The Shift from Sea to Sky: Why Precision Matters
While many traders are familiar with "FOB" (Free on Board) or "CIF" (Cost, Insurance, and Freight), these are technically reserved for sea and inland waterway transport. Using them for air cargo can lead to legal ambiguity regarding the exact point of Risk Transfer Point. In air freight, the transition of risk often happens at a terminal or when the goods are handed to the carrier, rather than "over the ship’s rail."
To ensure your logistics are compliant with the Marine Insurance Act, 1963, and that your coverage remains enforceable, you must transition to multimodal terms. These terms are designed to cover the complexities of air transport, including ground handling, terminal storage, and the high-speed nature of aviation logistics.
Key Note: Marine insurance is a broad category. Under regulatory frameworks, "Marine" coverage extends to goods in transit by rail, road, and air. A specialized "Air Cargo" policy is actually a subset of the broader marine insurance market.
Essential Incoterms for Air Freight
When your cargo takes to the skies, specific rules apply to dictate the flow of costs and the transfer of risk. Here is the breakdown of the most commonly used terms for air shipments:
- EXW (Ex Works): The seller’s only responsibility is to make the goods available at their own premises. The buyer handles everything else, including loading, export clearance, and air insurance.
- FCA (Free Carrier): Highly recommended for air cargo. The seller delivers the goods to the air carrier or another person nominated by the buyer at a named place. Risk transfers once the carrier takes charge.
- CPT (Carriage Paid To): The seller pays for the air freight to the destination airport, but the risk of loss transfers to the buyer as soon as the goods are handed to the first carrier.
- CIP (Carriage and Insurance Paid To): Similar to CPT, but the seller is obligated to provide insurance. Under Incoterms 2020, CIP now requires a higher level of cover (Institute Cargo Clauses 'A' or 'Air').
- DAP (Delivered at Place): The seller bears all risks and costs until the goods are ready for unloading at the specified destination (e.g., the buyer’s warehouse).
- DPU (Delivered at Place Unloaded): The seller is responsible for the air transit and the actual unloading of the cargo at the destination.
- DDP (Delivered Duty Paid): The maximum obligation for the seller, covering all costs including import duties, taxes, and final delivery at the destination.
Comparison of Responsibilities
The following table outlines the division of duties for the most frequent air cargo terms, ensuring you can align your insurance policy with your contractual obligations.
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Incoterm
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Export Clearance
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Air Freight Cost
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Transit Insurance
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Risk Transfer Point
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|
EXW
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Buyer
|
Buyer
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Buyer
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Seller’s Warehouse
|
|
FCA
|
Seller
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Buyer
|
Buyer
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When handed to Air Carrier
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|
CPT
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Seller
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Seller
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Buyer
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When handed to first Carrier
|
|
CIP
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Seller
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Seller
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Seller
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When handed to first Carrier
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|
DAP
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Seller
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Seller
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Seller/Buyer*
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Named Place of Destination
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|
DDP
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Seller
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Seller
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Seller
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Buyer’s Premises
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*Under DAP/DDP, while the seller bears the risk, the insurance arrangement is often a matter of commercial agreement, though the seller typically insures to protect their own interest.
Marine Insurance and Air Cargo: Core Components
When discussing marine insurance in the context of air freight, we are focusing on Cargo Insurance that adheres to the Institute Cargo Clauses (Air). These clauses are specifically drafted to address the unique risks of aviation, such as sudden turbulence, pressure changes, or terminal theft.
1. The Principle of Insurable Interest
For a claim to be valid, the party claiming must have an "insurable interest" at the time of the loss. This is why the Incoterm you choose is so critical, it defines exactly who has the financial stake in the cargo at any given second. If a loss occurs before the Risk Transfer Point, the seller claims; if after, the buyer claims.
2. Regulatory Compliance for Air Transit
All insurance policies must be issued by an insurer registered with the national regulator. These policies typically utilize the Institute Cargo Clauses (Air), which provide "All Risk" coverage. This is a broader protection than the standard sea clauses (ICC B or C) because air cargo is generally considered lower risk but higher value.
3. Defining the Risk Transfer Point
Instead of using the word "mapping," we refer to the Risk Transfer Point. In air freight:
- In FCA terms, the risk transfers when the goods are delivered to the airline's ground handling agent (GHA).
- In CIP terms, even though the seller pays for the insurance, the buyer becomes the "beneficiary" of that insurance the moment the goods are handed to the carrier.
Why CIP is the Preferred Choice for Air Cargo
For air shipments, CIP (Carriage and Insurance Paid To) is often the gold standard. It provides a clear framework for high-value electronics, pharmaceuticals, or perishables.
