Hidden dangers of CFR closing conditions: Lessons from fires

We illustrate the hidden dangers of CFR transaction conditions and the importance of shipping notices with the following cases!! Suppose you are the underwriter of the issue. Do you settle the claim?

Case: (Export Date: May 2022, Export Place: Kaohsiung Port, Taiwan, Destination Port: Felixstowe,UK)

As an underwriter of the insurance company, I will analyze the following situations and make a claim statement for the topic based on the case provided:

The Company shipped the goods as stipulated in the letter of credit and notified the UK buyer by email for insurance, subject to CFR conditions and payment terms of the letter of credit at sight. However, a fire broke out on the shipping vessel before the importer could open the mail, causing the cargo to burn. After receiving the shipping notice, the importer immediately took out insurance with the insurance company and only learned that the goods were burned after going through the formalities. Now they are still seeking compensation from the insurance company afterward.

I will explain and demonstrate as follows according to relevant insurance laws of Taiwan and government decrees on ocean freight contracting:

According to Article 98, Item 1 of Taiwan's "Insurance Law," before the risk occurs to the insured property or possible loss occurs to the insured property, the insured shall notify the insurer.

In this case, the buyer needed to know that the goods had been burned before taking out insurance. According to insurance law provisions, the buyer failed to notify the insurance company before the risk occurred. This may result in the insurance company not being liable for the loss.

In addition, according to Article 64, Item 1 of Taiwan's "Insurance Law," the insurer is liable for compensation for losses incurred by the insured property. However, the buyer only learned that the goods had been burned before taking out insurance. This means that an insurance contract has not yet been established. Insurance companies were not able to settle losses.

Regarding ocean freight contracting, according to Article 325 of Taiwan's Maritime Law, the carrier shall carefully keep consignment and deliver goods to the consignee by agreement. In this case, the importer may be able to seek a corresponding claim from the carrier for damage to goods due to a fire occurring during shipment.

In this case, the insurance company may not be liable for compensation because the buyer failed to notify the Company before the risk occurred. However, the importer may still consider seeking compensation from the carrier. The carrier is responsible for the safekeeping of goods during transportation and delivering them to the consignee. The importer may be entitled to compensation from the airline due to goods being burned in a fire during shipment.

According to the above analysis, because the buyer should have notified the insurance company before the risk occurred according to insurance law requirements, the insured should notify the insurer before the chance arises to the insured property. An insurance company may not settle the claim.

Importers may consider filing a claim against the carrier. Under maritime law, the airline must take care of goods during transportation and deliver them to the consignee. The importer may be entitled to claim compensation from the carrier due to goods being burned in a fire during shipment.

According to local laws in the UK, insurance companies should not settle claims either. Here is my analysis and explanation:

• UK's transaction conditions also follow Incoterms, so the meaning of CFR is the same as in mainland China; the seller is responsible for delivering goods to the destination port but not for insurance. Buyers should take out insurance after goods are loaded on board and bear the risk from the loading time to the destination port.

• UK's payment terms follow the Uniform International Letter of Credit Practice Rules (UCP) buyer by email and provide documents such as bills of lading. The seller has fulfilled its obligations and does not affect its right to payment.

• British insurance laws and regulations also have provisions similar to mainland China; when an insurance contract is established, the insurer is not responsible for paying insurance money if an insured event has occurred or is known to occur. According to Article 18 of "Marine Insurance Law," "insured must disclose to the insurer when an insurance contract is established every fact that he knows or should know under normal circumstances that may affect the insurer's decision whether to accept insurance or determine conditions of insurance." Therefore, if a buyer fails to disclose that goods have caught fire when applying for insurance, it may be considered a breach of disclosure obligation and invalidate the insurance contract. Therefore, the insurance company can reject the claim and cancel the insurance contract.

According to Article 2 of the Maritime Code, "Ship's luggage carrier is liable for any loss or damage caused by negligence or error of his or his agents or employees." • British Maritime Code also has regulations similar to those in mainland China; that is ship-owner is liable for damages caused by negligence in management command navigation, loading and unloading supply, and all other affairs of the ship. Therefore, the buyer can pursue liability for compensation against the ship owner or its agent.