LOGO
Chapter 3
TRANSPORTATION, INSURANCE,
PAYMENT IN FOREIGN TRADE
Insurance of goods in foreign trade
v Concept
v Insurance means a commitment of the insurer to indemnify the assured
against damages and loss due to agreed risks corresponding to a paid
insurance premium.
v Role
§ Insurance is very important for economic activities, it ensures the sharing
of responsibilities in the community
§ Insurance ensures to compensate for loss and damage to the matter of
insurance in order to remedy the consequences of risks.
§ Insurance generates huge source of capital and is an integral part of the
vibrant financial market.
§ Insurance activities also contribute to the State budget through its
business operations.
§ Insurance creates peace of mind in business activities
The risks in cargo insurance
Risks are accidents, disasters or
incidents that occur unexpectedly,
randomly or threats when occur will
cause loss to the matter of insurance.
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Types of risks in cargo insurance
v Based on the source of the risk
ü Natural disasters: (Act of God) Natural disasters are
natural phenomena that humans cannot control such as
earthquakes, floods, tsunamis ....
ü Maritime Risks (Perils of the sea) are accidents occur in
the sea, such as ships stranded, collision, fire, explosion,
capsized, missing ...
ü Other types of risks: aside from the causes of the
uncontrollable risks mentioned above, there are unexpected
risks such as: goods breaking onshore, theft, loss…
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Types of risks in cargo insurance
v Insured risks:
ü Normal insured risks: Risks that are accepted by the parties
according to common practices such as conditions A, B and C
include unexpected and random risks occurring unintended.
ü Individually insured risks: risks that are separated for the parties
to negotiate separately when buying insurance including special
risks such as war, strike and terrorism risks.
ü Uninsured risks: These are risks which naturally occur or are
certain to occur, due to the fault of the insured ... This risk is not
covered in any case, so it is called an exemption case when it is
definitely happening.
Loss in cargo insurance
Losses are damages, injuries of the subject-
matter insured due to risks
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Types of losses in cargo insurance
v Based on the level of loss:
v Partial loss is part of the subject-matter of insurance that is
damaged or lost
v Total loss means the whole insured subject has been damage or
irreparable or be used
§ Actual total loss means that the entire matter of insurance is
damaged, lost, or degenerated unlike the original at the time of
insurance and can not be recovered.
§ Estimated total loss are loss or damage of the subject-matter of
insurance not to the full extent but that object cannot be repaired
or used anymore.
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Some examples in marine insurance
1. A vessel carrying rice was on its way to the port of destination when it
hit a storm. When it took refuge at a port, the rice was wet. If the carrier
continues to transport to the port of destination, the rice will be damaged,
which means that total losses will occur and the insurer must pay full
compensation.
2. A vessel carrying steel had an accident and had to stop at a port for
refuge and could not continue the journey. Although iron and steel have
not yet been damaged, the cost of unloading ashore, hiring another vessel
to continue, loading the ship, warehousing, storage ... exceed the value of
the steel lot at the port of destination after it has arrived.
3. In order to be treated as an estimated total loss, the insured have to give
up their freight
Giving up is the action of the insured to waive all his rights to the
goods to the insurer in the event of an estimated total loss for full
compensation. 8
Types of losses in cargo insurance
v General loss: is a loss to general security, a sacrifice to the general
good or a general harm.
v The characteristics of a general loss must show as follows:
ü The act of general loss must be the voluntary action of the vehicle owners and
their comrades
ü Sacrifices or costs must be special and extraordinary - extraordinary costs with
significant meaning and duty
ü Sacrifice or reasonable expense for safety and public interests. Excessive
sacrifice or excessive expenses are considered unreasonable.
ü Loss, damage or expense caused by direct joint action
v Private losses: loss and damage of the matter of insurance due to an
accidental, incidental risk. For whom this loss occurs, the person
will suffer loss.
