This page explains what cargo insurance covers and why the sale's Incoterm decides who must buy it, for a merchandiser, buyer, or shipping coordinator working on an export order. This lesson mainly teaches information: what cargo insurance actually pays for, and how FOB and CIF, the two Incoterms an apparel export order most often uses, put the duty to buy that cover on a different side of the sale. Sara, the buyer at Northline Apparel, meets this question directly on Order A's export run, since Northline buys FOB and so must arrange its own cover once the goods are on board.
A person who assumes cargo insurance is always "the factory's problem" or always "the buyer's problem" gets it wrong on roughly half of all shipments, since the answer depends entirely on the Incoterm the sale contract names. Getting this wrong leaves a shipment moving across the ocean with nobody actually insuring it, so a single lost or damaged container becomes a cost nobody planned for, on top of the value of the goods themselves.
You need: no previous lesson is required, though a basic sense of FOB from earlier tracks helps.
By the end of this lesson you can:
Not covered here: how much cover to actually buy (lesson 7.2); filing a claim once a loss happens (lesson 7.3); what to do when a claim is delayed or disputed (lesson 7.4).
| Term | Meaning |
|---|---|
| Cargo insurance | Cover against loss or damage to goods in transit from factory to buyer, mostly for the ocean or air leg of an export shipment. |
| CIF | An Incoterm where the seller pays the goods, the freight, and the cargo insurance to the buyer's named port, even though risk passes earlier, once goods are on board. |
| FOB (free on board) | The factory delivers the goods on board the ship at its own port. Freight from there is the buyer's cost. |
| Insured value | What a cargo policy pays out on, commonly invoice value plus a margin such as 10%, though the actual basis is set by the policy. |
| Insurance premium | What is paid to the insurer for cargo cover, usually a small percentage of the insured value. |
| All-risks cover | A policy covering loss or damage from any accidental cause not specifically excluded, the widest standard cover. |
| Named-perils cover | A policy paying out only for causes it names, such as fire or sinking, narrower and cheaper than all-risks cover. |
Cargo insurance is cover bought against physical loss of, or damage to, a shipment while it moves from the factory to the buyer. It does not cover a late delivery, a rejected sample, or a buyer's own lost sales from a missed date; those are separate risks handled separately. Which side of a sale must buy that cover is not a free choice made shipment by shipment; it follows directly from the Incoterm named in the sale contract, since each Incoterm fixes, in advance, exactly where risk passes from seller to buyer and, for a small group of Incoterms including CIF, which side must arrange cargo insurance regardless of where risk has already passed.
| What can differ | The shapes you meet | Why it matters |
|---|---|---|
| Export, FOB | Under FOB, Northline Apparel takes on risk once Order A's goods are on board at the port of loading, and it is Northline, not Delta Garments, who must decide whether and how much to insure the ocean leg. | A factory selling FOB has no duty to insure the ocean leg at all; assuming otherwise leaves the shipment uninsured if the buyer also assumes the factory has covered it. |
| Export, CIF | Had the same order been sold CIF instead, Delta Garments would have had to buy cargo insurance through to Northline Apparel's named destination port, even though risk to the goods still passes to Northline once they are on board, the same moment as under FOB. | CIF is the one common Incoterm where the seller must insure a shipment it no longer carries the risk on for most of the voyage, a detail that catches people who assume risk and the duty to insure always move together. |
| Domestic, Make to Stock | Cedar & Co.'s domestic order for the same T-shirt never uses an Incoterm at all, since Incoterms apply to international sales; a domestic road delivery instead uses a goods-in-transit insurance policy, arranged by whichever side the domestic contract names, if either side insures it at all. | Cargo insurance in the ocean-freight sense simply does not apply to a purely domestic delivery; a different, domestic instrument covers the same kind of risk where it is used. |
| Other product families | A denim order such as Order B's jeans, sold FOB or CIF to a European buyer through Meridian Sourcing, follows the same Incoterm-decides-insurer rule as Order A, whatever the product. | The rule is not specific to T-shirts; it applies to any apparel export shipment, since it follows from the Incoterm, not the goods inside the container. |
Sara, the buyer at Northline Apparel, is confirming shipping arrangements for Order A's T-shirt run, 15,000 pieces at FOB USD 3.20 from Delta Garments. She checks the sale contract's own terms and confirms it is sold FOB, not CIF. Using the decision guide's Decide sheet, she enters "FOB" and confirms that Northline, as the buyer, carries both the risk and the duty to insure once the goods are loaded on board at the port near Delta Garments' own factory. Sara arranges an all-risks cargo insurance policy with Northline's own insurer before the goods sail, rather than assuming Delta Garments has already covered it.
The worked numberThis lesson's worked number shows how the shipment's own invoice value becomes the number a cargo insurance policy is actually written against.
A common mistake is each side of a sale assuming the other side has arranged cargo insurance, especially under FOB, where a factory that is used to selling CIF on other orders can forget that FOB shifts the duty to the buyer. Once a shipment sails with neither side having actually bought cover, the gap is only discovered after a loss or damage happens, at which point no policy exists to claim against.
This trap costs the full value of an uninsured loss, not a partial one. On Order A alone, an uninsured total loss of the 15,000-piece shipment costs someone USD 48,000 at invoice value, far more than the order's own total profit margin of USD 3,900 (15,000 pieces x USD 0.26), showing why confirming who insures a shipment, in writing, before it sails matters as much as any other shipping document.
