FOB Pre-shipment Clause

FOB Pre-shipment Clause

What is it:

A contingency cover for overseas imports providing protection for purchasers when there is the potential for loss or damage to have occurred to the cargo prior to it being loaded onto the overseas vessel at the origin port.

Things to think about:

Marine import insurance covers the Australian importer for cargo that is at their risk.

1. Internationally accepted rules of trade (Incoterms) establish at which point in the transit risk in the cargo transfers from seller to buyer and who is responsible for arranging marine insurance.  Incoterms also specify who is responsible for payment of freight and customs duties.
2. The Incoterms provide a common basis of defining risk transfer and responsibilities. This facilitates international trade, especially where banks are funding an import or export and they wish to see evidence of marine insurance.
3. It is important that importers in Australia are aware of the Incoterms applying to their shipment and their responsibilities.
4. The Incoterm applying to the shipment will generally be shown on the purchase invoice.
5. Never assume that an overseas seller is arranging marine cargo insurance for the entire duration of the transit.  For shipments by sea, the seller’s responsibility to arrange cargo insurance is generally specified by four Incoterms:
   a. FOB (Free on Board) or CFR (Cost and Freight): Risk in the cargo and insurance responsibility transfers from seller to buyer once the cargo is loaded on board the overseas vessel at the port.
   b. CIF (Cost, Insurance, Freight): Seller arranges cargo insurance to the overseas destination port.
   c. Less common in international trade is Ex-Works where risk and responsibility in the cargo transfers from seller to buyer at the point the goods leave the seller’s warehouse.
6. Issues can arise where there are gaps in cover due to the seller not being responsible for arranging cargo insurance for the entire duration of the transit.
7. In point 5(a) above, where goods are sold FOB or CFR, any loss or damage to the cargo occurring prior to it being loaded onboard the overseas vessel will the responsibility of the seller. However:
   a. Loss or damage may not be evident until the container is unpacked at destination. This can lead to debates as to where exactly the incident occurred.
   b. The seller may not have insurance or the means to pay for the portion of the transit that is their responsibility.
   c. The seller’s insurer may refuse to pay the claim.
   d. The importer (in Australia) may have already paid for the cargo and therefore has a financial interest in it and is at risk of financial loss if a claim is not paid by the seller or their insurer.
8. The FOB pre-shipment clause ignores the fact that the Australian importer is not responsible for marine insurance and extends the cover from the time the cargo leaves the overseas supplier’s warehouse for the entire duration of the transit.
9. This is a ‘silent’ cover not to be revealed to the overseas seller.
10. The policy holder must make all efforts to recover from the overseas seller.
11. The Australian insurer may attempt to make a subrogated recovery against the seller.

Example

Cargo arrives at a warehouse in Australia with water damage caused from holes in the shipping container.  The container came from a supplier in China.  At the time of shipping China was subject to monsoon rains.

Has the water damage occurred while in transit in China to the overseas ship, during the ocean transit or during the inland transit within Australia?

Proteus Marine’s annual marine cargo insurance includes 44 additional clauses enhancing the standard cover provided by the Institute Clauses.

The FOB pre-shipment clause is just one example of Proteus protecting the financial interests of our clients for their cargo in transit.

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• Single and Annual Cargo
• Carriers Cargo & Carriers Cargo Liability
• Commercial Hull
• Marine General Liability