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Insuring coffee shipments for export.

Insuring coffee shipments for export

Exporters of coffee on the international market should give special attention to arranging the insurance for their shipments. As coffee is very vulnerable to damage from moisture, contamination, infestation and other hazards, it should be fully covered for all risks during the entire period of the voyage. This applies equally to all types and forms of coffee. Certain basic guidelines should be followed by coffee traders taking out insurance.

Local shipments

When coffee is transported at the exporter's risk within the country of origin it is advisable to insure it under an "all risks" policy. The conditions under such a policy may vary according to the laws and customs regulating the local insurance market. If an exporter makes a considerable number of shipments during the year, it is obviously time consuming and expensive to insure each load separately. In such a case an annual "goods in transit" policy can be taken out for a fixed premium, which can be reviewed with the insurers at each renewal. These policies are usually subject to a cash limit per any one loss. It is important to be certain that the limit stated in the policy is adequate to cover any eventualities.

International shipments

Exporters shipping to foreign markets should take into account the requirements concerning insurance outlined in the Coffee Trade Federation Ltd. rules for contracts of 1 January 1988 (CTF 1988) and the European Contract for Coffee 1986 as amended on 1 January 1991 (ECC 1991). (Copies of these two booklets can be obtained from the Coffee Trade Federation Ltd., 146A High Street, Tonbridge, Kent TN9 1BB, United Kingdom, for 5.00 [pounds] and 7.50 [pounds] respectively, both plus postage.)

These two sources contain specific reference to insurance provisions especially agreed upon between the Federation of Commodity Associations in the United Kingdom and the Institute of London Underwriters.

International shipments of coffee usually involve a sea voyage, but the same general principles apply if the coffee is transported overland. The responsibility for insuring the shipment depends on the terms of the contract.

Parties involved: The parties involved in the insurance of an international shipment of coffee are the following:

1. The seller from origin. If the sale is on a CIF basis, the exporter is the insured party in the first instance and is responsible for taking out insurance adequate to meet the requirements of the sales contract, covering shipment from the warehouse at the port of loading up to the warehouse at the final port of discharge. The seller is covered by the policy until the export documents are paid for.

When coffee is sold on FOB and C&F terms the exporter does not have this responsibility but has an "insurable interest" under the policy for the period of transit between the final warehouse in his own country up to the point of loading the coffee aboard the overseas vessel. Under these two terms, the buyer is responsible only for the insurance up to the last warehouse before shipment and while the coffee is stored there for his own account. The importer is responsible for taking out insurance to cover the voyage from that point onwards. Because the coffee is at the exporter's risk up to the time it is loaded on board, the exporter has an interest in the policy covering the transport of the coffee up to the loading point -- if loss or damage occurs during that stage, the buyer is obliged to make his insurance cover available to the exporter.

2. The first and any subsequent buyers. In the case of a CIF shipment the insurance is automatically assigned to the first buyer. When the buyer purchases the coffee on FOB or C&F terms, as mentioned above, it is his responsibility as the insured party to take out the appropriate coverage. If the transaction involves a chain of buyers, the "insurable interest" passes from buyer to buyer, and the insurance certificate is included with the sales documentation and is assigned from one buyer to the next.

3. The final consignee. This is usually the final buyer, who obviously has an insurable interest in the goods and is in most cases the claimant if there is any loss or damage to the shipment.

4. The insurer. Generally this will be either an insurance company or a company authorized to underwrite marine risks. If no broker or intermediary is employed, the insurer usually issues the insurance policy or certificate direct to the insured party.

5. The insurance broker. The broker is employed to arrange the insurance on behalf of the insured party. Often the broker issues his own insurance certificate, which should not only identify the shipment and the risks covered but also clearly identify the insurers with whom the risk is placed.

6. The claim-settling agent at the destination. This person is usually specified in the insurance document.

7. The marine insurance surveyor. The surveyor will either be specified in the insurance document or appointed by the local claim-settling agent at the port or place of destination.

