Marine Cargo Insurance — Incoterms and Setting the Insured Amount

Trade Terms and the Sum Insured

The relationship between trade terms and the Sum Insured concerns the practical task of determining the appropriate valuation basis for marine cargo insurance in transactions using terms such as FOB, CFR, CIF, CIP, EXW, DAP, and DDP.

The Sum Insured is the amount stated in the insurance contract as the maximum amount recoverable in respect of the insured cargo, subject to the applicable policy terms. It also serves as a basis for premium calculation.

Trade terms define how the seller and buyer allocate responsibilities for arranging transport, paying freight and insurance, completing export and import formalities, bearing costs, and assuming the risk of loss or damage.

Trade terms do not directly determine the Sum Insured. However, because the costs included in the invoice amount differ by trade term, they significantly affect the base amount used to set the Sum Insured.

For example, the FOB price normally excludes ocean freight and the marine cargo insurance premium to the port of destination. Using only the FOB price may therefore result in a Sum Insured below the CIF-equivalent value and may create underinsurance relative to the Insurable Value.

Moreover, the risk transfer timing defined by Incoterms, the insurance arrangement obligations of the seller or buyer, the insurance period under the cargo insurance policy, and the actual timing of the insurance request are separate matters.

Therefore, when confirming the trade terms and the Sum Insured, it is necessary to check not only the invoice amount but also freight charges, premiums, domestic export costs, the required insurance percentage, currency, letter of credit conditions, the insurance period, and any special provisions in the sales contract.

Scope Covered in This Article

Item	Content Covered in This Article	Content to be Confirmed Separately
Trade Terms and the Sum Insured	Organizes the relationship between trade terms such as FOB, CFR, and CIF and the value that forms the basis of the Sum Insured.	Confirm individual sales contracts, price adjustment clauses, and the underwriting conditions of the insurer.
Sum Insured	Organizes its role as the payment limit under marine cargo insurance and as the basis for premium calculation.	Any insurance payment is assessed under the applicable policy terms, taking account of the Amount of Loss, Insurable Value, exclusions, deductibles, and residual value.
CIF Equivalent Amount	Organizes the concept of deriving the CIF equivalent amount by adding freight and insurance charges to FOB or CFR.	Confirm insurance premium rates, minimum premium, rounding methods, and calculation methods under the Open Cover Agreement.
110% of CIF Value	Organizes the common practice of setting the Sum Insured by adding 10% to the CIF value.	Confirm sales contract, letter of credit, Incoterms, and insurer’s specified conditions.
Insurable Value / Agreed Value	Clarifies differences from the Sum Insured and the relationship when the value is agreed upon at the time of contract conclusion.	Confirm whether an Agreed Value is established under the individual insurance contract by reviewing the insurance policy, schedule, and applicable policy terms.
Incoterms	Organizes the relationship among cost allocation, transfer of risk, insurance arrangement obligations, and Sum Insured.	Confirm the latest Incoterms edition and any additional or revised conditions in the sales contract.
Risk Transfer and Insurance Period	Organizes cases where transfer of risk under the sales contract and the start/end of cargo insurance differ.	Confirm the place of dispatch, place of destination, and Transit Clause as stated on the insurance policy.
Letter of Credit Transactions	Organizes Sum Insured, required insurance percentage, currency, and policy conditions as required by L/C.	Confirm the bank’s final examination of documents and determination of any discrepancy.
Freight Forwarder Involvement	Organizes the scope of tasks such as confirming trade terms, providing freight information, submitting insurance requests, and checking insurance policies.	Confirm insurance solicitation authority and freight forwarder’s liability insurance separately.
Claims Against Carriers	Organizes the relationship between a shortfall in the Sum Insured and claims for damages against NVOCCs and Actual Carriers.	Confirm carrier liability, liability limits, exemptions, notification deadlines, and Bill of Lading clauses.

Why Trade Terms Affect the Sum Insured

Trade terms affect the scope of costs included in the sales price.

For example, a CIF price typically includes the cost of goods, freight to the destination port, and insurance premiums. In contrast, a CFR price includes freight but excludes insurance premiums, while an FOB price usually excludes both the main sea freight and insurance premiums.

Therefore, even for the same cargo, a CIF price of USD 100,000 and an FOB price of USD 100,000 represent different scopes of costs covered by those amounts.

If only the invoice amount based on FOB or EXW terms is used as the basis for the Sum Insured, costs already confirmed as payable, such as freight and export domestic expenses, may not be reflected.

Conversely, DAP or DDP prices may include inland freight at the destination, import customs clearance charges, duties, import taxes, installation fees, and the like. It is important not to directly use the entire contract price as the basis for the Sum Insured without confirming the relationship with the covered cargo marine insurance period and the insured interest.

