The invoice value forms the basis of claim settlements under marine cargo policies, so why the fuss about Basis of valuation, one may feel. Seems fairly simple but then there are instances when doubts/disputes crop up.
The conventional ‘CIF +10%’ valuation is standard and a matter of right in every case. The additional 10% was intended to cover small hidden expenses incurred post-invoicing either at the load-port or disport but which do not form part of the invoice value. The insurer is expected to pay this additional 10% without seeking details of how, when, why and what these expenses were. In long sea voyages, expenses of this nature could well be incurred, but in the age of technology and ‘all-encompassing’ logistics contracts, is there a case for the additional 10% unidentified, hidden expenses? My humble opinion is that this additional 10% conventional payment can be done away with and thereby eliminate a whole lot of ambiguities surrounding the same.
First and foremost, the maximum liability of an insurer will be the sum/value insured under the policy. Look at a scenario of say a machine intended for export on CIF terms falling down while getting loaded at the manufacturer’s warehouse and becoming a Total loss. If the invoice value is say USD 1000 and it is insured for same value with basis of valuation stated as CIF+10%, will the insurer pay 1000+100=1100 ? No. The insured amount also ought to be Invoice value +10% i.e. 1100. Secondly, is there any justification for paying the additional 10%? Where are the hidden expenses incurred? In fact, in the case cited, insurer would not even pay the ocean freight value included in CIF, as the same had/cannot be incurred after the accident/incident.
Secondly, is there any relevance for the additional 10% in case of inland transit policies? Obviously no. In case of partial losses, again mainly in case of machinery where repairs are only done and no parts replaced, insurers often deny the additional 10%. While there are endless debates on this issue, I feel it is not worth anybody’s time and effort. Additional 10% should not be provided in case of inland transit policies.
A third point which insurers, assureds and intermediaries wrongly interpret is that this additional 10% is to take care of covers which are not taken. For e.g. in an import policy, it is always prudent to factor in the customs duty value and add it to the sum insured and also have the Duty clause attached to the policy. It is widely felt that even if Duty clause is not attached, the additional 10% added to the basis of valuation takes care of this.
Now the last point. There are certain contracts where the basis of valuation is stated at CIF/Invoice value +20%/30%/40%. This is often seen in case of government organisations’ tenders where they insist on vendors providing such increased valuations. Going by the premise that this additional 10% has to be totally eliminated, these organisations need to be enlightened on this aspect as this has been going on for years. Needless to say, this will take time and in the interim, such increased valuations may be looked at after verifying the contract details and also ensuring that the sum insured represents the enhanced value.
This demand for valuation higher than CIF +10% is often encountered when an Indian company has a trading subsidiary abroad (mainly in Dubai or Singapore),which raises the final invoice on the end-customer. The Indian company sells to its overseas subsidiary on FOB/CFR terms and the subsidiary after increasing the price raises an enhanced invoice on the end-buyer. However, the cargo moves from India directly to the end-buyer’s country. For instance, Indian company sells to its overseas subsidiary @ USD 1000 and the subsidiary raises an invoice on the end-customer @ USD 1500. While taking cargo insurance in India, the demand from assureds is to have the basis of valuation @ Invoice value +50% to factor in the margin which the overseas subsidiary builds in. Many intermediaries and insurers agree to this request without understanding that this will not help the assured/consignee in a claim situation. In case of a claim by the consignee at the destination, the invoice he would be holding and submitting to the loss assessor will be the subsidiary’s invoice which is not covered under the policy taken in India. The policy taken in India will refer to the Indian invoice only.
Reiterate– eliminate the 10%. Makes life so much simpler and easier for all concerned.
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Well said Bala. I’ve always said in inland transit risks this 10% should be eliminated but everyone has taken it for granted and insist on adding it to BOV.
Very well explained the need to drop plus 10% clause. your thoughts are understood unacceptable
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Insured incur many hidden Charges in business which cannot be substantiated by any document. Any accident, delay in delivery result in some unexpected additional expenses which is a loss in addition to cost. Also a administrative cost Is involved in claim settlement/ delay in claim settlement . The existing conventional 10% is found inadequate and therefore there is demand to increase it further . It should prevail in order to provide adequate indemnity to insured .
Thanks ,your views on subject are well Clarified and explained .
Great blog Sir. It has always helped me think rethink on better handling of commonly faced issues.
Agreed that life is greatly simplified when Basis of Valuation is Invoice only. Yet there are quite of few incidental charges which the insured does incur – for eg. Agency charges, Documentation charges, Freight charges, Shipping line charges, CFS charges, etc., which many times are all billed separately and which the client would want to cover. In such cases, I believe it is safe to have the +10% included.
I however do agree that claim settlement has fewer disputes when the BoV is just the invoice.
Could you please throw some light on how to handle labour costs in CIF+10% matters. For eg. when an imported machinery is received damaged (FOB import) and expense is incurred in getting it repaired (labour + spare parts), do we need to add 10% to the labour costs incurred?
On labour charges there is no question of adding 10%. On the spares amount, one school of thought says that if policy is subject to Institute Replacement Clause, then 10% should not be added since the clause stipulates that settlement should not exceed cost plus actual expenses. I personally do not subscribe to this view and hold that once premium is paid on Invoice plus 10%, any loss, Total or partial involving spares should qualify for 10%. Possibly only a legal ruling will set matters to rest.