Parties with no insurable interest: Certain parties during the voyage become involved in the shipment as bailees or custodians, either under statute or according to the contract. This includes, for example, inland carriers, warehousemen, shipowners, customs agents, ship's agents, lightermen, stevedores and port authorities. These persons have various responsibilities and liabilities for the coffee while it is in their possession, but they are not regarded as beneficiaries under the marine insurance coverage.

Choice of insurer

For shipments within the country of origin, the exporter insures for his own account and is therefore free to choose any insurer who can provide "goods in transit" insurance.

For overseas shipments, however, the exporter insures the coffee for the account of the importer and must therefore consider the importer's needs. In some countries exporters are required to get insurance coverage from specified domestic insurance companies, while in others they can select any local or foreign insurer. It is the exporter's duty to obtain cover from reputable insurers.

It is possible to apply directly to most insurance companies to obtain cover. But when a choice of insurer is possible, or the volume of business involved requires more than one insurer in the cover, it is usually advisable to employ the services of an insurance broker. The broker should be in a position to identify a company offering the lowest available premium rate compatible with complete security of the goods. (A broker, who is free to explore the insurance market for coverage, should be distinguished from a tied insurance agent, who is usually empowered to place business only with a particular company. In most legal systems the broker is held to be the agent of the insured, although he is usually paid by the insurer in the form of a commission.)

Scope of coverage

The insurance for international coffee shipments should be of the "all risks" type, including strikes and war risks. This is best achieved by insuring the shipment under the Institute Commodity Trades Clauses (A), Institute Strikes Clauses (Commodity Trades) and the Institute War Clauses (Commodity Trades). These clauses are specified in the CTF 1988 and ECC 1991 provisions mentioned above.

The term "all risks" when used in connection with insurance should not be interpreted too broadly. It does not include commercial risks, for example loss of market, or price fluctuations, and extends only to physical loss or damage to the coffee and certain related expenses to the coffee caused by the operation of "insured perils" during the period of the insurance. The loss or damage must be accidental. For example, if a consignment of coffee became damaged by the accidental entry of sea water and became mouldy, this damage would be covered. If, however, the coffee was shipped from the origin in a wet condition, and mould developed during the trip, this would not be covered.

The Institute Commodity Trade Clauses (A), which are specifically mentioned in the CTF 1988 rules and the ECC 1991 contract, state that the risks covered are "all risks" of loss of or damage to the goods insured, "general average" and salvage charges and also liability under the "both to blame" collision clause that appears in some bills of lading. They then, however, go on to specify certain exclusions.

Exclusions: In no case does the insurance cover:

a: Loss, damage or expense attributable to willful misconduct of the insured party. (This exclusion applies equally to the exporter taking out the insurance and any subsequent buyer taking advantage of the insurance.)

b. Ordinary leakage, ordinary loss in weight or volume, or ordinary wear and tear. (The exclusion of ordinary wear and tear applies to the scuffing and superficial external marking of coffee bags caused during the normal course of handling. Loss from torn bags would, however, be covered by the insurance.)

c. Loss, damage or expense caused by insufficiency or unsuitability of packing or preparation of the coffee. This exclusion is extended to include stowage in a container or liftvan, with certain exceptions. For example, this exclusion applies to losses caused by coffee being packed in loosely woven bags that permit leakage or by bags insufficiently stitched at the mouths. If the insured party, for example the exporter, permitted coffee beans to be stowed in an obviously damaged or unsuitable container, any resulting loss or damage would also be excluded.

d. Loss, damage or expense caused by an "inherent vice" in the coffee insured. One example would be infestation that was present in the coffee before shipment.

e. Loss, damage or expense "proximately" caused by delay (that is, if there is an unbroken chain of events linking the eventual damage to the delay itself), even though the delay is caused by a risk insured against, except expenses relating to general average and salvage charges. This exclusion, although apparently harsh, is common to practically all marine insurance policies. For example, if a ship is held up by a strike or for some other reason and the insured party notifies the insurer, the coffee is covered against insured perils during the delay, but any deterioration in the coffee caused by the delay is not covered.