Differences Between the Sum Insured, Insurable Value, and Agreed Value

Term	Meaning	Relationship to Trade Terms	Practical Points to Confirm
Sum Insured	The maximum amount recoverable under the insurance contract, subject to the applicable policy terms	Generally set based on the CIF value or an equivalent CIF amount.	Confirm the amount specified in the insurance policy, confirmation notice, or insurance schedule.
Insurable Value	The monetary value of the insured interest	Trade terms, freight, premium, and anticipated profit may be relevant to the valuation basis.	Note that the Sum Insured and Insurable Value are not equivalent concepts.
Agreed Value	The Insurable Value agreed between the insurer and the policyholder when the insurance contract is concluded	May be agreed based on the CIF value or similar.	Simply stating an amount on the insurance request does not necessarily establish this agreement.
CIF Value	The value including cargo cost, freight, and insurance premium	Commonly serves as the basis for setting the Sum Insured in marine cargo insurance for ocean shipments.	Distinguish between the actual trade terms and the CIF equivalent for insurance purposes.
110% of CIF Value	A method of setting the Sum Insured adding 10% to the CIF value	Widely used as an international commercial practice.	This does not directly indicate the actual profit margin; the applicable contractual and policy terms should be verified.
Amount of Loss	The economic loss actually incurred due to an accident	It is distinct from both the trade terms and the Sum Insured.	Any insurance payment is assessed under the applicable policy terms, taking account of the Amount of Loss, residual value, exclusions, and deductibles.

The Sum Insured and Agreed Value may be set at the same amount, but they are not synonymous.

Even when the Sum Insured is set at 110% of the CIF value, whether that amount constitutes an Agreed Value under the individual insurance contract depends on the insurance policy, insurance schedule, Open Cover Agreement, and applicable policy terms.

Background for Setting the Sum Insured at 110% of the CIF Value

In marine cargo insurance for international shipments, it is common practice to set the Sum Insured at 110% of the CIF value.

This additional 10% is recognized as a customary business margin that accounts for anticipated profits and other incidental benefits that are not directly reflected in the cargo price, freight, and insurance premiums alone.

However, there are several distinct rationales behind the 110% of CIF value standard:

Basis	Description	Reference Documents	Notes
General Underwriting Practice in Cargo Insurance	Setting the Sum Insured by adding 10% to the CIF value	Insurer calculation standards, Open Cover Agreement, insurance request forms	This method is not necessarily applied mechanically to every contract.
Incoterms CIF and CIP	Seller’s obligation to arrange insurance at a certain coverage level for the buyer	Sales contracts, Incoterms 2020	The standard required coverage levels differ between CIF and CIP.
Letter of Credit Conditions	Specification of Sum Insured, percentage, currency, insurance terms, and certificate format	L/C, SWIFT messages, insurance certificate drafts	May comply with general insurance practice but still conflict with L/C conditions.
Individual Agreement under Sales Contracts	Custom insurance percentages such as 120% or other terms agreed between parties	Sales contracts, purchase orders, transaction terms	May require insurer underwriting approval.

Although 110% of the CIF value is a common benchmark, the Sum Insured, Insurable Value, Agreed Value, and Amount of Loss are distinct concepts.

Setting the Sum Insured by Trade Term

Incoterm	Main Costs Usually Included in the Sale Price	Insurance Arrangement Obligations under Incoterms	Main Approach to Setting the Sum Insured	Key Points to Note
EXW	Amount centered on the cargo price at the seller’s premises	No insurance arrangement obligation is imposed on either party.	Organize a CIF-equivalent amount by adding collection costs, domestic export transport charges, export-related expenses, main carriage costs, and insurance premium to the EXW price.	Confirm the starting point of insurance coverage and risks during loading operations.
FCA	Costs up to handover to the carrier at the specified place	No insurance arrangement obligation is imposed on either party.	Organize the basic amount by adding main carriage costs and insurance premiums to the FCA price.	Risks transfer at the point of delivery to the carrier at the specified place.
FOB	Cargo price and costs up to loading on the vessel	No insurance arrangement obligation is imposed on either party.	Calculate a CIF-equivalent amount by adding ocean freight and insurance premiums to the FOB price, then apply the required insurance percentage.	FCA may be more appropriate for containerized cargo.
CFR	Cargo price and ocean freight to the destination port	The seller has no obligation to arrange insurance.	Calculate a CIF-equivalent amount by adding insurance premiums to the CFR price, then apply the required insurance percentage.	Be cautious about the buyer possibly neglecting to arrange insurance.
CIF	Cargo price, ocean freight, and insurance premium to the destination port	The seller arranges insurance on behalf of the buyer.	Confirm the CIF or contract price as the basis, usually with a specified required insurance percentage such as 110%.	For maritime and inland waterway transport, the minimum coverage standard is generally equivalent to ICC (C).
CPT	Cargo price and freight to the specified destination	The seller has no obligation to arrange insurance.	Add insurance premiums to the CPT price and organize the basic value based on the covered transport segment.	Risks transfer upon delivery to the first carrier.
CIP	Cargo price, freight to the specified destination, and insurance premium	The seller arranges insurance on behalf of the buyer.	Confirm insurance of at least 110% based on the contract price as a rule.	Minimum coverage standard is generally equivalent to ICC (A).
DAP	Price including freight to the specified destination	No insurance arrangement obligation is imposed on either party.	Break down the contract price into cargo value and insurable transportation costs.	Confirm that import duties, taxes, installation costs, etc., are not included.
DPU	Price including costs up to unloading at the specified destination	No insurance arrangement obligation is imposed on either party.	Confirm the price breakdown including unloading costs and the insurable coverage segment.	Risks transfer upon unloading at the specified place.
DDP	Price that may include freight, import clearance fees, and duties to the specified destination	No insurance arrangement obligation is imposed on either party.	Separate customs duties, import taxes, and costs excluded from insurance coverage, then organize the basic amount.	The entire contract price does not necessarily constitute the Insurable Value for marine cargo insurance.