Higher Insurance Standards
Incoterms 2020 updated CIP to require "Clause A" level insurance. This is crucial for air cargo because "Clause A" (or the specific Air equivalent) covers almost all risks except specific exclusions. Given the high value of air shipments, this maximum coverage is non-negotiable for most CFOs.
Simplified Claims Process
Because the seller arranges the insurance but the buyer holds the risk once the goods are with the airline, the buyer can claim directly from the insurance company in their own region if the goods arrive damaged. This avoids the "ping-pong" effect of blaming the seller for transit damage.
Predictable Costs and Landed Price
The seller includes the air freight and insurance premium in the invoice price. This provides the buyer with a "landed cost," which is much easier to budget for than trying to calculate individual shipping and insurance components from afar.
Strategic Advantages for Your Business
Choosing the right term isn't just about compliance; it's a strategic business decision that impacts your balance sheet.
- FCA allows the buyer to use their own global marine insurance policy. This is often better if the buyer has a "Marine Open Cover" policy that offers volume-based discounts.
- CPT/CIP allows the seller to control the logistics. If you are a seller with high-volume contracts with major airlines, you can potentially lower the overall cost of the goods for your customer, making you more competitive.
- Control over Documentation: Under FCA, the buyer gets the Air Waybill (AWB) directly, providing better visibility over the shipment's status compared to terms where the seller controls the documentation.
Detailed Analysis of "Free Carrier" (FCA) for Air Freight
FCA is perhaps the most versatile term for air cargo. Under Incoterms 2020, a significant change was made to FCA to accommodate "On-Board" requirements.
In an air freight context, the seller's responsibility ends when the goods are delivered to the named place. If the named place is the carrier's terminal, the seller is responsible for the delivery to that terminal but not for the unloading. However, if the named place is the seller's warehouse, the seller is responsible for loading the goods onto the truck sent by the buyer.
Insurance Implications for FCA:
The buyer must ensure their insurance policy is "attached" from the moment the goods are handed over at the named place. If there is a delay between the goods leaving the seller's warehouse and arriving at the airport terminal, and the named place was the airport, the seller must ensure their own insurance covers that domestic leg.
The Role of the Air Waybill (AWB) in Insurance Claims
In marine insurance, the Bill of Lading is the key document. In air cargo, it is the Air Waybill.
- Evidence of Contract: The AWB proves that a contract of carriage exists.
- Receipt of Goods: It serves as proof that the carrier received the goods in "apparent good order and condition." If the AWB is marked (claused) with notes of damage, the insurance company will look to the seller for the loss, not the transit policy.
- Risk Transfer Verification: The date and time on the AWB are often used by insurance surveyors to determine if a loss occurred before or after the risk transferred according to the Incoterm.
Key Exclusions to Remember
Regardless of the Incoterm or the insurance policy, certain exclusions are standard across the industry as per regulatory guidelines:
- Inherent Vice: Damage caused by the nature of the product itself (e.g., a battery leaking due to its own defect or fruit rotting due to its own chemistry).
- Insufficient Packaging: If the air cargo wasn't packed to withstand the pressures and vibrations of flight, the insurer may deny the claim.
- Wilful Misconduct: Any intentional act by the insured that leads to a loss.
- Delay: Loss of market value because a flight was delayed is typically not covered. If you are shipping seasonal goods or perishables, you need a specific "Delay" endorsement.
Best Practices for IRDAI-Compliant Air Shipping
To remain fully protected under the law and ensure your claims are paid, follow these professional standards:
- Always Mention the Year: Your contract should read "CIP New York Airport (Incoterms 2020)." Omitting the year can lead to disputes if an older version of the rules is used in court.
- Verify the Insurance Certificate: If you are the buyer under CIP terms, demand the insurance certificate from the seller. Ensure it is issued by a reputable insurer and covers 110% of the CIF/CIP value.
- Survey on Arrival: For air cargo, time is of the essence. If damage is suspected, a survey must be called immediately. Most air cargo policies have a very short window (often 7-14 days) for reporting "concealed damage."
- Avoid Sea Terms for Air: Using "FOB" for an air shipment creates a legal vacuum. There is no "ship's rail" at an airport. Use FCA instead to ensure your Risk Transfer Point is clearly defined at the carrier's gate.
Conclusion
Selecting the correct Incoterm for air cargo is the foundation of a sound marine insurance strategy. Whether you are using FCA to maintain control over your insurance costs or CIP to provide a comprehensive package to your buyer, the clarity of the Risk Transfer Point is what prevents financial disaster.
By adhering to the Institute Cargo Clauses (Air) and ensuring all policies are compliant with national insurance regulations, businesses can leverage the speed of air freight without the hovering shadow of unmanaged risk.
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