f. Loss, damage or expense caused by insolvency or financial default of the owners, managers, charterers or operators of the ship if, at the time the coffee is loaded on board, the insured party is aware, or should be, that such financial difficulties could prevent the normal undertaking of the voyage. The exporter or whoever is responsible for the original shipment should take every precaution that the shipowners and other concerned parties are of good commercial standing. Insurers realize, however, that subsequent buyers of the coffee may not have had an opportunity to check the financial standing of the shipowners. The exclusion does not therefore apply in the latter situation.

g. Loss, damage or expense arising from the effects of any atomic or nuclear device.

h. Unseaworthiness or unfitness of the ship for the safe transport of the coffee, when the insured party is aware of this situation at the time the coffee is loaded.

i. Unfitness of the container, liftvan or land conveyance for the safe transport of the coffee when the loading is prior to the coverage period of the insurance.

Concerning items (h) and (i) above, however, these exclusions do not apply to a subsequent buyer making a claim under the policy.

j. War and strike risks. Although these risks are excluded by the "A" clauses, an adequate degree of coverage is provided for them under the Institute War Clauses (Commodity Trades) and Institute Strikes Clauses (Commodity Trades). It is therefore important to make sure that these clauses are mentioned on the insurance certificate.

Duration of insurance

Continuity of cover is essential for coffee shipments. The period of insurance should extend from the time the coffee leaves the exporter's warehouse at the port of shipment up to its arrival at the warehouse or other place of storage at the port of destination.

For shipments in containers the insurance should cover at least the period from the loading of the coffee into the container up to its unloading from the container, often at an inland destination. Otherwise the consignee will either need to get an extension of the existing insurance or arrange his own cover for the remainder of the journey. The latter case has drawbacks for the buyer, as it is not advisable to change insurers at a point where the cargo cannot be examined, because disputes may arise over where any eventual loss or damage occurred. Furthermore the additional insurance premiums are often charged at disproportionately high rates compared to the cost of the basic premium. Insurers usually agree to issue certificates indicating that the goods are covered up to the final inland destination.

The period covered by the insurance is important, as only loss or damage to the coffee within that time is covered.

Commencement: The Institute Clauses (A) and the Institute strike clauses state that the insurance takes effect when the goods leave the warehouse or place of storage at "the place named herein" for the start of the voyage.

Continuation: The coverage continues during "the normal course of transit." This means the customary direct route between the port or point of shipment and the final destination and includes any customary transshipment. If any transshipment is expected, this should be briefly mentioned on the insurance certificate. If the normal transit is interrupted in any way, the insurer should be informed immediately with a request that he "hold covered" during the delay. Otherwise the insurance may lapse before the coffee is delivered to the final destination.

Termination of cover: The cover usually terminates either (a) on delivery to the consignee's warehouse or other final place of storage at the destination named in the insurance certificate; (b) on delivery to any other place of storage, whether prior to or at the specified destination, which the insured party elects to use, either for storage other than in the ordinary course of the transit or for allocation or distribution; or (c) after 60 days following the completion of unloading of the coffee from the ship at the final port of discharge, whichever occurs first.

Delay during shipment: The insurance remains in force during any delay beyond the control of the insured; any deviation, forced discharge, reshipment or transshipment; and any variation of the operation arising from the exercise of a liberty granted to shipowners or charterers under the contract of affreightment. (As noted above, however, damage or deterioration to the coffee arising from the delay itself is not covered by the insurance.)

Termination of carriage contract: If the transport contract is terminated before the ship arrives at the specified destination, the insurance coverage stops unless prompt notice is given to the insurers and a request is made to continue it. If this request is made, the insurance remains in force provided that any additional premium required is paid until the goods are sold and delivered, or on the expiry of 60 days after arrival of the coffee at the destination, whichever occurs first. If the coffee is forwarded to the destination within 60 days or any agreed longer period, the insurance continues to the final destination.

Change of voyage: If the insured party decides to change the destination after the coverage has started, the new routing will be held insured at a premium and under conditions as arranged, provided that the insured party gives prompt notice of this change.

