Seller’s interest clause is added to policies where the seller, as per INCOTERMS is not responsible for arranging cargo insurance, but opts for this extension to protect himself in cases where the buyer refuses to pay following a loss/damage to the cargo. Typically, this extension is given in cases where the seller exports goods on FOB or CFR terms.
A question often asked is “Can Seller’s Interest clause under an Open policy be applicable in cases, where some of the sales are on ‘Ex works’ basis?” Under Ex-works sale, the responsibility of the seller is limited to the following — Making the goods available for delivery at his named location.
Buyer takes the responsibility for
1) Clearance for exports
2) Loading
3) Carriage till final destination
4) Transit insurance till final destination.
Now, if the ex-works sale is on credit basis and during the transit, the cargo is damaged and the buyer refuses to pay the seller, will the Seller’s Interest clause come to the seller’s rescue as it would have, had the sale been on FOB/CFR terms?
Opinion is divided. Some underwriters hold the view that as long as premium is paid on Total sales (irrespective of INCOTERMS) under an Open policy or Sales Turnover policy, Sellers’ Interest clause can apply to an Ex-works sale too. There are others who opine that Sellers’ Interest clause can apply only where the seller carries the risk for at least a part of the transit as in the case of FOB/CFR, where the risk lies with the seller for the leg from his warehouse till the cargo is placed on board the vessel at the load-port. I subscribe to the latter view and the reasons for the same are as under:
The Marine Insurance Act, 1963 ( which draws from The Marine Insurance Act,1906) under Section 6(2) defines a wagering contract as:
” where the assured has not an insurable interest as defined by this Act, and the contract is entered into with no expectation of acquiring such an interest”.
In an Ex-works sale, the seller obviously has no insurable interest in the subject-matter after it has been sold and it is not expected that he would acquire insurable interest in the same at any point during the voyage or subsequently. So, if he were to buy a cargo insurance in his favour, it could well be interpreted as a wager. Yes, under marine insurance, insurable interest needs to exist only at the time of loss, but that does not mean that any unconnected person can buy a cargo insurance policy in the first place.
Then how come, Seller’s interest clause can be attached to transits on FOB/CFR basis, one may ask. Here too, after the risk transfer point ( FOB point), the seller has no insurable interest in the subject-matter. Again, reference has to be made to the Marine Insurance Act,1963, which under Section 9 provides that a ‘contingent interest’ is insurable. In a FOB/CFR contract of sale, the seller does have an insurable interest in the subject-matter till it is placed on board the vessel at the load-port. Therein after, the insurable interest gets transferred to the buyer. Once the buyer rejects the contract or refuses to take delivery of the goods following a loss/damage to it caused by an insured peril and if the sellers remains unpaid, under this contingent circumstance, the insurable interest reverts back to the seller. Hence the Seller’s interest clause was originally called as Sellers’ Interest contingency.
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Hi Sir, I can understand the sense in covering Seller’s Interest Clause along with the Inco term Ex-works as it will have same checks and balance of FOB / C&F Contracts as Insurer would require rejection of the contract or refusal to take delivery of the goods following a loss/damage to cargo by the buyer in order to process the claim. However here in UAE, I am coming across some strange requirements as “Coverage irrespective of Inco terms” whereby the coverage is requested on normal insurable interest basis without any contingency interest or clause for exports with the Inco term of Ex-works / C&F / FOB. How does it work and what would be implication at the time of claims as either of the party can claim under their respective insurance? If an Insurer has to grant this cover, how can they prevent from being claimed for same loss by Buyer and seller. Look forward your views on it.
“If an Insurer has to grant this cover, how can they prevent from being claimed for same loss by Buyer and seller.” precisely what’s wrong with the insurance industry. I hope you understand what I am trying to convey.
Plz identify yourself, my friend. Why anonymous?
Requirement of cover ‘ irrespective of Incoterms’ is there in India too.It does not really serve any purpose as no insurer in any country is going to blindly pay the claim without looking at whether the claimant has insurable interest at the time of loss.It is meant to be contingent interest only though not stated as such. The idea is that, should the insured lose his cargo and also remain unpaid, whatever be the Incoterm, there should be a recourse for him to make good his loss. You must also remember that at times, if there is an underlying agreement which overrules or is wider than the responsibilities cast by the relevant Incoterm, The wider requirement could well prevail.
To my opinion the situation would not change in case of Ex-works like FOB. The interest is still contingent till the time the invoice is on credit.