Increased value insurance
The practice of insuring goods above their purchase price to cover the freight, duties and profit that their loss wipes out.
Incoterms 2020, published by the International Chamber of Commerce, set the floor. Under CIF and CIP alike, the seller insures the goods for the contract price plus 10%, on Institute Cargo Clauses (C) terms for CIF and (A) terms for CIP. Purchase price falls short as the insured value of goods in transit. The loss also destroys freight already paid, customs duties, insurance costs and the profit the resale would have produced. International trade practice closes that gap with a fixed uplift to the value. The buyer does not have to prove the profit it would have made, which keeps an intractable accounting argument out of every claim. The uplift dovetails with the incoterms, since the CIF or CIP sale puts insurance on the seller for the account of a buyer it may never meet. It also dovetails with the documentary credit. Banking rules impose a minimum insured amount so that, in the event of loss, the bank finds enough in the indemnity to cover its advance. Without it, an indemnity principle applied to the letter would leave the buyer compensated and yet out of pocket on the deal.
The Uniform Customs and Practice for Documentary Credits, in the UCP 600 version in force since July 1, 2007, require the insured amount to be at least 110% of the CIF or CIP value of the goods. A shipment invoiced at one million dollars must therefore be covered for 1.1 million at minimum. Otherwise the bank rejects the documents and the seller is not paid.
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