To standardize and make the responsibilities between buyers and sellers more explicit, the International Chamber of Commerce has issued and updated "Incoterms"—a set of international commercial terms with established meanings about when ownership of goods passes from the seller to the buyer and who is responsible for providing insurance on a particular shipment. Recently updated, Incoterms 2010 defines 11 sales terms or rules that went into effect Jan. 1. Three of the most commonly used terms of sale are:

EXW: Ex Works. Title and risk of loss pass from the seller to the buyer at the place of shipment. This places the maximum obligation on the buyer and thus the buyer provides insurance.
FOB: Free on Board. The seller must load and clear goods for export as instructed by the buyer. Title and risk of loss pass from the seller to the buyer when the shipment passes the ship's rail. The buyer provides insurance.
CIF: Cost, Insurance and Freight. The seller is responsible for the arrangements, export clearance and cost of shipping to the port of destination. However, the seller's risk and responsibility for the condition of the cargo end when the goods are placed on board. Although risk is transferred to the buyer once goods are loaded on the ship, it is the seller who must provide the insurance. Because the seller sometimes only obtains minimal coverage, a buyer may wish to purchase additional insurance.

Agents can help customers understand the importance of choosing specific terms of sale for each shipment, and can review the circumstances to determine the pros and cons of various insurance-buying strategies for a customer. For example, while it may sound attractive to have the buyer be responsible for insurance costs and damages from the moment a product leaves the seller's hands, it may build better long-term customer relations to keep control until the product is in the buyer's possession. By keeping control, the seller can make sure there is adequate insurance and that coverage is with a carrier that will work swiftly to resolve claims.

Special Reports /

Ship Shape

Related Stories

Recommended For You