Compensation of damage claim in a CIF shipment

One of the readers, Mahesh asked below question about compensation of damage claim in a CIF shipment..

Please advise as to who will get the claim amount in case of CIF shipment where the cargo was damaged in transit. The shipper or the buyer?

Alexander Robertson of Robertson’s Cargo Consultancy is an accredited trainer with ICC South Africa for Incoterms® 2010 rules and a TETA registered trainer and he opines as below :

When Incoterms® CIF is mentioned or used, it is presumed that the shipment would either be bulk or break-bulk.

Should the consignment have been containerised, the correct Incoterms® rule would be CIP.


Bearing this in mind, when considering any claim it is necessary to take into account at whose risk the goods were at the time of loss. Under CIF the risk in the goods passes from the seller to the buyer at the time the goods are loaded and stowed on board the vessel.

With CIP the risk in the cargo passes when the goods into the care of the main carrier. This can be at the warehouse, container terminal prior to loading on the vessel, seller’s premises if the container operator collects the goods from the seller’s premises/warehouse.

Compensation of damage claim in a CIF shipmentTherefore only the person at whose risk the goods are being moved can be reimbursed for any loss. Remember that the insurance taken out by the seller is insurance for the benefit of the buyer and not that of the seller, even though the insurance is in the name of the seller.

Whenever any claim is settled by any insurance company, the company will consider insurable interest and this is determined by the choice of which Incoterms rule is used in the sale agreement.

Any sale agreement has more than one contract, there is the actual sale, the payment, insurance and transit sections which all need to fall into place.

If you have any alternate point of view, please feel free to comment on who must be paid the compensation of damage claim in a CIF shipment.. The seller or the buyer..

*** End of Article ***

28 thoughts on “Compensation of damage claim in a CIF shipment”

  1. A Brazilian company sells agricultural products to your French company, on the basis that the goods are to be shipped CIF Marseille. The seller telephones you to tell you about an accident. The consignment of the goods was duly delivered to the Brazilian port, cleared through customs and loaded onto the ship. The ship ran into a storm at sea. During the storm, the ship’s cargo shifted in the hold and some heavy machinery crushed the containers containing the agricultural products, contaminating the products and making them valueless. Advise the buyer how this accident will affect the contract and the performance obligations of each party. Assume that the seller has not yet been paid for the goods.

    Reply
    • Hi Godwin, from reading the scenario mentioned by you it would appear that the cargo was containerized. CIF is not an appropriate rule for containerized cargo.. It is best to use CIP. Once the cargo under CIF has been loaded on board the vessel, the risk has passed from seller to buyer and thus the buyer is bound to pay for the cargo.
      Under CIP the risk passes as soon as the cargo has been handed to the buyer by the seller.
      under CIF it is necessary for the seller to purchase insurance at the minimum of CIF value plus 10% under C Clauses. Under C Clauses there will be no claim against the insurance taken out.
      Now that we have Incoterms 2020 rules, under CIP rules, A Clauses insurance must be taken out on behalf of the buyer. The rule states that the insurance shall be CIP value plus 10% minimum with it being permissible to increase the value plus cover to include strikes and war clauses. Under the A Clauses there will be a recovery against the insurance.
      Whether it be under CIF or CIP, there will be a claim against the ship as it may be argued that the other cargo was not stowed correctly in the hold and that the ship should have anticipated a storm at sea. Then it must be taken into consideration the maximum value for which the ship is liable, this being set by the terms of carriage, Hague rules, Hague-Visby rules or Hamburg rules.

  2. S Kanth, Incoterms has nothing to do with ownership of the cargo. As you have rightly stated, ownership passes when payment has been made. However, risk in the movement of the goods is dictated by the Incoterms rule applicable. Under CIF the risk of moving the cargo passes from the seller to the buyer once the goods have been loaded on board the vessel. Under CIP the risk passes once the goods have been handed to the carrying vessel. Therefore the seller must endorse the certificate of insurance over to the buyer to enable the buyer to claim against that insurance which has been taken out on behalf of the buyer.
    Trust that this assists you.

    Reply
  3. The insurance is taken out by the seller on behalf of the buyer so it is always the buyer who claims. It is up to the seller to endorse the certificate over to the buyer to enable the buyer to lodge the claim. Remember that the risk in the cargo passes from the seller to the buyer when it has been loaded on board the ship. The cost of getting the cargo to the named port remains with the seller but the risk of that is with the buyer. The insurance taken out does not cover that portion of the transit prior to loading on board the ship.

    Reply
    • Thanks very much for the clarification. One of the buyers says that they have an arrangement whereby they pay for the goods 30 days after arrival. Hence their idea is that the seller has the ownership and the risk of goods when they take the CIF or CIP. Therefore, any loss or damage in tranist even after being loaded on the vessel is to the seller and they have to claim.. Is the buyer correct in their view?. It seems the commercial contract and the insurance contract may contradict.. Can you please clarify and which will prevail?

  4. In CIF Shipment who will able to Claim for Damage , What will be the procces if any minor damage occur during the Shipment time.