Cargo insurance pays out if goods are lost or damaged on the way from factory to buyer. It does not cover a late delivery or a rejected sample. Which side buys it is not a habit or a guess; it comes from the sale terms in the contract. Under one common arrangement, the buyer takes on risk once goods are loaded onto the ship, and also arranges the insurance from that point. Under another, the seller must buy insurance all the way to the buyer's own port, even though the buyer already carries the risk for most of the voyage. A purely domestic delivery does not use these terms at all; it can use a different, domestic transit cover instead, if either side buys any. Confirming who is responsible, in writing, before goods sail is the only way to be sure a loss does not fall on nobody's policy.
Sara, the buyer at Northline Apparel, is finalising shipping arrangements for Order A's 15,000-piece T-shirt run, three days before the confirmed sailing date. The facts in front of her:
The document Sara reads, the purchase order's own commercial terms line:
Should Sara assume Karim's email means Delta Garments has already insured the ocean leg, or should she confirm and arrange Northline's own cargo insurance regardless? Decide before you open the answer.
She should confirm and arrange Northline's own cargo insurance regardless of Karim's email. The purchase order's own FOB terms already state that freight and cargo insurance from the port of loading are the buyer's account, so the duty to insure the ocean leg sits with Northline Apparel whatever Karim's email meant.
Two facts, together, decide this. First, the sale is FOB, and the decision guide's own rule for FOB names the buyer as the party who must insure once goods are on board, regardless of any informal reassurance from the seller. Second, Karim's email does not name an actual insurer or policy, only a general statement that could just as easily mean the factory's own domestic liability cover, which does not extend to an ocean voyage once goods are on board.
Assuming Delta Garments had already insured the shipment, and being wrong, would leave the entire USD 48,000 invoice value uninsured against loss or damage for the whole ocean voyage, a cost with no policy behind it at all.
This lesson's cost compares the small cost of buying cargo insurance against the full exposure of sailing without it. An all-risks cargo insurance premium on Order A's USD 52,800 insured value, at a typical rate in the low single-digit percentages of insured value, costs a few hundred dollars, a small fraction of the order's own USD 3,900 total profit margin (15,000 pieces x USD 0.26). Sailing the same shipment uninsured, and then losing it, costs the full USD 48,000 invoice value, more than twelve times the order's own profit margin, showing why confirming and paying for cargo insurance costs far less than the exposure it removes.
Copy this row into the cargo insurance decision guide's Decide sheet, using the Incoterm and invoice value for the shipment you are deciding for.
| Check point | Spec says | Found (your entry) | Result |
|---|---|---|---|
| Who must buy cargo insurance, and the recommended insured value | Enter the sale's Incoterm and invoice value into the Decide sheet and record who it names and the insured value it returns |
Download the full working sheet, with Order A's FOB decision already filled in, from the link on this course's page.
1. Under FOB, who must buy cargo insurance for the ocean leg, and from what point?
2. Under CIF, why must the seller buy cargo insurance even though risk to the goods passes to the buyer at the same moment as under FOB?
3. A different order's invoice value is USD 30,000. Using the common practice of invoice value plus 10%, what insured value would the decision guide recommend, and how much extra cover is that above the invoice value?
| EN | AR | FR | TR | Meaning |
|---|---|---|---|---|
| Cargo insurance | تأمين البضائع | Assurance marchandises | Kargo sigortası | Cover bought against loss of, or damage to, goods while they move from the factory to the buyer, most often for the ocean or air leg of an export shipment. |
| CIF | CIF (التكلفة والتأمين والشحن) | CIF (coût, assurance et fret) | CIF (maliyet, sigorta ve navlun) | An Incoterm under which the seller pays the cost of the goods, the freight, and the cargo insurance through to the buyer's named destination port, even though risk passes to the buyer earlier, once the goods are on board. |
| FOB (free on board) | تسليم على ظهر السفينة في ميناء المصنع | FOB (franco à bord) | FOB (gemide teslim) | The factory delivers the goods on board the ship at its own port. Freight from there is the buyer's cost. |
| Insured value | القيمة المؤمَّن عليها | Valeur assurée | Sigortalı değer | The amount a cargo insurance policy agrees to pay out on, commonly the shipment's invoice value plus a margin such as 10% to cover freight, duty and lost profit, though the exact basis is set by the policy itself. |
| Insurance premium | قسط التأمين | Prime d'assurance | Sigorta primi | The amount paid to the insurer for cargo cover on a shipment, usually a small percentage of the insured value. |
| All-risks cover | تغطية جميع الأخطار | Couverture tous risques | Tüm riskler teminatı | A cargo insurance policy that covers loss or damage from any accidental cause not specifically excluded, the widest standard level of cover. |
| Named-perils cover | تغطية الأخطار المحددة بالاسم | Couverture des périls nommés | Belirlenmiş riskler teminatı | A cargo insurance policy that pays out only for the specific causes of loss it lists by name, such as fire or sinking, narrower and usually cheaper than all-risks cover. |
You now know what cargo insurance covers and who has to buy it under FOB and CIF. The next lesson looks at how much cover to actually buy once you know you are the one buying it. Back to the course map