The Institute Cargo Clauses are standard terms in the international insurance market in the case of international sales where delivery occurs by ship in cargo.
The Institute Cargo Clauses were introduced in 1982 by a joint working party from the Institute of London Underwriters and the Lloyds Underwriters Association and have been updated in the current version which was published in 2009.
Before their introduction, the insurance market used a number of provisions attached to the Marine Insurance Act under English law, that were called SG policies, with S and G standing for ships and goods, respectively.
The SG policies were eliminated after a series of complaints from several international institutions, including the UNCTAD, due their arcaic language.
The Institute Cargo Clauses are divided into three types, (A), (B) and (C), with each clause providing for a different level of coverage. You can read the complete official publications at the Lloyd’s Market Association (LMA)’s website.
Institute Cargo Clauses (A)
Institute Cargo Clauses (A) are the most extensive of the three clauses, at it covers all risks with a number of exclusions that range from clause 4 to 7 of the provision, with the most important being:
- Defective packing
- Inherent vice
- Wear and tear
Apart from that, clause (A) covers all risks, including general average, salvage charges, collision, and fortuitous losses.
For example, if a cargo of wool arrives damaged because of wetting, clause (A) would cover the damage. The same is true for damages cause by accidental fire, in which case the insured does not has to provide detailed proof, but just that the goods have been damaged due to the fire.
Institute Cargo Clauses (B)
Institute Cargo Clauses (B) provides cover for loss or damage to goods that, in addition to general average, is reasonably attributable to:
- Sink of the vessel
- Discharge of cargo
Reasonably attributable means that there must be a causal requirement between the event and the damage, but it is one of proximate causation.
Institute Cargo Clauses (C)
Institute Cargo Clauses (C) are the most restrictive of the three and essentially cover only general average.
Institute Cargo Clauses and Incoterms
As we wrote before, there are two Incoterms, CIF Cost, Insurance and Freight and CIP Carriage and Insurance Paid To, that specifically mandate insurance to be included in the contract, to be paid by the seller on behalf of the buyer.
However, the level of coverage is different among the two Incoterms:
- CIF Cost, Insurance And Freight Incoterms 2020 requires insurance coverage as per Institute Cargo Clauses (C), therefore the minimum.
- CIP Carriage And Insurance Paid To Incoterms 2020 requires insurance coverage as per Institute Cargo Clauses (A), therefore the maximum.
Even if the Incoterms rule chosen by the parties does not mandate insurance, it is always advisable to do so, especially from the party most exposed to the risk of loss or damage to the goods as provided by the Incoterms (for more on this topic, you can refer to our series about Incoterms 2020).
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