By Jennifer Chang    Photo：CANVA

When we engage in international trade, goods travel all the way from the seller's warehouse or factory, through ports, are loaded onto ships, and then sail across the sea to the buyer. In this seemingly simple journey, responsibility and risk are actually transferred like a baton, stage by stage, which can be dazzling and confusing. Who should be responsible for the risk of the goods? The seller or the buyer? And who should purchase insurance? These questions are closely related to the International Commercial Terms (INCOTERMS). It's like a GPS for the international trade community, helping everyone find their way, divide responsibilities, and avoid risks.

INCOTERMS are like a common language for the trading world, helping buyers and sellers clearly define responsibilities and determine who is responsible for the transportation, risks, and costs of goods at different stages. Common terms include:

FOB (Free On Board): Once the goods are loaded onto the ship, responsibility and risk transfer to the buyer. The seller only needs to get the goods on board, and then they can wash their hands of it; the remaining risks and costs are entirely the buyer's responsibility.

EXW (Ex Works): The buyer must pick up the goods from the seller's factory and is solely responsible for transportation and risk. The seller has the easiest job; they just need to have the goods ready at the factory gate, and the buyer has to figure out how to pick them up and transport them, bearing all the risks.

DDP (Delivered Duty Paid): The seller is responsible for transportation, customs clearance, until the goods are safely delivered to the buyer. This is the most demanding for the seller, as they have to escort the goods all the way to the buyer, even taking care of customs clearance and duties.

While these terms seem clear, they can still lead to misunderstandings, especially concerning insurance. Many people mistakenly believe that Delivery Terms = Responsibility + Risk + Insurance, but this isn't actually the case. The primary function of INCOTERMS is to regulate the division of responsibilities and obligations between buyers and sellers in international trade regarding the transportation and delivery of goods, as well as related customs procedures. They do not mandate that the buyer or seller must purchase cargo insurance.

We often encounter some disputes:

Case 1: The Insurance Misconception of FOB

Seller: "I've loaded the goods onto the ship, mission accomplished!"

Buyer: "The goods were damaged at sea, will you compensate me?"

Seller: "According to the rules, you bear that risk!"

Buyer: "But I didn't take out insurance... shouldn't you bear some responsibility? You were the one who packaged the goods!"

Case 2: The Logistical Blind Spot of EXW

Seller: "The goods are already at the warehouse door, come and pick them up yourself."

Buyer: "I hired a freight forwarder to handle it for me."

Freight Forwarder: "Oh, the goods were damaged in transit. Do you have insurance?"

The result? Everyone passes the buck, and no one compensates for the damage. This kind of situation is too common, and when something goes wrong, it turns into a Rashomon effect. In such cases, if it wasn't agreed beforehand who would take out insurance, the seller and the freight forwarder often get morally blackmailed. Although not expressly provided for, the seller or freight forwarder may be expected to bear some or all of the losses for moral reasons.

The only exceptions are:

CIF (Cost, Insurance and Freight): The seller must purchase insurance for the goods to ensure their safety during transit.

CIP (Carriage and Insurance Paid To): Similar to CIF, the seller is required to provide insurance.

However, under other delivery terms, insurance is a "grey area," and this ambiguity often leads to disputes.

INCOTERMS are a useful tool, but not a panacea. They won't buy insurance for you, nor will they automatically resolve disputes. What truly protects you are clear agreements, reasonable planning, and the necessary insurance coverage. Be sure to explicitly state in the contract: who is responsible for purchasing insurance, the extent of the coverage, and whether it covers total loss or partial damage. After all, risks don't disappear just because you can't see them, and losses won't be covered by someone else simply because you "didn't know." So, the next time you're negotiating a trade, consider asking: "Who will handle the insurance for this shipment?" That one question could save you from a lawsuit and a huge financial loss!

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