Good faith and disclosure

The insurance contract is subject to the principle of the "the utmost good faith." The party to be insured and/or his broker must, when taking out insurance, inform the insurer of all facts that may influence the insurance company in accepting, declining or rating the risk. This duty of disclosure continues throughout the period of the policy. The insurer has a similar duty, but obviously the duty falls more heavily on the insured party, who is assumed to know everything about the particular risk.

If the party taking out insurance does not follow this requirement, the insurer may consider the policy void.

Open covers

If an exporter is involved in a number of CIF contracts during the year, it is advisable for him to take out an "open cover." Under such a cover the exporter agrees to insure all CIF sales during the period covered (usually one year), and the underwriter agrees to accept all such shipments for insurance. For each shipment the insurer provides the exporter with an insurance certificate setting out the terms and conditions of the cover, which he presents to the importer with the other documentation required under the contract.

The advantages of an open cover are that the coverage is always available when required; the premium for any shipment is known in advance; the premium rates quoted under such a cover are usually considerably lower than those for single shipments; and at the end of the period of one year, when the cover comes up for renewal, if the claims have been low the insurer may possibly agree to a lower premium rate for the following year.

Cancellation clauses: Cancellation clauses under an open cover give periods of notice applicable if either the insurer or the insured party wishes to cancel the cover before the normal expiry date. There should be provision for continuity of cover for coffee shipments that may be en route when the cover is cancelled.

Ships: The types of vessels that the insurer considers suitable for transporting the coffee are stipulated in the open cover. Ships not falling in the approved categories must be covered at a premium and under conditions to be arranged.

Voyages: This section of the open cover defines the voyages covered by the contract. The description should be as wide as possible to allow for any extension of origins or destinations during the period of the cover. The duration of cover required for all shipments is usually indicated. This should comply with the requirements of the various sales and purchasing contracts used by the party taking out the insurance. (See "Duration of insurance" above.)

Interest: The provisions in this section of the contract describe the goods falling within the scope of the cover. If the insurance is to be used for shipments of other products in addition to coffee, the wording should be sufficiently broad to include these.

Loss settlement: This clause sets out the agreed basis of settlement in the event of loss before declaration of the insured values of the shipment concerned.

Sum insured: The cover will always indicate a limit per any one ship or other means of conveyance. It also usually includes the Institute Location Clause: "Notwithstanding anything to the contrary contained in this contract, underwriters' liability in respect of any one accident or series of accidents arising from the same event in any one location shall not exceed the sum of ........." It is obviously necessary for the insured party to make certain that the limit per vessel is adequate to cover the highest likely value of coffee to be shipped at any one time. When deciding on the location clause, the party taking out the insurance should calculate a multiple of the limit per ship to allow for the possibility of coffee shipments in several vessels becoming concentrated at a particular port or place.

If a coffee shipment exceeds the cover limit, the insurer is not obliged to provide coverage for the excess. If the excess is advised promptly, however, the insurance company may agree to extend the limit, charging an appropriate additional premium. Otherwise the additional coverage may have to be found elsewhere.

Conditions: The cover will specify the various standard clauses applying to the goods and any other special conditions imposed by the insurers. It is important for the insured party to make certain that the conditions do not limit the coverage to less than that required by the various types of coffee contract (for example CTF 1988 or ECC 1991).

Rating schedule: The insurance document will specify either a single premium rate to cover all voyages within the scope of the contract or a schedule of various rates for different origins and destinations. From time to time the insured party may wish to extend the contract to include storage of the coffee at the destination or some intermediate location. Often the contract will

mention a premium rate for storage based on each 30-day period.

Security: The policy should clearly spell out the identity of the insurers providing the cover and, when there is more than one insurer, the proportion of the coverage underwritten by each. The party taking out the insurance should not accept a policy that merely shows the name of the broker or the intermediary.

Insurance certificates

When a single shipment of coffee is insured on an individual basis, a policy is issued that can be included with the shipping documentation. If shipments are insured by declaration under an open cover, an insurance certificate is issued for each shipment. Letters of credit should therefore stipulate provision of either an insurance policy or a certificate.

The insurance certificates may be issued by either the insurer or his authorized representative, the broker, or the insured party when this is authorized by the insurer.