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General loss
v General loss = sacrifice of general loss + cost of general loss
§ Sacrifice of general loss: damage caused by act of general loss
§ Cost of general loss= rescue expenses + costs of floating the ship + costs
at the port for refuge + interest of the amount recognized as general loss
§ Procedures related to general loss:
§ Ship owner:
• Declared general loss
• Invite to assess loss of ships and cargo
• Send cargo owners a guarantee of contribution to the general loss
§ Cargo owners:
• Declare cargo value (if required by the ship owner)
• Fill out the general loss contribution guarantee form and send it to the insurance company
to sign to receive the goods
• If the goods are not insured, the owner must make a deposit in cash (= the amount
advanced to allocate general loss payable)
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Types of cargo insurance
v According to the BH London Institute:
ü Free of particular average conditions: In English the
term PA (particular average) means partial loss and FPA
(Free particular average) means that partial loss
compensation is not a general loss but still a total loss
compensation.
ü With average conditions (WA): Acceptance of
insurance for the risks which occurrence cause private
loss.
ü All risks conditions (All risks)
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Types of cargo insurance
v According to ICC 1963
ü Insurance condition A: This condition is similar to the all risks
condition but has modified more contents than the condition (All
risks) above. This insurance condition is the largest covered condition
among other insurance conditions including insurance condition B
and insurance condition C.
ü Insurance condition B: This insurance condition is similar to the
with average condition. As amended in 1963, the insured cases are
more specific and provide clearer exclusion conditions.
v Insurance condition C: This insurance condition is similar to the
free of particular average condition . Exclusion clauses are similar to
the provisions of clauses B and A.
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Types of cargo insurance
v According to ICC 1982: In 1982, a clearer classification
from basic to various forms of insurance was introduced,
including:
ü Institute Cargo Clauses A
ü Institute Cargo Clauses B
ü Institute Cargo Clauses C
ü Institute War Clauses, cargo applied to goods transported
by sea
ü Institute Strikes Clauses, cargo applied to goods
transported by sea
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Institute Cargo Clauses C
v Covered risks include:
ü Fire or explosion
ü Ship or barges were stranded, sunk or capsized
ü The ship collided with other vehicles or objects that were not water or were missing
ü Unloading at the place of refuge
ü Road vehicles were derailed or subverted
ü Sacrifice for general average
ü Throw the goods into the sea
v Losses, expenses and liability of the insurer
ü General losses and rescue costs are calculated and distributed according to the contract of
carriage and / or according to applicable laws and practices.
ü Both to blame collision clause: The insured's responsibility when both ships collide and
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both are at fault
Institute Cargo Clauses B
vIn addition to the risks covered under condition C,
there are also the following additional risks:
ü Earthquakes, volcanic eruptions, lightning strikes
ü Water pulled goods from the ship
ü Sea water, rivers and lakes flowing into ship tunnels,
barges, means of transport, containers or cargo places
ü Total loss of any package that falls from the ship or
falls during loading, unloading on board and barge
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Institute Cargo Clauses A
vContents of institute cargo clauses A are:
üTo be compensated for any loss, damage or
expense of the subject-matter of insurance
except for exclusion risks such as conditions
B and C.
üIn addition, there are additional conditions to
be compensated for risks caused by
intentional damage or vandalism not caused
by the insured.
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Institute War Clauses
v War, civil war, rebellion, civil uprising or civil conflict
arising from these events or any hostile act caused by or
against a participating force.
v Seized, confiscated, arrested, restrained or detained as a
result of such events and their consequences or the
conspiracy to conduct such activities.
v Landmines, torpedoes, bombs or derelict weapons of war
after the war
v Contribute to the general average
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Institute Strikes Clauses
vRisk covered for loss or damage of the subject-matter
of insurance due to:
vStrikes, workers who are prohibited from workshops
or participants who cause labor disturbances, riots or
rebellions of the people
vAny terrorist or any person acting for political
purposes
vGeneral losses and rescue costs
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General exclusion risks
v Loss, damage or expense due to the insured's willful act
v Normal leakage, normal loss in weight or natural erosion of the matter of insurance
v Loss, damage or expense due to incomplete or inappropriate packaging
v Loss, damage or expense due to inherent vice or the nature of the matter of
insurance
v Loss, damage or expense as a direct cause of delay whether or not the delay is
caused by a covered risk
v Loss, damage or expense due to the ship's inability to repay debts or financial
deprivation, ship managers, charterer or operator.
