Insurance Interest in case of FOB and CIF Method

In detailed marine insurance covers national or international shipments it is clearly mentioned- the time and place of delivery, at what point the loss would shift to the buyer from a seller, which party will pay the cost of marine insurance and freight, etc.

What is the FOB method?

1. FOB stands for ‘free on board’ or ‘freight on board’ in which the seller would be held responsible till the goods are placed on the vessel as designated by the buyer. Here, the seller is under an obligation to ensure that goods are successfully delivered at a named place for transfer to the carrier.
2. In the case of FOB origin, the buyer would become the owner by the time and place the product actually originates. Here the buyer becomes responsible for freight and damaged goods.
3. In the case of FOB destination, the seller is responsible till the buyer receives the goods.
4. For eg. Is Mr. A (seller) is sending goods to Mr. B (buyer) on a FOB (free on board) basis, then Mr. B will be responsible for arranging insurance for Mr. A. So, in an instance of loss arising during the transit, Mr. B will get compensation from the insurer.
5. The landmark case on the question of the transfer of title in the goods in FOB contracts was stated by the constitutional bench in BK Wadeyar v. Daulatram Rameshwarlal (AIR 1961 SC 311)., wherein the court noted that in FOB contracts for the sale of goods, the property is intended to pass and does pass on the shipment of the goods. Here it held that the seller had no insurable interest in the goods thereby absolving the insurance company of the liability to reimburse the loss arising from the non-delivery of such goods.

When is FOB method preferable?

It is preferable when participants are engaging in global business. It is also useful in contracts that involve valuable items which are exposed to the threat of theft and loss. It brings clarity about who is the owner of the goods in transit.

What is CIF method?

CIF stands for Cost, Insurance, and Freight. It is an international shipping agreement that denotes the cost that the seller needs to cover- cost, insurance and freight. In this method, the seller is accountable for the insurance and pays to insure and transport goods to the buyer’s destination port. The seller has to bear the costs of any loss/damage to the product. The seller has to pay the additional customs duties, export paperwork, or inspections or re-routing if any. Once the goods have reached the buyer’s port of destination then the buyer assumes responsibility for any fees/charges for unloading and delivering the shipment to the final destination.

What is the relevance in distinguishing between FOB and CIF methods?

A clear understanding of the implication of these methods is pertinent to ascertain which party has an insurable interest as a party without insurable interest is a wagering contract that is not valid under The Marine Insurance Act, 1963.

What is insurable interest?

• Section 7 of the Act defines insurable interest as every person who has an insurable interest is one who is interested in a maritime adventure. Such a person is interested in adventure by way of legal or equitable relations. He is interested in the safe arrival of insurable property and may be prejudiced by its loss. It is necessary that such a person has an interest in the subject matter at the time of the loss though he may not be interested when the insurance is effected as per Section 8 of the Act.
• A partial interest of any nature is insurable.
• Bottomry- the lender of money on bottomry or respondentia has an insurable interest in respect of the loan.
• Master’s and seamen’s wages- the master or any member of the crew of a ship has an insurable interest in respect of his wages.
• In the case of advance freight, the person who advances the freight has an insurable interest, in so far as such freight is not repayable in case of loss.
• Where the subject matter is mortgaged then the mortgagor has an insurable interest.
• In the case of Contship Container Lines Ltd. v. DK Lall & Ors., the insurance company had contended that since the transaction between the exporter and the purchaser in Spain was on FOB (free on board) basis the exporter had no insurable interest in the goods once the same was delivered to the carrier. It’s because in a FOB transaction the property in goods stands transferred to the purchaser as soon as goods are entrusted to the carrier or at least when the same cross the customs barrier for shipment, i.e. all risks relating to such goods are that of the purchaser alone. So the question before the Apex Court was whether a seller of goods on FOB basis be said to be ‘interested in marine adventure’? However, the Court didn’t delve into the question and instead noted that the Claimant had wrongly mentioned that it was on CIF (cost insurance and freight basis) while in reality it was sent on FOB basis and hence it was considered as a breach of good faith (section 19 of the Act) and Court upheld the rejection of claim.

TT Ltd. v. Golden Eagle Company Limited & Others, Delhi High Court, 2018

Facts:

1. Defendant No.1 company is buyer of goods situated in Vietnam.
2. Defendant No.2 is the insurance company of Defendant No.1.
3. Defendant No.3 is the insurance company of the Plaintiff. It had insured the exported goods.
4. There was a contract to supply de-oiled rice bran extraction. Plaintiff claims to have supplied 4040 bags 200.28MT of goods at US$226 per MT for which invoice dated 01.11.2012 was raised.
5. Plaintiff had sent the consignment on board on 14.11.2012 under shipping bill dated 9.11.2012 and had it insured with defendant no.3 for journey from plaintiff’s warehouse(Kolkata) to Defendant no.1 warehouse in Vietnam. Defendant no.1 had also taken insurance.
6. In Mid December, 2012 plaintiff was informed that portion of cargo was damaged and so he accordingly invoked insurance with Defendant no.3 which failed to take action so Plaintiff appointed an independent surveyor who said 10% goods were damaged.
7. Then upon intimation by Plaintiff Defendant No.1 also appointed it surveyor.
8. Plaintiff raised claim to Defendant no.3 for damage and inspection charges but they denied it.
9. Defendant no.1 denied to make payment for damaged goods.

Arguments:

1. Defendant no.3 said that the suit is not maintainable as the consignment was dispatched by the plaintiff on CNF terms and hence it was Defendant no.1 (buyer) who had to take the insurance coverage for the goods
2. Defendant no.3 also pleaded that damage cannot be attributed to be done during the voyage hence no amount is payable.

Question of Law:

1. Whether the Plaintiff had insurable interest in the insured goods?

Decision:

1. The trial court had held that even if property in goods passes to the buyer yet in case the seller has control of the goods, even in such circumstances there would be an insurable interest but in the present case the appellant/plaintiff had retained no control over the goods.
2. Section 8 of the 1963 Act wherein it is clearly stated that “Where the assured has no interest at the time of the loss, he cannot acquire interest by any act or election after he is aware of the loss ……”.
3. Referred to the SC judgment of Contship Container Lines Ltd. v. DK Lall, wherein SC quoted from Halsbury’s Laws of England, 4th Edn., Vol. 25 (para 190)- “190. Meaning of ‘insurable interest’: A person may be said to be interested in an event when, if the event happens, he will gain an advantage, and, if it is frustrating, he will suffer a loss, and it may be stated as a general principle that to constitute an insurable interest it must be an interest such that the peril would by its proximate effect cause damage to the assured, that is to say, cause him to lose a benefit or incur liability.”
4. The court upheld the decision of the trial court as the plaintiff had no insurable interest because ownership of goods had passed to the buyer.

Hence, it is pertinent to keep this in mind while entering into an agreement (between buyer and seller) to decide on the method to be FOB or CIF and its likely implications in ascertaining who holds insurable interest while claiming insurance from the assurer.