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Sunday, October 2, 2016

FOB coverage 'as an extention' to Inland Transit - Insurance parlance of FOB

My earlier post on ‘FOB What it is’ detailed on the acronym ‘Free on board’ – the meaning of the term, the Inco Terms and the way the obligations of contracting parties – Seller and Buyer are defined in the various Incoterms.  Read the earlier post here : http://www.sampspeak.in/2013/11/understanding-concept-of-fob-free-on.html


FOB coverage in Insurer’s parlance is different… sure you could have seen policies with ‘FOB clause’ – which has nothing directly with the Incoterm but has more to do with the ‘duration clause’ – definition of coverage and its termination.  Though it is very rudimentary, there is need to recall the duration clause under Inland Transit policies.   Here is the relevant portion extracted from the Inland Transit (Rail or Road) Clause – A… Transit Clause [Duration clause 5]

 This insurance attaches from the time the goods leave the warehouse and/or the store at the place named in the policy for the commencement of transit and continues during the ordinary course of transit including customary transshipment if any

i.        until delivery to the final warehouse at the destination named in the policy or
ii.       in respect of transits by Rail only or Rail and Road, until expiry of 7 days after arrival of the railway wagon at the final destination railway station or
iii.       in respect of transits by Road only until expiry of 7 days after arrival of the vehicle at the destination town named in the policy

whichever shall first occur.

So, there could be unintended restriction when a cargo meant for export on ‘FOB’ terms is covered ………. For example – leather from Ranipet to Italy via Chennai Port on FOB terms.   Here it is the obligation of the Seller to place the goods on board the nominated vessel at Chennai Port…. seller bears risks of loss of or damage to the goods until such time they have passed the ship’s rail at the named port of shipment or on board the ship going by the version of Inco….

Being a land transit, coverage will only be on Inland Transit clause which has the above duration clause.  The transit in the given example from Ranipet to Chennai could be over in a day …….. and going by the clause coverage would cease upon expiry of 7 days after arrival of vehicle at Chennai [provided of course that no delivery is taken /  for other purpose]. Also some Insurer could interpret that coverage ceases upon reaching Chennai, the destination named in the policy,.

Though the cargo could continue to be on ‘ordinary course of transit’ – there sure would be some time as it is in CFS and then taken to the nominated ship..

In such a circumstance there is the proverbial ‘slip between cup and lip’ – the Seller who would have taken insurance would want the coverage completely covering his obligation, while coverage provided is restrictive.

The FOB clause attached to Inland transit policies would amend the duration clause as to read (in case of export consignments on C&F /FOB / FAS and similar basis) – ‘the Insurance would extend to cover interest insured until goods are placed on board the ocean going vessel including sling loss’ or until expiry of two weeks after arrival of goods at the place of storage at the port town and/0r docks awaiting shipment, Whichever shall first occur’….. This ‘two weeks’ – can be suitably altered upon payment of additional premium to include some more intended time. 

Not over.    The situation between Chennai Port / Cochin Port  where loading on to the Overseas vessel is done directly from Wharf/ Quay can be far different from the situation where loading on the Overseas vessel is done ‘mid-sea’ – may in Kakinada or Cuddalore Ports

In these cases, the exposure to liability is more …… Insurers upon collection of suitable additional premium would word their Policies on Inland Transit (Basic) Risks only  to cover losses to the subject matter arising out of / reasonably attributable to :

a)      craft, raft or lighter being stranded, grounded, sunk or capsized
b)      fire, lightning, collision or contact of the craft, raft or lighter or conveyance with any external object other than water
c)       total loss of any packing lost in loading, transshipment or discharge
d)      including the risks of ‘jettisoning due to stress of weather only’

However, where coverage is on Inland Transit (All risks)  - there is no need for this and coverage would be on similar terms with termination uptil goods placed on board the vessel or expiry of two weeks as stated above. 

There is still more.: There is something known as ‘shut-out cargo’. 

When loading is done mid-sea from barges / cargo boats – the carrying smaller vessels may have to return either due to heavy weather or absence of loading facilities or loading space being not available. Even in modern World of technology,  the goods taken nearer the Overseas vessel for loading after ‘let export order’ – may have to return due to paucity of space or sometime vessel having left without loading this part of cargo. 

In circumstances explained above, the cargo will have to brought back to Customs premises ….technically, this return journey is not intended to be covered………………..there is further procedure of Exporter obtaining permission from Customs for taking back the cargo to his premises.

In good old Marine Cargo Tariff days, Insurers used to charge an additional premium of 0.10%  to cover goods whilst on board Craft, raft or ligher until loaded on Ocean going vessel but not exceeding 48 hours or return to loading point and discharge.

When cargo was shut-out midstream due to strike / lockouts etc., it was 0.03% for each period of 2 weeks…. When goods involved rail or road transit for return journey back to the warehouse, appropriate full premium became chargeable for the return journey.

Now If one were to write about all these, some Insurance Brokers / Clients would ask for these clauses to be included as well ~ nay, not with any additional premium, at the same premium rate or perhaps with some more discount as is the norm in the market.

Marine Insurance is most exciting and interesting …..

With regards – S. Sampathkumar.


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