Under Incoterms, only CIF and CIP explicitly require the seller to arrange insurance.

For all other Incoterms, there is no imposed obligation for either party to arrange insurance. In practice, who arranges insurance should be confirmed based on risk transfer points, the sales contract, and agreement between the parties.

In the Case of CIF Terms

Under CIF terms, the seller arranges the ocean freight to the destination port and marine cargo insurance for the buyer.

The CIF price typically includes the cargo price, ocean freight, and insurance premium, making it common practice to use the CIF value as the basis for setting the Sum Insured.

Generally, the Sum Insured is set at the CIF value plus 10%.

However, the standard insurance the seller is expected to arrange under CIF terms, according to Incoterms 2020, is typically Institute Cargo Clauses (C) or equivalent coverage.

If the buyer requires broader coverage such as ICC (A), war risks, strikes risks, or other extended protections, this must be clearly specified in the sales contract or letter of credit.

Additionally, the transfer of risk under CIF terms occurs when the cargo is placed on board the vessel at the port of shipment. Although the seller bears freight and insurance costs to the destination port, the risk does not remain with the seller until arrival at the destination port.

In the Case of CIP Terms

Under CIP terms, the seller arranges the transportation cost to the named destination and procures cargo insurance for the buyer.

According to Incoterms 2020, CIP generally requires insurance coverage under Institute Cargo Clauses (A) or equivalent terms, with insurance arranged for at least 110% of the contract price.

However, the risk transfers to the buyer not upon arrival at the named destination, but generally at the point when the seller delivers the goods to the first carrier.

Therefore, under CIP terms, the point of risk transfer and the insurance termination point may be significantly different.

In containerized or multimodal transport, CIP or FCA terms may better reflect the actual transaction conditions than CIF.

In the Case of FOB Terms

Under FOB terms, the seller completes delivery when the cargo is placed on board the vessel at the port of shipment, and the risk transfers to the buyer at that point.

Incoterms do not impose an obligation on either the seller or buyer to arrange insurance; however, the buyer typically considers arranging insurance to cover damage after the transfer of risk.

The FOB price usually does not include ocean freight or cargo insurance premiums to the port of destination.

Therefore, rather than using the FOB price as the Sum Insured, the ocean freight and insurance premium are added to determine a CIF-equivalent value, to which the necessary required insurance percentage is applied.

For containerized cargo, since cargo is handed over to the terminal or carrier before loading on the vessel, it should also be confirmed whether FCA is more appropriate than FOB based on the actual delivery conditions.

In the Case of CFR Terms

Under CFR terms, the seller bears the ocean freight to the destination port but is not obligated to arrange cargo insurance.

The risk, as with CIF, transfers to the buyer once the goods are placed on board the vessel at the port of shipment.

The CFR price includes the ocean freight but does not include the insurance premium.

Therefore, the Sum Insured is calculated by adding the insurance premium to the CFR price to arrive at an equivalent CIF value, to which a required insurance percentage such as 110% is applied.

In CFR transactions, there is sometimes a misunderstanding that the buyer assumes the seller arranged insurance because the seller bears the ocean freight. It is important to clarify the party responsible for arranging insurance before shipment.

Calculating CIF Equivalent from FOB or CFR

When calculating the CIF equivalent value from FOB or CFR, the premium is calculated based on the Sum Insured, which can result in a circular calculation where the premium and the Sum Insured mutually influence each other.

Assuming the Sum Insured is 110% of the CIF equivalent and the premium rate is applied to the Sum Insured, the basic approach is as follows.