    Reply
  5. HI All,

    I have a question .

    In this case, i am the buyer and seller ships the material on CIF basis and gets damaged during unloading. Now my insurance paper has total bill value but unsure if it would cover the customs duties. Do you think it cover ?

    Else , if i get the replacement part from shipper on DDP basis , will the bills be claimable ?

    Reply
  6. CIF thus cost insurance and freight. if the buyer pays the cost , insurance and freight then the risk remains with the seller till delivery is effected . so if goods are damaged in transit risk remains to the seller who will in turn sought for compensation from the insurance company he would have engaged. so the insurance pays the seller and in turn the seller pays the buyer.

    Reply
  7. When the writer termed “damaged in transit”, it would unlikely the responsibility of seller under CIF. As to the question on who will get the claim amount, I simply think only cargo owner. Cargo owner would mean buyer if buyer has paid off for the cargo. Alternatively, cargo owner would remain with the seller if buyer has not yet paid for the cargo.

    Reply
  8. CIF (Incoterms) applies to the contract of sale which involves the seller and buyer (does not apply to the carrier!). The right to seek compensation from the carrier is the person who has the right to dispose of goods on the basis of B / L or another transport document.
    The insurer shall pay compensation to the person to which the policy was inserted and bear the risk in accordance with the trade agreement.

    Reply
  9. Excellent topic! This is a constant battle with my commercial manager colleagues as they ‘argue’ that their customers are used to the “CIF” Incoterm notwithstanding that it is wrongly applied.

    In response to the specific question, I agree with explanation given and I would add that the buyer is under the obligation to pay entirely the invoice (including the lost or damaged goods) to the seller. Again, this is a point of contention with the commercial guys as they ‘argue’ that this obligation ‘sours’ the relationship.

    What I came up with is that we insure the cargo but in our favor. If something goes wrong, all I need to do –with respect to my customer– is obtain a subrogation letter in my favor and find them replacement cargo.

    I’ll deal with the responsible party and with the insurance for the claim and I expect the commercial guys to use this option as a major selling point of the value added that comes with dealing with us.

    Reply
    • Hi Carlos, glad that this article resonates with your live situation.. There will always be this argument between Commercial and Operations/Claims teams with regards to risk.. 🙂 Is your company in favour of taking the risk of insuring the cargo in their name..??

    • If our customer wants to purchase their own insurance, they are free to do so. If they did so and they want to handle the claim, we have no issue with that either. If they want us to handle the claim, we’re prepared to do so as we have coverage anyway. In short, yes, we are prepared to assume the risk which, again, is a strong selling point for our commercial managers.

    • HI,
      I didn’t find any article or incoterms deffinitions saying that CIF is not for containers, but Break Bulk and Bulk cargo only. Where is it stated? Thank you!

  10. Hi,
    This article made me realize that I have been using CIF terms incorrectly for a long time, since I wasn’t aware that this IT is not appropriate if the cargo is containerised. Thank you for helping me learn that…

    Then, What would you say is the less risky option for seller? Using CIP or FOB?

    I ask this because it occurred to me that if I chose CIP to make sure I pass risk to the buyer as early as possible in the transaction, I’m transferring the risk of losing the cargo to the buyer, but if the cargo were to be lost or damaged, and my buyer doesn’t pay me, then I still lose and the buyer could still claim the insurance?

    I figured that if I use FOB and the cargo is lost or damaged I could be on the safer side relying on the insurance claim to be received rather than relying on the customer to pay. I realize this is highly dependable on the kind of customer I have and his reputation but, what are your thoughts on this?

    Thak you!

    Reply
  11. In CIF you need to see the point of damage. The term CIF is same as FOB if you consider the liability of shipper, the responsibility of shipper ends when he successfully load goods on vessel. In CIF fright & Insurance is arrange by shipper but if damage occur in transit, it’s the Importer concern, however shipper can help buyer but in legal terms, its the importer who has to take painstaking efforts for insurance survey & claim.

    If damage occur in transit whole claim would be provided to Importer only in CIF.

    Reply
  12. In CIF terms, the seller will get the compensation from the insurance company. Seller will organise the insurance survey at the destination. The seller will have to pay this compensation to the buyer.

    Reply
  13. Thank you for providing advice in relation to CIF terms however the use of CIP terms could also harbour peril to the buyer as CIP terms only require the seller to provide minimal insurance cover. Bearing this in mind, it may pay to bring this to the attention of the buyer so that the relevant adjustments can be made in terms of the cover provided, therefore mitigating any further loss during the resolution process.

    Reply
    • Hi Hariesh, I notice that there is tremendous confusion about the various aspects of the Incoterms rules, and the insurance which the seller is obliged to take out on behalf of the buyer in two of the rules. Anyone is welcome to contact me about my Incoterms and cargo insurance master classes where all this is gone into in great depth.

    • Hi Alexander, what you have said is true in terms of the confusion reg the Incoterms to be used.. This training is something that all parties involved in international trade must go through for their own benefit..

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