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Ömer Haluk TURANLI
UGM Education Consultant
Insurance Subject and Frequently Made Mistakes
In my second article on International Delivery Methods, I would like to touch upon the frequently made mistakes encountered in the use of delivery methods. Although these are actually very simple mistakes, they can cause major sanctions and penalties inversely proportional to their smallness. Therefore, they can have cost-increasing and time-consuming effects on exporters and importers.
Various examples of incorrect use can be given;
Incorrect Delivery Method Usage
First, let's give an example of an incorrect delivery method declaration;
Let's consider EXW (ex-factory), which is the simplest delivery method for the exporter. In this delivery method, the exporter does not even have to pack the goods. The importer can also do the packaging by the agreements of the parties. In this case, even simple operations such as loading the vehicle that comes to their facility, let alone the exporter opening the export declaration and performing customs exit procedures or transporting the goods from their field to a place to deliver them to the carrier, remove the delivery method from being EXW. Therefore, if the exporter performs any operation for the goods, this delivery method should be stated as FCA at best.
This situation poses a risk for importers, as there are pre-import cost items that need to be added to the fob price to calculate taxes at the import stage. In EXW delivery, there is normally no such cost, only the cost of the goods is involved, but in a transaction declared as EXW by mistake, such costs are involved and are not declared to customs, therefore, noticing this mistake during a possible control or inspection will result in retroactive penal sanctions.
Using a Delivery Method That Is Not Appropriate for the Mode of Transport
Another example of incorrect usage is the incompatibility of the delivery method with the mode of transport. There are 11 delivery methods in Incoterms 2020, four of which (FAS, FOB, CFR, CIF) can only be used in sea and inland waterway transport, while the remaining seven delivery methods (EXW, FCA, CPT, CIP, DAP, DPU, DDP) can be used in all modes of transport (road, air, rail, sea, and inland waterway).
In this case, the delivery method cannot be FOB, for example, in a transport carried out by road.
Indicating the Delivery Method Without a Place of Delivery or with an Incorrect Place of Delivery
A rarer example of incorrect usage is as follows; when specifying the delivery method in any document, it is not enough to write only the delivery method, for example, just FOB. The name of the place where the delivery is deemed to have taken place according to the relevant delivery method should also be written next to the delivery method. For example, since delivery will be made at the exporter's port in FOB delivery, the delivery method should be written as FOB ANY PORT IN TURKEY or FOB AMBARLI PORT, ISTANBUL, indicating the correct place of delivery. In such an export transaction, an exporter who is obliged to deliver his goods at a port in Istanbul, for example, cannot specify the delivery method as FOB ANY PORT IN GERMANY.
Similarly, for the CIF delivery method, where the delivery of the goods and the transfer of risk take place at the importer's port, the same exporter should use the phrase CIF ANY PORT IN GERMANY. The phrase CIF ANY PORT IN TURKEY would be incorrect.
D Delivery Methods and Insurance, Carrier's Insurance
Finally, I would like to touch upon the very important issue of insurance. The content of the delivery methods or the illusion that the carrier's transportation is insured under various convention rules can cause trouble for the parties.
Incoterms 2020 (and previous Incoterms versions) stipulates that in D delivery methods (DAP, DPU, DDP for Incoterms 2020) delivery and risk transfer take place at any place specified by the importer in the terminal/customs area of the importer's country in DAP and DPU, in DDP delivery form, in the importer's country, and with the import procedures completed, at any place the importer wishes, most often at the importer's premises, and imposes all costs and risks until delivery on the importer. Naturally, this situation leads to the illusion that the seller has insured the goods in favor of the buyer in D delivery methods. However, among the 11 delivery methods, there are only two delivery methods that require the seller to have insurance in favor of the buyer. These are CIF and CIP, and no delivery method requires the seller to have insurance other than these two delivery methods. Based on this, in D delivery methods, the importer must first obtain the relevant document (insurance policy, a statement on the invoice stating that the insurance was made and the fee was collected from him, etc.) if the goods are insured, to both take precautions against the risk of loss of the goods and to avoid problems during the taxation process at customs, and if the goods are not insured, he must have the insurance done himself, or if he prefers to undertake this risk, he must inform the customs that no insurance was made during the import phase and ensure that the tax is calculated correctly.
Another mistake made regarding insurance is the incorrect information that the transportation companies' transportation insurance also covers and protects the goods carried. It is true that carriers are included in a certain insurance system by the international agreements they are subject to and that the transportation they carry out is under insurance coverage at certain rates, but this coverage does not cover the entire cost of the goods being transported, only the small amounts stipulated by the relevant legislation are covered. For example, for air transportation, this amount is approximately ₺135.00 per kilo within the scope of the Warsaw Convention and the Turkish Civil Aviation Law, and roughly ₺150.00 per kilo within the scope of the Montreal Convention. In road transportation, this amount is approximately ₺65.00 per kilo for a transportation company included in the CMR Convention.
In light of this information, I recommend that the goods subject to trade are insured during both the export and import stages.