Value Basis	Basic Formula	Example of Sum Insured Calculation	Notes
CFR	CIF Equivalent = CFR Value + Premium	Sum Insured = 1.1 × CFR Value ÷ (1 – 1.1 × Premium Rate)	Confirm minimum premium, rounding rules, and the actual applied premium rate.
FOB	CIF Equivalent = FOB Value + Freight + Premium	Sum Insured = 1.1 × (FOB Value + Freight) ÷ (1 – 1.1 × Premium Rate)	Confirm the scope of applicable freight and additional transportation charges.

For example, if the CFR value is USD 10,000, the premium rate is 0.3%, and insured at 110% of the CIF equivalent, an approximate Sum Insured can be calculated as follows:

USD 10,000 × 110% ÷ (1 – 110% × 0.3%) = approx. USD 11,036

In practice, the Open Cover Agreement or the insurer’s specified calculation method, minimum premiums, currency units, and rounding rules are used. Personnel should not finalize the Sum Insured by arbitrarily adding estimated premiums.

In the Case of EXW or FCA Terms

Under EXW or FCA terms, the invoice amount may not include the main carriage charges.

For EXW, verify collection fees from the seller's premises, domestic export transportation costs, export customs clearance-related expenses, port charges, main carriage charges, and insurance premiums.

For FCA, since costs up to the specified delivery location are included in the price, confirm the main carriage charges and insurance premiums that apply after the specified delivery point.

Additionally, when the start point of marine cargo insurance is set at the seller’s premises, clarify how the transfer of risk under the sales contract coincides with the insurance coverage period.

In the Case of DAP, DPU, and DDP Terms

The contract price under DAP, DPU, and DDP terms may include transportation costs to the destination, inland delivery charges at the destination, unloading costs, import customs clearance fees, duties, import taxes, or installation-related expenses.

Do not mechanically use the entire contract price as the basis for the Sum Insured; instead, verify the breakdown of costs and the insurance coverage scope.

Cost Item	Likely Included in DAP, DPU, DDP Price	Consideration for Sum Insured Setting	Checkpoints
Cargo Price	Usually included.	This forms the core value of the Sum Insured.	Confirm the actual transaction value.
International Freight	Usually included.	Confirmed as a cost within the insured transport section.	Obtain freight details.
Inland Delivery Charge at Destination	May be included.	Confirm whether this is transportation cost within the insurance period.	Cross-check the final destination and insurance policy description.
Unloading Costs	May be included under DPU, etc.	Check if unloading operations fall within the insurance period.	Confirm the operation location and risk transfer point.
Import Customs Clearance Fees	May be included under DDP, etc.	Separate this from the cargo value for clarity.	Confirm with the insurer whether these fees can be added.
Customs Duties and Import Taxes	May be included under DDP.	This is not necessarily included by default in the standard marine cargo insurance base value.	Also confirm the necessity of duty insurance or similar coverage.
Installation and Trial Operation Costs	May be included depending on the contract.	Because these differ from ordinary transportation risks, they are separated.	Check for installation insurance or other relevant coverages.

Transfer of Risk and Insurance Period Are Not the Same

Under Incoterms, the transfer of risk determines which party—seller or buyer—bears the risk of loss or damage to the cargo.

The insurance period in marine cargo insurance is determined by the insurance policy and the applicable policy terms.

Therefore, the point of risk transfer does not necessarily coincide with the start or end point of insurance coverage.

Transaction / Situation	Concept of Risk Transfer	Potential Mismatch	Practical Confirmation
FOB, CFR, CIF	When the cargo is placed on board the vessel at the port of shipment	Insurance coverage may start at the seller’s premises.	Confirm whose insurance covers the pre-shipment leg.
FCA, CPT, CIP	When the cargo is handed over to the first carrier at the named place	Insurance may continue until the named destination.	Clarify the handover place and insurance inception point.
EXW	When the cargo is placed at the seller’s disposal at their premises	Responsibility for risk during loading operations can be unclear.	Confirm loading operations and the insurance start point.
DAP, DDP	When the cargo is at the buyer’s disposal before unloading at the named destination	Insurance coverage may have ended earlier.	Verify the final warehouse and insurance expiry point.
DPU	When the cargo is unloaded at the named destination	Insurance conditions during unloading operations become relevant.	Confirm whether insurance includes unloading risks.
Delay in Requesting Insurance	Insurance contract may not be established even after risk has transferred.	Application may be made after transport has started or after an incident.	Check the dates of insurance request, transport commencement, and incident occurrence.

Matters to Confirm in Letter of Credit Transactions

In Letter of Credit (L/C) transactions, it is necessary not only to set a reasonable Sum Insured but also to ensure that the insurance policy or certificate presented to the bank complies with the L/C conditions.

Shortage of the Sum Insured, currency discrepancies, missing required endorsements, insufficient insurance terms, or inconsistencies with other shipping documents may result in discrepancies.

