When Risk Transfers During Shipping

In a business climate driven by results, shipping terms can be an afterthought of a sale. However, this can affect your bottom line, as assuming additional risk increases your potential for loss. As a business it is important to understand when risk transfers during shipping.

Shipping Terms

The terms laid out in a shipping agreement determine when ownership of the goods transfers from you to the buyer. The longer you hold ownership, the more risk you face. To make sure you are adequately prepared in the event of a loss, it is important to have a clear definition of when risk transfers. Published by the International Chamber of Commerce (ICC), the International Commercial terms, or Incoterms, are a set of internationally respected and recognized shipping terms used in transactions both domestically and between nations. While the definition of a given term should be explicitly defined in the shipping agreement to avoid any confusion, they are typically defined as follows:

Group E

EXW, EX works: The seller makes goods available at their premises. The buyer is responsible for carriage arrangements and any subsequent risk.

Group F

FCA, Free Carrier: Risk and responsibility for shipping costs transfer to the buyer when goods are in the possession of the carrier at the carriers’ location.

FAS, Free Alongside Ship: Risk, and responsibility for shipping costs, transfer to the buyer when the seller deposits goods alongside the ship before departure.

FOB, Free on Board: Risk, and responsibility for shipping costs, transfer to the buyer when goods pass the ship’s rail during the loading process.

Group C

CFR, Cost and Freight: Risk transfers to the buyer when the goods pass the ship’s rail during the loading process. The seller is responsible for shipping costs to the named port of destination.

CIF, Cost, Insurance and Freight: Risk transfers to the buyer when the goods pass the ship’s rail during the loading process. The seller covers the insurance and shipping costs to the named port of destination.

CPT, Carriage Paid To: Risk transfers when the goods are in the possession of the carrier. The seller covers cost of carriage to the named place of destination.

CIP, Carriage and Insurance Paid To: Risk transfers when the goods are in the possession of the carrier. The seller covers cost of carriage and insurance to the named place of destination.

Group D

DAT, Delivered at Terminal: The seller covers all transportation costs and bears all risk until the goods are unloaded at the named place of destination.

DAP, Delivered at Place: The seller covers all transportation costs and bears all risk until the goods are available to the buyer at the final destination.

DDP, Delivered Duty Paid: The seller covers all transportation costs and bears all risk until the goods are available to the buyer at the place of destination. The seller is responsible for all associate costs with importing goods.

It is important for your sales force to understand the potential costs involved in shipping agreements. Making concessions in shipping responsibilities to achieve a higher selling price could work out poorly in the long run if the shipping agreement, then puts a majority of the risk on you. Ideally, you want to transfer risk to the buyer as soon as possible.

Undefined Shipping Responsibilities

If you fail to establish in the contract when risk transfers and a loss subsequently occurs, the resulting dispute of ownership will most likely be for the court to resolve. There, ownership will be on the understanding of whether the contract was of the shipment or destination type:

Shipment Contracts: Contracts that require the shipping of goods to be by a carrier, but do not specify an end destination. In these situations, the extension of the seller’s responsibility is complete when the goods are in the possession of the first carrier. After that, the buyer is responsible.

Destination Contracts: Contracts that specify an endpoint or final destination, such as the buyers place of business. In these situations, risk transfers at the point when the merchandise is present to the buyer at the final destination.

While these categories generally outline risk, it is ultimately up to the court to determine who is the owner the goods at the time of loss. To prevent an unfavorable court ruling, always define the transfer of risk in your shipping agreements. Clearly establishing your responsibilities, as well as those of the buyer, will help both parties obtain the proper amount of protection without leaving gaps or paying for additional coverage that is unnecessary.

For further coverage or risk management information and assistance, contact Byars|Wright Insurance or connect with us online for more additional resources.