Sales terms and insurance - common pitfalls and how to avoid them

ArticleSeptember 21, 2023

Marine cargo insurance covers the risks of physical loss or damage to goods and merchandise while in transit, by almost any method of conveyance and almost anywhere in the world. With today’s ever more complex supply chain in global trade, you need to understand and choose the right trade or sales terms. With well-defined terms, such as Incoterms (introduced by the International Chamber of Commerce) you have plenty of options. In this article Zurich Nordic’s Peter Hallin shares his expertise on a few pitfalls and how to avoid them.

Share this

In 2022, the worldwide export of goods had a total value of around 25.3 trillion USD and every year, almost 11 billion tons of goods are transported by ship. Needless to say, for suppliers and their customers it is important to have an adequate sales process in place, not least to avoid adverse insurance situations.

With a variety of demanding (and less demanding) customers, using the right sales terms is key. Fortunately, a wide range, such as the Incoterms, are available to make your sales process smoother. Incoterms is a pre-defined set wordings published by the International Chamber of Commerce that clarify contracts and help parties understand their obligations and responsibilities within the agreement. Using standardized, well known, sales terms is key to manage expectations in sales relations. Predictability in resolving sales issues can be the difference between retaining or losing a key customer.

A popular sales term

With many terms to choose from, there is plenty variation afforded. One popular term is the CIF which, beside goods cost (C), includes both insurance (I) and freight (F) in the sales price. It often comes with a separately issued policy (sometimes called a certificate) with the buyer as named assured. One reason for its popularity is that it allows the seller to retain oversight of the transport by using its own logistics partner. “It’s included in the price” is another good selling point. One that also typically warrants a higher price.

In an ideal world, your customer sees the upside of your offer and if anything goes wrong they will say: “The goods arrived with some scratches. Luckily, insurance was included, and we got compensated.”

Pitfalls to avoid

Using the right sales terms is a tool to perfect your sales process but make sure they don’t negatively affect your insurance. By managing expectations, you can avert these common risks:

1. When using sales terms that include insurance, your offer can be perceived as “all inclusive” with questions arising such as “why don’t you resolve the claim for us?” Set expectations right in the beginning. It can be painful for relations to backtrack the whole sales process. Not to mention the extra work to set things right. Your insurer can tell you more about how the included insurance can be beneficial to your customer.

2. Insurance included can often be understood as “all risks are covered.” The cover you hold as an insured is typically wider than that of the sales agreement. However, the fact that you are covered doesn’t mean your customer has the same protection. Make sure not to overpromise what is included in the sales price. Contact your insurer to discuss what cover you can provide when insurance is included in sales.

3. If the included insurance cover for a particular sale is issued in favor of the buyer, the customer might not contact you if a damage or a loss occurs. If they only inform their own insurance company you may lose the opportunity to handle the root cause (e.g. improve packaging or change the transit route). In addition to your usual customer interaction, make it a habit to regularly check in with the claims handlers at your insurer to spot any patterns or trends before they become a problem. Digital loss runs which are updated daily, are widely available to help in this regard.

Furthermore, from time to time, buyers systematically report small claims in subsequent shipments. It is rarely a concern on the individual claim but they are often unintentionally supported by a surveyor. The cargo buyer is apparently a specialist in concerned goods as opposed the generalist surveyor. Claimed amount is set low to make sure surveyor is convinced any remedy (scrap sale or return shipment) is deemed not worthwhile. The goal is for the buyer to end up with both goods and compensation. If this becomes a pattern we suggest you contact your insurer for further advice on how to mitigate these risks from re-occurring.

At Zurich Nordic you have access to a powerful global network of marine experts. We have the right tools to help you predict, avert and react to these risks. For more information on our offering. Please contact filip.cokorilo@zurich.com, Head of Underwriting Marine.