Item to Confirm	Common Issues in L/C	Documents to Check	Practical Response
Sum Insured	Specification such as 110% or more of the invoice or contract value	L/C, Invoice, Draft insurance policy	Verify the base amount and required insurance percentage.
Valuation Basis	Base values differ depending on terms like CIF, CIP, CFR, FOB, etc.	Invoice, Sales Contract, L/C	Cross-check the valuation basis stated in the invoice with the L/C conditions.
Currency	Currency differs between the insurance policy and the L/C or invoice	L/C, Invoice, Draft insurance policy	Confirm the specified currency and the method of conversion.
Insurance Terms	Terms such as ICC (A), War Risks, Strikes Risks are specified	L/C, Draft insurance policy, underwriting response	Ensure consistency with the actual underwriting terms.
Endorsement / Insured Party	Issuing party or endorsement method on the policy differs from the specification	L/C, Draft insurance policy	Confirm that the format allows the bank or designated party to claim insurance proceeds.
Date	Policy date is later than the shipping date	insurance policy, B/L, L/C	Check for retroactive coverage and compliance with L/C conditions.
Cargo / Route	Cargo description, quantity, port of shipment or destination differ from other documents	Invoice, B/L, insurance policy	Confirm no inconsistencies among documents.

If the L/C conditions differ from the usual 110% of the CIF value, not only should the documents be prepared according to the L/C conditions, but it should also be confirmed whether the insurer can underwrite the specified amount.

Typical Cases of an Insufficient Sum Insured

Case	Cause of Deficiency	Impact	Verification Documents	Initial Response
Insured with FOB price only	Sea freight and insurance premiums are not added	The Sum Insured may be lower than the equivalent CIF value.	Invoice, freight details, insurance details	Recalculate the equivalent CIF amount.
Insured with CFR price only	Insurance premium and required insurance percentage are not reflected	The Sum Insured may be lower than the usual 110% of the CIF value.	CFR invoice, rate, confirmation notice	Confirm the insurer’s calculation method.
Insured with EXW price only	Collection charges, domestic export transport costs, and main transport costs are not included	Transport costs are not included in the Sum Insured.	Transport quote, export cost breakdown	Obtain detailed breakdown of transport costs.
Increased quantity not reflected	Shipment quantity increased after insurance request	The increased quantity is not included in the Sum Insured.	Corrected invoice, packing list	Confirm correction notice or additional insurance.
Currency conversion error	Specified date or specified exchange rate was not used	The Sum Insured converted into Japanese yen may be insufficient.	Conversion standard, exchange rate, policy documents	Recalculate using the specified conversion method.
Failure to meet L/C specified ratio	Policy issued with general calculation only	Bank document examination may find discrepancies.	L/C, insurance policy, invoice	Confirm possibility of policy correction.
Did not verify breakdown of DAP/DDP prices	Used total contract price including customs duties or excluded necessary transport costs	The Sum Insured may be excessive or insufficient.	Price breakdown, freight details, customs clearance costs	Separate applicable value components.
Misallocated multiple split shipments	Total contract price not correctly allocated to each shipment	The Sum Insured may be insufficient for particular shipments.	Split shipment details, unit price list	Reallocate based on quantity and unit price.
Additional freight charges not reflected	Seasonal surcharges, dangerous goods surcharges, etc. increased after confirmation	Difference arises with the confirmed equivalent CIF amount.	Final freight details, revised invoice	Confirm need for correction under the Open Cover Agreement.
Used a calculation method different from Open Cover Agreement terms	Person in charge applied an independent calculation method	Confirmed notice and contract terms do not match.	Open Cover Agreement, operational procedures	Unify to the contract prescribed calculation method.

Shortfalls in the Sum Insured and Claims Against Carriers

Even if the Sum Insured is insufficient, the shortfall does not automatically become the responsibility of the NVOCC or the Actual Carrier.

Claims for damages against carriers are judged based on whether the carrier has legal or contractual liability, whether limitation of liability applies, the existence of exempting circumstances, compliance with notification deadlines, and other relevant factors.

Issue	Marine Cargo Insurance	Claims Against Carrier	Practical Notes
Insufficient Sum Insured	The payable amount is determined based on the Sum Insured in the insurance contract and the applicable policy terms.	The shortfall does not necessarily fall under the carrier’s responsibility.	Separate the responsibility of arranging insurance from carrier liability for transportation accidents.
Carrier’s Negligence	If the risk is covered, insurance payment may be considered before the carrier’s liability is established.	Confirm the cause of the incident, negligence, and liability according to applicable rules.	Marine cargo insurance and carrier liability are distinct assessments.
Limitation of Liability	The contractual payment amount is considered based on the Sum Insured.	Limitation of liability under the B/L terms or applicable law may apply.	Full recovery of the cargo’s value may not be possible.
Subrogation by Insurer	To the extent of an insurance payment, the insurer may be subrogated to the insured’s rights of recovery against responsible parties.	The insurer may pursue recovery against the carrier or other responsible parties.	Ensure that the insured does not independently waive rights or settle claims without coordination.
Uncompensated Portion	A portion of the loss may remain uncompensated after the insurance payment.	The insured may retain the right to pursue the uncompensated portion, subject to the insurer’s subrogated rights and the applicable law.	Coordinate with the insurer on claim procedures and recovery allocation.
Notification Deadlines	Accident notification to the insurer is required.	Confirm damage notification to the carrier and statute of limitations for lawsuits.	Do not forget to notify the carrier, even if only making an insurance claim.