Insurance certificates are pre-printed forms approved by the insurer and provided by him or the broker on which the specific details relating to the particular coffee shipment are typed or written. Certificates are issued with pre-printed reference numbers.

To avoid certificates falling into unauthorized hands, each one has to be accounted for, and any that are cancelled or spoiled must be returned to the insurer or the broker.

Each certificate is printed as a set containing one original and several copies. The original is passed on with the shipping documents, while the copies are used as reference or for filing by the various parties involved, including the insurer or broker for record purposes.

Insurers usually pay claims only against the original. If the claimant cannot produce this, he may have to prove that he has an insurable interest and is authorized to collect any claim settlement. He will also be required to complete a "letter of indemnity" for nonproduction of the certificate.

Premiums

Premiums are usually expressed in the form of a rate (percentage) applied to the insured value of the shipment. It is customary to show separate rates for marine risks, and for war and strike risks. It is not unusual, however, for these rates to be shown as a single combined figure for ease of calculation.

When determining the rate for a single voyage, the insurer usually considers such aspects as the age of the vessel, the route, and the quantity and type of coffee. For an open cover he will also take into account the insured party's previous loss experience.

Underwriters have more expenses in providing a single policy than in accepting declarations under an open cover, and they also tend to regard single policies as more speculative than open-cover policies. The rates under open covers are therefore generally much lower than those charged for "one-off" policies.

If an open cover is renewed with the same insurers over a number of years, the insurance company can get a good idea of the general loss experience of the exporter concerned and develop a good working relationship with him. In this situation insurers are more likely to offer competitive insurance rates and provide special or exceptional coverage when needed than for newer customers. The continuity of the relationship can also help establish a more cooperative attitude concerning "difficult" claims.

It is advisable for the insured party whenever possible to keep his own record of premiums paid and claims settled under the policy, so that at renewal he can decide whether it is reasonable to request a reduction in the premium for the next year.

Franchises: Under some marine insurance policies and covers it is possible to obtain a reduction in the rates by accepting a deductible clause or franchise. This is not, however, acceptable for cover that must comply with the various rules governing contracts for coffee, whereby the buyer is entitled to full indemnity for any loss that may be incurred on the shipment. A final consignee cannot be expected to go to the trouble of claiming part of his loss from the insurer and the rest from his supplier.

Increased values

A consignment of coffee often passes through a number of sellers and buyers before it is finally sold to the roaster or end-user. This does not present any difficulty concerning insurance for the first seller on a CIF contract. He arranges coverage for the CIF invoice value (CTF 1988 stipulates that the coffee should be insured for an amount 5% above the contract price, freight included). The insurance certificate, which is proof of the insurance, is a freely negotiable document. The certificate is assigned (transferred) to the first buyer by the seller.

If the first buyer resells the coffee at a higher price, he should increase the insured value accordingly. He therefore obtains an "increased value" insurance from his own insurers who issue the corresponding certificate. He passes this certificate, together with the original insurance certificate, to the new buyer.

The final buyer in the chain therefore receives the original certificate, together with one or more increased-value certificates. Any claim for loss or damage to the shipment will be paid by the prime insurer, the one who issued the original certificate, and the increased value insurers, who issued the supplementary certificates, in proportion to the insured values indicated on the certificates.

Claims

To recover loss or damage under the insurance, the insured party must have an "insurable interest" in the coffee at the time of loss. This means that he must be in a position to gain by the preservation of the goods and lose by their loss.

If the insured voyage is terminated at some point other than the final destination, the insurers agree to pay any extra charges properly and reasonably incurred by the insured party in unloading, storing and forwarding the coffee to the destination to which it is insured. (This concession does not apply to "general average" or salvage charges.)

When the coffee is partially lost or damaged before the final destination, the cargo owner may decide that it is uneconomic or impractical to spend any further money on reconditioning, recovering or forwarding it to the destination. He will therefore try to claim "a constructive total loss" from underwriters. Such a loss is not recoverable from insurers unless the coffee is reasonably abandoned. (Therefore, in practice, the situation should be discussed with insurers before the coffee is abandoned.)

