Client Question:
We sell CIF, but with the current (middle-east) situation we cannot obtain war cover and risk finding no cover at all. What is our position?
Answer:
In an Incoterms CIF (and CIP) contract, the seller procures insurance for the buyer.
In any C-prefixed sale, the seller has no cargo risks as they are only selling the documents that evidence the cargo and its movement/shipment.
However, as the carrier’s principal they are exposed to certain transit risks in their role as ‘shipper’, yet these risks can be mitigated, if not avoided, if the consignee is adequately insured.
The impression is that the CIF seller is buying insurance cover for the buyer when they are in fact buying insurance cover to protect the ‘shipper’.
Any benefit that falls to the buyer in this action is coincidental to the seller looking after the seller.
It is for this reason that Incoterms Rules CIF supports that the seller need only buy the ‘minimum’ cover for the buyer.
Minimum cover has very limited benefits for the buyer, but it will protect the shipper in most situations, reducing the risk of the consignee abandoning the cargo in an endeavour to avoid certain claims that may be made against them by the carrier.
The classic example of this scenario is a seafreight carrier declaring a General Average. There is no motive for the buyer (as consignee) to avoid this claim and contribution as even the minimum cover under CIF Incoterms Rules addresses this exact condition.
(Conversely, should the uninsured consignee abandon the cargo because they are unable to meet the carrier’s claim, the claim falls on the shipper.)
“War Cover”, which of itself is quite a limited advantage, is a cargo risk and, as the seller has no interest in the cargo, is not an automatic obligation of the CIF seller to procure.
Rather, war cover (and several other additional concepts such as indemnification against loss or damage resultant from strikes and riots) is only procured by the seller if requested by the buyer and, crucially, if such cover is available.
On the business principle that no one offers you an umbrella when its already raining, war cover is generally unobtainable when the probability of a war, or the consequences of a war that is already declared, become a strong possibility.
In part, the text of Incoterms states (at A5) “…When required by the buyer, the seller must…provide…any additional cover, if procurable, such as cover complying with the Institute War Clauses and / or Institute Strikes Clauses…”
War cover isn’t an automatic obligation; the buyer must request it and if it can’t be obtained, then it can’t be obtained and in that event the CIF seller has no contractual exposure. They have not failed to perform.
However, should an extreme situation arise where no cover whatsoever can be procured i.e. not just war cover but even basic cargo insurance, then the seller is potentially exposed to a claim from the buyer for failure to perform, which might lead to the greater claim of breach of contract.
The seller would need to then perhaps fall back on any force majeure (or similar) clause in the sales agreement; something that allows the seller protection from the consequences of conditions beyond the seller’s control.
Going back to the extreme declaration of a seafreight General Average, if no cover whatsoever can be secured then the seller (in their role as shipper) is exposed to a risk. Therefore, it might be prudent for the seller to use any “force majeure” relief to avoid the whole contract and not just to excuse themselves of the insurance obligation.
From the foregoing it follows that the seller lacking a formal written agreement, or a seller who has an agreement lacking a force majeure-type clause, is left, as mentioned, in the position of having a breach of contract claim made against them.
As the great American philosopher Edwin Starr famously grunted: War, huh, yeah. What is it good for?
Absolutely not Marine Insurance.
The CIF seller unable to obtain war cover is (as a general proposition) protected. The CIF seller unable to obtain any cover at all is potentially at the mercy of the sales contract additional terms and conditions.
Having a well-worded written sales agreement that correctly incorporates a defined commercial term alongside the commonest contract clauses does not guarantee success, but it certainly places you in a position where success is more likely. Crucial to the question at hand, it provides direction and protection when you most need it.
It is perhaps apposite to reflect on the words of the Persian polymath Muḥammad ibn Muḥammad ibn al-Ḥasan al-Ṭūsī, writing in the 13th century –
“Anyone who knows and knows that he knows makes the steed of intelligence leap over the vault of heaven.
Anyone who does not know but knows that he does not know can bring his lame donkey to the destination, nonetheless.
Anyone who does not know and does not know that he does not know is stuck forever in double ignorance.“
In the kingdom of the blind, what you see is what you get.
Source: Freight Training