If a freight forwarder undertakes insurance arrangement and neglects to confirm the Sum Insured or freight information, resulting in an insurance shortfall, the forwarder’s liability for insurance arrangement work may become an issue separately from the liability for the transport accident.

Scope of Freight Forwarder Involvement and Trade Terms Confirmation

The five classifications used in this article are not established by law or industry-wide consensus. They serve as an analytical framework within this series to clarify the scope of freight forwarder involvement.

Standard Five Classifications	Main Involvement Related to Trade Terms and the Sum Insured	Scope of Delegated Authority to Confirm	Practical Notes
Simple Intermediary	Conveys the shipper’s trade terms, invoice amount, currency, and requested Sum Insured to the insurance agent.	Whether it is merely information transmission or also includes confirmation of calculations	Does not necessarily guarantee the appropriateness of the Sum Insured.
Cargo Transportation Service Provider	Provides freight charges, transport-segment details, mode-of-transport information, and related costs.	Whether insurance arrangement itself is contracted	Distinguishes the provision of freight information from determining the Sum Insured.
NVOCC / House B/L Issuer	Provides information such as House B/L, ocean freight, Place of Receipt, and Place of Delivery.	The scope of operations as Contracting Carrier and of insurance arrangement tasks	Being an NVOCC alone does not grant authority to determine the Sum Insured.
Door-to-Door Single Contractor	Coordinates transport costs, the insured transit, and insurance arrangements from pickup through final delivery as an integrated service.	Scope of valuation calculations, insurance inquiries, policy review, and shipper approval	Records the calculation basis and the shipper’s approval.
Agent/Coordinator for Specific Operations	Coordinates specified operations such as freight inquiries, Sum Insured calculations, L/C review, or insurance policy issuance.	The individually delegated tasks, deadlines, and approval authority	Does not unilaterally change the trade terms or policy conditions beyond the delegated scope.

Contracting Carrier and Actual Carrier indicate legal or contractual status and do not replace the Standard Five Classifications used in this article.

Individual tasks such as providing freight charges, confirming invoices, converting currencies, submitting insurance requests, checking L/C requirements, and forwarding insurance policies do not themselves constitute a sixth classification.

Common Misunderstandings

Common Misunderstanding	Actual Understanding	Practical Response
The FOB price can be used directly as the Sum Insured.	The FOB price usually does not include ocean freight and insurance premiums.	Calculate the equivalent CIF amount and confirm the required insurance percentage.
Under CFR, the seller arranges the insurance.	Under CFR, the seller has no obligation to arrange insurance.	Confirm who will arrange insurance, including the buyer side.
Under CIF, there is no need to verify the coverage terms.	The standard insurance level for CIF is generally equivalent to ICC (C).	If broader coverage is needed, specify it in the sales contract or similar agreements.
The insurance coverage levels of CIP and CIF are the same.	According to Incoterms 2020, CIP is generally ICC (A), while CIF is generally ICC (C).	Confirm the mode of transport and required coverage terms.
The 110% of the CIF value represents the actual profit margin.	The 10% is a customary markup and does not necessarily equal the actual profit margin.	Check the contractually agreed required insurance percentage and the basis for valuation.
The Sum Insured and Agreed Value are the same.	The Sum Insured is the maximum amount recoverable under the contract, while the Agreed Value is the Insurable Value agreed by the parties.	Verify the insurance policy and applicable policy terms.
Risk transfer and insurance commencement always coincide.	Risk transfer under the sales contract and the insurance period of marine cargo insurance are determined separately.	Reconcile the delivery location with the shipment origin stated in the insurance policy.
Under DAP or DDP, insuring the full contract price is sufficient.	The contract price may include customs duties, import taxes, installation costs, etc.	Check the breakdown of the contract price.
In L/C transactions, only the Sum Insured needs to be correct.	Currency, insurance terms, endorsements, dates, and consistency with other documents are also subject to review.	Match these details with the L/C before issuing the insurance policy.
Any shortfall in the Sum Insured can be fully claimed from the carrier.	Recoveries vary depending on carrier liability, limits of liability, and exemptions.	Distinguish between marine cargo insurance, responsibility for arranging insurance, and carrier liability.

