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What is Free on Board (FOB) in Marine Insurance?

  • Author :
  • TATA AIG Team
  • Published on :
  • 11/01/2024
  • 2 min read

Transporting goods from one place to another is no easy task. The process involves various risks, especially when the goods travel by sea. In international trade, the liability of the buyer and the seller in respect of the traded goods may be complex to understand.

This is where the International Commerce Terms (Incoterms) come in. Incoterms are pre-defined trade terms that clarify the obligations of buyers and sellers. Currently, there are 11 Incoterms, and Free on Board (FOB) is one of them.

This article discusses FOB meaning in shipping and how it impacts a marine insurance policy’s terms and conditions.

What is Marine Insurance?

Marine insurance is a contract of indemnity. It is designed to provide coverage against potential losses or damages incurred while transporting goods. Marine insurance covers loss or damage to cargo, ships, terminals, etc. and is a crucial element of import/export proceedings. Any party involved in the transportation of goods can buy a marine insurance policy, such as an exporter, importer or forwarding agent.

What is Free on Board in Marine Insurance?

Free on board or freight on board is a widely used shipping term established by the International Chamber of Commerce (ICC). The Incoterm is used to bifurcate the liability of the buyer and the seller during the transportation of goods domestically and internationally.

FOB shipping terms indicate who bears the risk of loss or damage, pays for the freight insurance and transportation, and possesses the title to the goods while in transit. They are specified in the purchase orders between buyers and sellers. Free on board, meaning in export, is used in shipments via water only and not for air, road or rail transportation.

Under free on board in marine insurance, the term “free” indicates that the seller is responsible for delivering goods to a designated place for transfer to the carrier. Once goods are loaded onto the vessel, the buyer holds all the responsibility for the goods.

Now that you are familiar with the FOB definition, here are the two types of FOB terms:

FOB Origin

In FOB origin or FOB Shipping Point, the buyer takes all the responsibility the moment goods are loaded onto the vessel at the point of origin or shipping. The buyer now stands liable for potential loss or damages while the goods are in transit. Since FOB origin transfers the title of the goods to the buyer at the shipping point, the sale is recorded in the ledger at that time. The seller is now free from any responsibility for goods during transit.

For example, Company XYZ in the United States buys shoes from a supplier in China under a FOB origin contract. If the goods are lost or damaged during transit, Company XYZ assumes liability and cannot ask the seller to compensate for the losses. It is because the seller is responsible for transporting the goods successfully to the carrier, where the title of the goods is transferred to the buyer.

FOB Destination

In FOB destination, the seller has all the responsibility until the goods reach the buyer. The seller is considered the owner of the goods during transit and is liable for any loss or damage until delivery. Once the seller delivers the goods to the buyer, the title of ownership is transferred to the buyer, after which the sale is recorded.

For example, Company ABC in the United States buys pepper from a supplier in India under a FOB destination contract. If the pepper gets lost during transit and never reaches Company ABC, the supplier is responsible for reimbursing or reshipping the pepper to Company ABC.

What are the Seller’s Responsibilities in FOB?

When entering into a contract with FOB Incoterms, the seller has to fulfil the following responsibilities:

Packaging: The seller arranges for all the packaging to make sure the cargo is shipped safely.

Loading: The seller bears the costs involved in the loading process at his warehouse.

Delivery to the port of origin: The seller bears the trucking fees to move the goods from his warehouse to the port of origin.

Export duty, customs clearance and taxes: The seller pays for the export duty, customs clearances and taxes for the seamless export of the cargo.

Origin Terminal Handling Charges: The seller is responsible for paying the OTHC.

Loading on carriage: The seller bears the cost of loading the cargo onto the carriage.

What are the Buyer’s Responsibilities in FOB?

The buyer may agree to take up the following responsibilities under the FOB Incoterms:

Insurance: While freight insurance is not necessary under the FOB agreement, the buyer can buy an insurance policy to safeguard the shipment from marine risks.

Freight charges: The buyer pays for the carriage charges to ship the goods from the port of origin to the destination.

Destination Terminal Handling Charges: The buyer is responsible for paying the DTHC.

Delivery to destination: The buyer pays for the delivery of the goods to their final destination.

Unloading: The buyer bears all the costs involved in unloading the cargo.

Import duty, customs clearances and taxes: The buyer pays for all the fees and taxes involved in customs clearance.

What is FOB Pricing?

The costs involved in FOB contracts can include charges for transporting goods to the port of shipment, freight transport, insurance, loading the goods onto the vessel, and unloading and moving the goods from arrival port to final destination.

Who Pays FOB Charges?

When it comes to FOB origin, the seller bears the fees and transport costs until the goods reach the port of origin. Once the goods are loaded onto the ship, the buyer holds financial responsibility for costs related to transport, taxes, customs and other fees.

On the other hand, FOB destination requires the seller to assume all the fees and costs until the goods reach their destination. Once the goods enter the destination port, the buyer bears all the fees and costs, including duties, taxes and customs.

In Conclusion

FOB is the most commonly used agreement between a buyer and a seller when shipping goods via sea. The two basic options are FOB origin and FOB destination. While FOB origin holds the seller liable for the goods only until the shipment begins its journey to the buyer, FOB destination makes the seller responsible until the goods reach the buyer. FOB is particularly essential in contracts involving valuable goods susceptible to loss or theft.

Now that you know FOB meaning in export, you must consider buying a marine insurance policy for every shipment you make. Marine insurance effectively protects valuable cargo and vessels from multiple marine perils along their journey.

If you look forward to buying marine insurance in India, look no further. Tata AIG provides customisable marine cargo insurance plans that protect goods against unforeseen financial liabilities while transporting goods.

FAQS

Is FOB shipping cheaper?

Buyers usually consider FOB agreements as a cheaper and more cost-effective choice. This is because FOBs offer more control and allow buyers to choose shippers and insurance limits.

What is the disadvantage of FOB contracts?

FOB may not be the right option if you are a new buyer in international shipping. It is because FOB places a lot of responsibilities on the buyer. The buyer has to understand all the complexities involved in international shipments and arrange for a shipper and insurance policy.

What is the alternative to FOB?

The most common alternative to FOB is the Cost, Insurance and Freight (CIF) agreement. CIF contract makes the seller responsible for the goods until they reach the point of destination. The seller has to arrange for insurance and pay transportation costs. Once goods reach the port of destination, the buyer assumes the responsibility of transporting them to the warehouse.

What is the difference between free on-board and free carrier?**

FOB origin requires the seller to hold responsibility for the goods till they are loaded onto the vessel, while FOB destination mandates the seller to assume responsibility until the ownership of goods is transferred to the buyer. On the other hand, Free Carrier (FCA) requires goods to be delivered and unloaded by the seller to a place selected by the buyer.

Is CIF better than free on-board FOB?

Both FOB and CIF have their own advantages for buyers and sellers. The one you choose may depend on your business’s specific needs and risk tolerance. If you are a seller with expertise in local customs, CIF may be the right option for you, as this can help you gain a competitive edge. However, as a small vendor, you may want large buyers to hold responsibility for the shipment. In this situation, FOB agreement may be the right option to lower costs.

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Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

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