Part II — The Commercial Framework

Cargo Insurance

Why goods in transit must be insured, what the Institute Cargo Clauses (A, B, C) actually cover, and how insurance ties back to the Incoterm.

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Cargo can be lost or damaged at any point in a journey — a container overboard in heavy seas, water damage, theft, a handling accident, a general average declaration after a fire. The carrier’s liability for this is strictly limited by international convention and is far less than the value of most cargo. Insurance closes that gap. A forwarder who understands cargo insurance protects the customer from a loss the carrier will never fully pay.

Why the carrier’s liability is not enough

Carriers limit their liability by weight under international conventions (the Hague-Visby Rules for sea, the Montreal Convention for air). These limits are typically a small amount per kilogram, with no regard to the actual value of the goods. For anything valuable relative to its weight — electronics, machinery, branded goods — the carrier’s maximum payout is a fraction of the loss. Cargo insurance, not carrier liability, is what makes the owner whole.

The Institute Cargo Clauses — A, B and C

The market-standard wordings are the Institute Cargo Clauses (ICC), published by the (London) Institute of Underwriters. There are three levels of cover:

All three exclude inherent vice, ordinary leakage, insufficient packing, delay, and (separately insured) war and strikes — the latter added back via War and Strikes clauses where the route demands.

How insurance ties back to the Incoterm

This is where Chapter 4 and Chapter 7 meet. Only two Incoterms oblige the seller to insure on the buyer’s behalf — CIF and CIP — and Incoterms 2020 set different minimum levels for each:

Term	Seller’s insurance obligation (Incoterms 2020)
CIF (sea only)	minimum cover — Institute Cargo Clauses (C)
CIP (any mode)	all-risks — Institute Cargo Clauses (A)

Under all other terms, insurance is optional and a commercial decision — but a forwarder should always offer it. On CFR or FOB, for instance, no one is contractually obliged to insure, yet the buyer carries the risk at sea and is dangerously exposed without cover.

The older naming — FPA, WA, AR

NAFL teaches the market’s traditional clause names, still seen on older policies and in some banks’ L/C wording. They map onto today’s A/B/C:

• FPA — Free from Particular Average ≈ the narrowest cover (≈ Clauses C): general average, “perils of the sea” (stranding, sinking, fire, collision), total loss of whole parcels, and named catastrophes (earthquake, flood). A parcel arriving part-broken would not qualify. Adequate only for bulk/unpacked cargo (logs, iron bars, pipes).
• WA / WPA — With (Particular) Average ≈ a wider cover including partial losses and damage (often with a franchise percentage, or IOP “irrespective of percentage” if fully liable).
• AR — All Risks ≈ Clauses A: the widest, standard for general cargo — but still excludes war, strikes, riots and civil commotion (W & SRCC), which must be added separately, plus the standard exclusions (inherent vice, inadequate packing, delay, wilful misconduct, ordinary wear).

NAFL’s standing advice: unless FPA-only cargo, contract “all risks, including pilferage, breakage, wetting by sea/rain water, including W & SRCC.”

Open cover — how forwarders actually insure

Rather than insuring each shipment one by one, NAFL recommends the open contract (floating policy / open cover):

Claims and how settlement is calculated

When properly insured cargo suffers a covered loss, the insured submits a claim with: the policy/certificate, invoice, survey report (if any), claim letters/reserves, short-landing or loss certificate, and repair/replacement invoices. NAFL’s settlement rules:

• Settlement is proportional to the insured value. Example: 10 cases insured for $12,000 (value $10,000 + margin); one case lost → pay 1/10 = $1,200, even if a replacement costs $1,350.
• Pilferage example: goods worth $862 lost, insured value $12,000 on $10,000 value → compensation = 12,000 × 862 ÷ 10,000 = $1,034.40.
• Survey: no survey is usually required for small claims (commonly under ~$500), since a survey itself costs $100–200 — but the insured must still make reserves and pursue the responsible party.
• General average settlement: if cargo is jettisoned, the insurer pays the owner in full, then recovers under the average adjustment — with the payout adjusted for the contribution the goods would have borne had they arrived.

Duties of the insured party

The insurer pays only if the insured safeguarded the goods: taking all measures to preserve/salvage cargo and minimise loss, issuing valid reserves to protect the right of recourse against the carrier or party at fault, and (on settlement) signing a letter of subrogation. NAFL stresses this is exactly where forwarders must be careful — a forwarder receiving goods on a client’s behalf who fails to note damage and reserve rights commits “a serious mistake.”

Key terms a forwarder should recognise

• Insured value — usually CIF value + 10% (cost, insurance, freight, plus a margin for expected profit/expenses).
• General Average — an ancient principle: when part of a cargo or vessel is sacrificed to save the whole (e.g. jettison, or salvage after a fire), all cargo owners contribute proportionally to the loss. Without insurance, an owner whose goods arrived safely can still face a large general-average bill.
• Subrogation — after paying a claim, the insurer takes over the owner’s right to recover from whoever caused the loss.

What to take from this chapter

1. The carrier’s liability is limited by weight and rarely covers the cargo’s true value — insurance closes the gap.
2. Cover comes in three levels: Clauses A (all-risks), B (named perils), C (major casualties only).
3. Only CIF and CIP oblige the seller to insure; under Incoterms 2020, CIP = all-risks (A), CIF = minimum (C).
4. Insure to CIF + 10%, understand general average, and offer cover on every shipment.