Decision Checklist

Timing of Confirmation	Party to Confirm With	Items to Confirm	Actions if Issues Are Found
Upon Receipt of Insurance Request	Shipper, Exporter	Cargo description, quantity, invoice amount, currency, and trade terms	If the trade terms is unknown, confirm before proceeding with the insurance processing.
Trade Terms Confirmation	Shipper, sales contract personnel	EXW, FCA, FOB, CFR, CIF, CPT, CIP, DAP, DPU, or DDP Incoterms	Organize the costs included in the invoice amount.
Freight Confirmation	Freight Forwarder, NVOCC, Shipping Line	Main freight charges, inland transportation fees, surcharges, and incidental costs	Confirm with the insurance agent whether provisional freight rates can be used.
Insurance Premium Calculation	Insurer, Insurance Agent	Rates, minimum premium, CIF equivalent amount, and calculation formula	Do not finalize the Sum Insured based on independent estimates.
Insurance Ratio Confirmation	Shipper, Insurance Agent	110% of CIF value, 110% of contract value, or other specified terms	Confirm the basis from sales contracts, letters of credit, and Open Cover Agreement.
Confirmation of Insurance Arranger	Seller, Buyer, Shipper	Who arranges insurance, when, and for which transport segment	Verify insurance has been completed before transport begins.
Currency Conversion	Insurer, Insurance Agent	Conversion reference date, applied exchange rate, policy currency, and rounding method	Use the method specified in the master contract.
Letter of Credit (L/C) Confirmation	Shipper, Bank, Insurance Agent	The Sum Insured, currency, policy conditions, endorsements, routing, and dates	Cross-check the insurance policy draft against L/C conditions.
Before Issuing Insurance Policy	Insurance Agent, Shipper	The Sum Insured, cargo description, currency, origin, destination, and policy conditions	Correct discrepancies with invoice, insurance request, and L/C.
When Quantity or Freight Changes	Shipper, Freight Forwarder, Insurance Agent	Changes in quantity, unit price, freight, routing, and trade terms	Check whether a correction notice or additional premium is required.
When an Incident Occurs	Insurer, Insurance Agent, Shipper	The Sum Insured, Insurable Value, Amount of Loss, trade terms, and freight	Organize causes of shortfall and applicable policy terms.
When Considering Recovery	NVOCC, Actual Carrier, Insurer, Lawyer	Cause of incident, responsibility segment, liability limits, and notification deadlines	Preserve the insurance claim and rights of recovery against the carrier in parallel.

Practical Example 1: Insurance Arranged Only for the FOB Price

The buyer arranged marine cargo insurance for machinery with an FOB value of USD 100,000.

The insurance request specified only the invoice amount, excluding ocean freight of USD 8,000 and insurance premium from the Sum Insured.

During transportation, a shipboard fire occurred, resulting in a total loss of the cargo. After the incident, the Sum Insured was confirmed to be only USD 100,000.

Ideally, the CIF equivalent amount should have been calculated by adding ocean freight and insurance premium to the FOB value, and then applying the designated insurance coverage rate to that amount.

In this case, the relationship between the insurance payout and the Sum Insured, the instructions given by the party requesting the insurance, and the scope of confirmation duties entrusted to the freight forwarder should be clarified.

The shortfall in the Sum Insured does not automatically translate into liability for the shipping line or NVOCC. Responsibility for the transport accident and responsibility for insurance arrangement should be considered separately.

Practical Example 2: Buyer Failed to Arrange Insurance under CFR Terms

The seller and buyer had concluded a sales contract under CFR terms.

Since the seller had paid the ocean freight to the destination port, the buyer mistakenly believed that the seller had also arranged marine cargo insurance.

After the cargo was loaded onto the vessel, the buyer requested the freight forwarder to arrange insurance.

Under CFR, the seller has no obligation to arrange insurance. As the risk transfers to the buyer once the cargo is placed on board the vessel, the buyer needed to arrange insurance before shipment.

In such cases, it is necessary to verify the sales contract, booking, loading date and time, insurance request date and time, as well as the presence or absence of any incidents, and not to unilaterally decide that retrospective insurance arrangements are possible.

Practical Example 3: L/C Requirements Did Not Match the Insurance Policy

In an export transaction under CIF terms, the L/C required 110% of the invoice value in USD, with ICC (A), War Risks, and Strikes Risks coverage specified.

However, the issued insurance policy was in Japanese yen, and the coverage was limited to ICC (C) only.

Although the Sum Insured was sufficient by internal currency conversion, the currency and coverage conditions did not match those required by the L/C, resulting in a discrepancy during the bank’s document review.

Simply being under CIF terms does not guarantee compliance with the coverage conditions required by the L/C.

Before issuing the insurance policy, it is necessary to cross-check the Sum Insured, currency, coverage terms, endorsements, issuance date, and voyage with the L/C requirements.

