A marine insurance policy plays an important role by covering you against various losses or damages which may arise during the transportation of goods. While transporting goods, there is a free on board term that should catch your attention as it will affect terms & conditions of your marine insurance policy.
Free on board or freight on board (FOB) comes under marine insurance, and implies that the seller would be held responsible till all the goods are placed on the vessel as designated by the buyer. It means the goods would be delivered as per the seller’s cost via a particular route to the destination as specified by the buyer.
In case of marine insurance, the word ‘free’ means that the seller would have an obligation to deliver goods successfully at a named place for transfer to the carrier. In case of marine insurance which covers international shipments, contracts which involve international transportation often contain trade terms which clearly state the details like, time and place of delivery, at what point loss would be shifted to the buyer from a seller, who would pay the cost of marine insurance and freight, etc.
For instance, Mr X sends goods to Mr Z on FOB basis, which means that Mr Z would be responsible for arranging insurance for Mr X. In case any loss arises during the transit, Mr Z would get the compensation from the insurer.
Additional Read: What is Insurable Interest of different parties in Marine Policies?
Free on board is an important term for participants who are involved in global business. It is also useful in such contracts which include costly items which are vulnerable to theft and loss. One of the most crucial aspects of FOB is that it helps in knowing which party owns the freight while it is still in transit. In case the freight is lost or damaged, the marine insurance company of the owner would come forward.
There are certain variations of FOB terms about which you should be aware of. In case, there is a FOB destination; the seller would be responsible till the goods delivered to the buyer. However, in case the marine insurance specifically uses FOB origin, the buyer would become the owner by the time and place the product actually originates. It helps in making the buyer responsible for freight and damaged goods.
It’s crucial for all parties to have a clear understanding of the specifics of the FOB terms to know who would be responsible in case of unforeseen events.
Case Study: 1
A pepper dealer buys 20,000 tons of pepper from Company ABC in India to sell them at its store situated in London. The purchase contract says, “FOB destination, London, XYZ warehouse,”. It means, the Company ABC would pay the loading and shipping expenses to send 20,000 tons from its Indian factory to XYZ warehouse in London.
The pepper would become the dealer’s property in London. It means, if there would be any loss to jars, like if they get lost, destroyed or stolen on their way to London, Company ABC would still be considered responsible as it owns the goods while they are in transit.
In cases where goods are destroyed or stolen after they reach the XYZ warehouse, the buyer would be held liable.
Case Study: 2
Rajesh is a machinery seller who stays in Delhi, India. Last year, he signed a deal with a buyer located in New York. As per the deal, Rajesh has to sell goods to the buyer on FOB basis. Here, the seller meets all the expenditures which are incurred in transporting the goods to Delhi port. The seller pays custom clearance expenses in Mumbai to get the goods either on board to airlines or ship.
Here, it is essential to note that all the further costs associated with the goods to reach the buyer’s place would be paid by the buyer.
Additional Read: Why Do You Need Marine Insurance?
Here, the buyer decides the shipping company or airline and seller ships goods as per the recommendation of the buyer. The buyer pays the freight cost to the shipping airlines or company and also makes arrangements to insure the consignment and pays the insurance cost.