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..

What did you think of the above article..?? Comment below..

17 comments on “Compensation of damage claim in a CIF shipment

  1. Mukwindidza Lloyd says:

    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.

  2. Allin says:

    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.

  3. 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.

    1. Hello Andrzej,thanks for the participation and comment..:)

  4. Carlos says:

    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.

    1. 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..??

    2. Carlos says:

      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.

    3. Zuzana Haider says:

      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!

  5. Julio says:

    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!

    1. Hello Julio, FOB is also an incorrect Incoterm to use for containers.. I would recommend you read this article http://shippingandfreightresource.com/the-correct-usage-of-incoterms-2010-rules/ which also has a link to the ICC bookstore where you can buy the Incoterms 2010 rules book online.. This will greatly assist you in your business..

  6. Kishan Barai says:

    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.

  7. R VIJAYAN says:

    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.

    1. Hi Vijayan, thank you for your comment..

  8. Kate Ankers says:

    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.

    1. Hello Kate, thank you for your comment.. The core question if CIF is used, who should the insurance people compensate in case of any damage.. The buyer or the seller..??

    2. 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.

    3. 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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