Practical Example 4: Entire DDP Price Used as the Basis for the Sum Insured

The DDP price included the cargo value, international freight, import duties, import consumption tax, customs clearance fees, and final delivery costs.

The person in charge set the Sum Insured by applying 110% to the total DDP invoice amount.

Subsequently, the insurer requested a breakdown of the price, and it was necessary to reconfirm whether import duties, import taxes, and certain installation-related expenses should be included in the usual marine cargo insurance valuation basis.

Under DAP or DDP terms, the entire contract price should not simply be treated as the Insurable Value for marine cargo insurance solely because the contract price is high.

The cargo value, freight charges for the insured transportation segment, and costs excluded from insurance or requiring individual confirmation should be separated.

When an Insufficient Sum Insured Is Discovered After an Incident

1. Verify the Sum Insured and currency stated in the insurance policy, confirmation notice, or insurance statement.
2. Check the invoice, sales contract, and trade terms.
3. Confirm the calculation basis for freight charges, insurance premium, domestic export costs, and the required insurance percentage.
4. Verify the relationship with the Insurable Value or Agreed Value.
5. Confirm whether any changes in quantity, unit price, freight, or currency are reflected in the insurance coverage.
6. Retain records of instructions and responses exchanged among the shipper, freight forwarder, insurance agent, and insurer.
7. Check the cause of cargo damage, amount of loss, salvage value, and applicable policy terms.
8. Notify the NVOCC or Actual Carrier of the incident to preserve rights of recovery.
9. Do not negotiate settlements, waive liability, or relinquish rights with the carrier without approval from the insurer.
10. If an error is suspected in the insurance arrangement process, notify the insurer or insurance agent handling the freight forwarder's liability insurance.

Marine Cargo Insurance and Freight Forwarder Liability Insurance

When cargo is damaged due to an accidental incident during transportation, first verify the marine cargo insurance insured perils, Sum Insured, Insurable Value, exclusions, deductibles, and the Amount of Loss.

On the other hand, if a freight forwarder arranged marine cargo insurance without confirming the trade terms, insured only based on the FOB price, failed to include freight costs, made currency conversion errors, did not verify L/C terms, or failed to notify the insurance agent of any changes, the freight forwarder’s liability may become an issue.

Whether freight forwarder liability insurance will cover such cases depends on the scope of the entrusted service, instructions given, actual fault, legal or contractual liability, applicable policy terms, exclusions, and the timing of accident notification.

If the shipper claims insufficient Sum Insured, consult with the freight forwarder liability insurer or insurance agent before acknowledging responsibility, settling, agreeing to bear costs, or making any payment.

Summary

Trade terms allocate costs, transport arrangements, transfer of risk, and insurance-arrangement obligations between the seller and the buyer.

Trade terms do not directly determine the Sum Insured, but they affect the insurance valuation basis because the costs included in the invoice amount differ by trade term.

Under CIF terms, it is easier to use the CIF value as the base; however, under FOB, FCA, CFR, CPT, EXW, or other terms, it is necessary to add freight, insurance premium, and required transportation costs to arrive at a CIF-equivalent amount.

In marine cargo insurance, it is common to set the Sum Insured at 110% of the CIF value; however, the sales contract, Incoterms, letter of credit, Open Cover Agreement, and the insurer’s underwriting conditions should be confirmed.

The Sum Insured, Insurable Value, and Agreed Value are separate concepts. Setting the Sum Insured at 110% of the CIF value does not automatically establish an Agreed Value under an individual insurance contract.

Under Incoterms, the seller’s obligation to arrange insurance applies only to CIF and CIP terms. For all other trade terms, the sales contract and the transfer of risk should be reviewed to determine which party will arrange the insurance.

The timing of risk transfer and the insurance period under marine cargo insurance should be determined separately. It should be clearly defined before transport starts who arranges insurance, when, and from which location to which location.

For letter of credit transactions, it is necessary to verify not only the Sum Insured but also the currency, policy conditions, endorsements, dates, routes, and consistency with other shipping documents.

Even if the Sum Insured is insufficient, that shortfall does not automatically become the responsibility of the NVOCC or the Actual Carrier. Responsibilities for cargo insurance, insurance arrangement, and carrier liability should be organized separately.

This article provides an overview of general practice concerning trade terms and the Sum Insured under marine cargo insurance. It does not determine the Sum Insured, Insurable Value, Agreed Value, insurance payment, L/C compliance, or legal liability for any individual transaction.

In actual arrangements, please confirm the sales contract, invoice, freight details, letter of credit, insurance policy, Open Cover Agreement, applicable policy terms, and the insurer’s underwriting response.

Marine cargo insurance for ocean shipments varies more by policy terms than by premium. Consult an insurer or insurance agent regarding the selection of coverage and the interpretation of policy terms.