to avoid common pitfalls.
What Are Incoterms?
Incoterms, short for International Commercial Terms, are standardized trade terms published by the International Chamber of Commerce (ICC). The latest version, Incoteri. ms 2020, outlines 11 different rules that define the tasks, costs, and risks involved in the delivery of goods.
Helpful Facts
- Incoterms define who holds risk and pays for insurance at each stage of shipping.
- Misunderstanding Incoterms can cause costly insurance gaps and denied claims.
- EXW and FOB place most insurance responsibility on the buyer.
- CIF requires sellers to insure, but only at minimum coverage.
- Aligning insurance policies with Incoterms is essential to avoid liability issues.
They serve as a universal language in global trade contracts, specifying whether the buyer or seller is responsible for shipping, customs clearance, insurance, and more. Examples include:
- EXW (Ex Works): The buyer bears all costs and risks from the seller’s premises.
- FOB (Free On Board): The seller is responsible until goods are loaded onto the shipping vessel.
- CIF (Cost, Insurance, and Freight): The seller covers transport and insurance to the destination port.
Each term shifts responsibility at different points in the journey—and that includes insurance coverage.
Why Insurance Responsibilities Matter
Understanding who holds risk at which point in the shipping process is essential for ensuring adequate insurance coverage. Misinterpretation or miscommunication around Incoterms can lead to:
- Gaps in insurance coverage
- Delayed claims payouts
- Legal disputes over liability
For example, if a contract uses FOB terms, and the buyer mistakenly assumes the seller has insured the cargo beyond the point of loading, they could face significant financial loss if the goods are damaged in transit.
Key Incoterms and Their Insurance Implications
1. EXW (Ex Works)
- Risk Transfer: At the seller’s premises
- Insurance Responsibility: Buyer must insure from point of pick-up onward
Since the buyer assumes responsibility early in the process, they should arrange insurance before the cargo leaves the seller’s location. This term places a heavy burden on the buyer.
2. FOB (Free On Board)
- Risk Transfer: When goods are loaded on the vessel at the port of shipment
- Insurance Responsibility: Buyer should insure from point of loading onward
This is a common term in maritime trade. Buyers must understand they are liable for the cargo once it’s on the ship, not after it reaches their country.
3. CIF (Cost, Insurance, and Freight)
- Risk Transfer: When goods are loaded on the vessel
- Insurance Responsibility: Seller provides minimal coverage to destination port
This term requires the seller to obtain insurance, but only at the minimum coverage level. Buyers who want full protection should supplement with additional policies.
4. DAP (Delivered at Place)
- Risk Transfer: When goods are ready for unloading at buyer’s premises
- Insurance Responsibility: Seller should insure for entire journey
The seller bears most of the risk under DAP, making it critical that they arrange comprehensive insurance, including inland transport if applicable.
Insurance Best Practices Based on Incoterms
To avoid costly mistakes, businesses should align their insurance policies with the selected Incoterm. Here are some best practices:
Align Incoterm and Insurance Policy
Make sure the party responsible for risk at each stage is also named as the policyholder or is appropriately covered in the cargo insurance policy.
Use Stock Throughput Policies
Stock throughput policies can help bridge gaps in traditional marine cargo coverage by insuring goods from the point of origin to final delivery—including warehouse storage.
Require Proof of Insurance in Contracts
Especially under CIF or CIP (Carriage and Insurance Paid To) terms, buyers should request a copy of the seller’s insurance certificate and confirm that the coverage meets their risk tolerance.
Work With Insurance Experts
Navigating the intersection of Incoterms and insurance is complex. Consult an experienced commercial insurance broker, like Coughlin Insurance Services, to tailor coverage based on your shipping terms.
Common Pitfalls to Avoid
Even experienced shippers and freight forwarders can fall into traps. Here are some of the most common missteps:
- Assuming insurance is included: CIF and CIP only require basic coverage (usually Clause C). It’s often insufficient for high-value or fragile goods.
- Using the wrong Incoterm for the shipment type: For instance, FOB is meant for sea freight only.
- Failing to update terms with trade partners: Old Incoterm versions (like Incoterms 2010) may not be appropriate for current risk scenarios.
- Not accounting for inland transport risks: DDP and DAP terms often include inland transport, which may require extended insurance coverage.
How Coughlin Insurance Services Can Help
At Coughlin Insurance Services, we specialize in providing robust commercial and cargo insurance solutions that align with the realities of global trade. Our advisors can:
- Analyze your shipping terms
- Identify gaps in existing coverage
- Recommend tailored policies like marine cargo insurance or stock throughput
- Support documentation and claims management
With decades of experience in insuring importers, exporters, manufacturers, and logistics firms, we help protect your business from unnecessary exposure.
Incoterms are more than legal jargon—they define risk ownership at every step of the global supply chain. Misunderstanding them can lead to expensive gaps in coverage, denied claims, and operational disruptions.
Whether you’re a seasoned importer or just entering international markets, aligning your insurance with Incoterms is essential. Partnering with experts like Coughlin Insurance Services ensures your goods—and your business—are fully protected.
A Partnership Where Understanding Meets Action
Since 1947, Coughlin Insurance Services has committed its resources to assist distributors, importers, and exporters, ensuring they are protected against the unpredictable nature of the food trade industry. As specialists who understand the nuances and vulnerabilities of the global food distribution network, we have fine-tuned our insurance solutions to cater to this industry’s evolving dynamics. Our affiliations with the Association of Food Industries (AFI), National Frozen & Refrigerated Foods Association (NFRA), and the Peanut And Tree Nut Processors Association (PTNPA), reinforce our commitment to safeguarding your business with unparalleled expertise. We ask you to consider a partnership where understanding meets action.
You may have been recommended to us by one of our many satisfied customers, or you may have searched online for “Ocean Cargo & Stock Throughput Insurance near me.” However you found us, we’re happy to welcome you. To discuss your needs and objectives and how we can help your company, please contact JJ Van Aman, Vice President of Sales email: jj@coughlinis.com or tel: 973-598-5884 or reach out for a free insurance quote today!