The "increased value clause" sets out the basis for allocating any insured loss, damage or expense between the primary insurer under the original certificate and any "increased value" insurers.

Steps to take: When loss or damage is reported during the voyage prior to arrival at the final destination, the insurer should be notified immediately and be kept informed of developments. In most cases, however, the condition is not discovered until the ship is unloaded at the final port, or, in the case of containers, when the coffee is removed from them at the final destination. The consignee must make sure that notification is immediately made to any party who could possibly be responsible for the loss or damage while the coffee was in their custody, that is, the shipowner and/or his agents at the port of discharge; the charterer when bills of lading were issued on his behalf; the port authority; and stevedores and inland carriers at the destination (and also the exporter, if there is any suggestion that the damage might be of preshipment origin). Any of these may decide to appoint their own surveyors if considerable damage has occurred.

The consignee should obtain the original (or if necessary a copy) of the insurance certificate and follow its instructions relating to claims procedure. If the certificate nominates a local representative or settling agent of the insurers, that person should be contacted immediately so that he can decide whether to appoint a cargo surveyor on behalf of the insurers.

Some insurance certificates indicate a cash limit below which surveyors need not be appointed. When estimating the probable loss for such purposes, the consignee should determine the maximum possible amount of the claim to avoid difficulties if the claim is eventually found to exceed the survey limit.

The consignee cannot reject damaged or torn coffee bags out of hand and must make every effort to reduce the loss to a minimum. When bags are wet or dry stained and the damage has penetrated to the contents, the consignee must agree with the surveyor on one of the following actions: accept the bags for use or resale without depreciation; accept the bags subject to a mutually agreed allowance or percentage depreciation; recondition the coffee, selling off or destroying any damaged portion; sell the damaged bags at the best price obtainable; or destroy completely unsaleable, badly damaged coffee. No damaged coffee should be destroyed without the agreement of the cargo insurance surveyor and an official destruction certificate.

When all of the damaged coffee has been taken care of according to one of the steps above, the consignee is in a position to follow up his initial notification to the insurance company (through letters of reserve) with a calculated claim against the shipowner and any other third parties. If the shipowner requests to see the cargo insurance surveyor's report, the consignee should refer the request to the claim-settling agent or the insurers before releasing this document.

If the shipowner or any other party makes an offer that is less than 100% of the amount claimed, the offer should be referred to the cargo insurers before acceptance. If the shipowner declines liability or does not respond promptly, the insurance claim should be submitted to the claim-settling agents, brokers or insurers following the instructions given in the insurance certificate.

Disputes and arbitration

Most insurance disputes in the international coffee trade arise in connection with claims. No provision is usually included in insurance policies for settling disputes between the insurer and the insured party through arbitration. Claims are settled according to the law and practice of the insurance market concerned.

If an insurer declines a claim, the only path open to the insured party, if he considers his claim valid, is to obtain legal advice on whether to pursue the matter through the courts. Fortunately there are comparatively few disputes involving coffee insurances that warrant such an expensive course of action.

If the dispute, although concerning the insurance arrangements, is between the seller and the buyer, for example on the question of whether the insurance protection obtained was adequate to satisfy the requirements of the rules governing the contract, this could no doubt be dealt with by arbitration as laid down by the appropriate body (for example, the Coffee Trade Federation Arbitration Rules 1989).

The best way to avoid disputes with insurers is to keep them informed of all developments relating to shipments, to pay premiums promptly and to build up a relationship of mutual confidence.

PHOTO : Coffee is very vulnerable to damage from moisture and other hazards. Above, growers in Guatemala examine beams.

PHOTO : Insurance does not cover certain situations, such as unsuitable packing.

PHOTO : Coverage should extend through arrival in the warehouse of destination.

Peter Dixon is a marine insurance manager of a major coffee processer, who works in the company's office in the United Kingdom. This article is based on a chapter that he wrote for a forthcoming ITC guide for coffee traders.
COPYRIGHT 1991 International Trade Centre UNCTAD/GATT
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Dixon, Peter
Publication:International Trade Forum
Date:Apr 1, 1991
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