v Deliberate damage or intentional destruction to the matter of insurance by the
wrongdoing of any person
v Loss, damage or expense resulting from the use of any war weapon involving
nuclear or radioactive energy.
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Excluded risks due to transportation
vInsurance does not cover loss, damage or expense
caused by:
vShips or barges are incapable of sailing;
vShips, barges, other means of transport, containers,
wagons are not suitable for safe transport of goods for
which insurance buyers or their employees know the
conditions mentioned above when loading goods onto
those vehicles and transport tools.
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Risks excluding war risks
v In no case shall compensation for loss, damage or
expense resulting from the following:
v War, civil war, revolution, rebellion, insurrection or
hostile action caused by or against a force to fight.
v Captured, confiscated, arrested, restrained (not including
pirates), and the consequences of such actions
v Bombs, mines, torpedoes or other war weapons left over
from battles.
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Risks excluding strike risks
v In no case shall compensation for loss, damage or
expense resulting from the following:
ü Strikes, banned workers, or anyone involved in a labor
disorder, violence or civil rebellion
ü Strikes, factory bans, labor disorders or civil riots
ü Terrorist or anyone acting on political motives
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Products and goods insurance market
in foreign trade
v Products:
• Main insurance products
• Additional insurance products
v Markets:
• The process of formation and development
• Foreign trade insurance market characteristics
• Commodity insurance markets in foreign trade
Main insurance products
üInstitute Cargo Clauses A: insurance of all
risks.
üInstitute Cargo Clauses B: insurance with
average
üInstitute Cargo Clauses C: insurance with Free
particular average
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Insurance value, insurance amount and
insurance fee
1. Insurance value = value of the matter of insurance at the
beginning of insurance + insurance fee + other expenses
• Insurance value of goods = freight cost at the port of departure (C) +
insurance fee (I) + freight to port of destination (F) = CIF or CIP price
• When exported under FOB or CFR terms, the insurance value is calculated by
the CIF of the item.
• To ensure benefits, the insured can also insure the expected interest of the
import and export.
• Therefore, the insured often buys insurance value = (100% + 10%) of CIF or
CIP price
1. Insurance fee (I) is calculated according to the ratio of insurance
fee (R) or insurance rate: this is the price set by the insurance
company and depends on the nature of the goods or means of
transport that R is high or low.
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Calculation of premiums and conversion
of FOB & CIF prices
v Premium = Premium rate x base value of insurance product. The
calculation formula is I = R. CIF
v Base value of insurance products = Value of initial goods +
Insurance fee + shipping fee. The calculation formula is CIF = C
+I+F
v When the value of the insurance product's base is not expressed or
incomplete in the foreign trade contract, it shall be calculated as
follows:
v CIF = C+I+F change I = [Link] we have: CIF= C+[Link]+F
ü Therefore, CIF - [Link] = C + F or CIF (1-R) = C + F
ü So CIF = (C + F) / 1-R
ü And when buying under the condition of 110% of the value of the subject of
insurance we have: CIF = (C + F) / 1-1,1R 26
Extra insurance products
v War insurance conditions apply to goods transported by sea
(Institute War Clauses, cargo)
v War insurance conditions apply to air freight (Institute War
Clauses, air cargo)
v War insurance conditions apply to goods transported by post
(Institute War Clauses, sending by post)
v Conditions of strike insurance apply to goods transported by sea
(Institute Strikes Clauses, air cargo)
v Conditions of strike insurance apply to goods transported by air
(Institute Strikes Clauses, air cargo)
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