International Cargo Insurance in Russia: Legal Risks, Documentation, and Incoterms 2020

August 31, 2023

BRACE Law Firm ©

International logistics is inextricably linked to the potential loss and damage of goods. To minimize these risks, entrepreneurs insure cargo during its transportation from seller to buyer.

Cargo insurance represents a relationship between foreign trade transaction participants and an insurance company aimed at restoring the property interests of the parties. These interests are compensated through paid insurance premiums. Under Russian law, insurance is a relationship to protect the interests of individuals, legal entities, the Russian Federation, constituent entities of the Russian Federation, and municipalities upon the occurrence of specific insured events. This protection is funded by insurance reserves formed from paid insurance premiums (contributions) and other insurer resources. [1]

In accordance with Article 930(1) of the Civil Code of the Russian Federation (the "Civil Code"), a party may insure property under an insurance contract for the benefit of a person (the "Policyholder" or "Beneficiary") who has an interest in preserving that property based on law, other legal acts, or a contract. The interest in preserving property under a voluntary insurance contract consists of protecting it from the negative consequences stipulated by the insured event. [2]

As a rule, the following types of risks are insured:

• All risks, where the insurer compensates for all losses resulting from any damage to the transported cargo;
• Specific risks defined in the terms of the insurance contract;
• Carrier liability in the event of damage to the vehicle carrying the cargo.

The choice of cargo insurance significantly depends on the vehicle transporting the goods. However, in most cases, parties insure against risks of loss, theft, damage due to weather conditions, damage during loading and unloading, breach of packaging integrity, and traffic accident risks (for road transport).

Notably, when determining the customs value of imported goods based on the transaction value, parties must add additional charges to the price actually paid or payable. These include insurance costs related to the following operations:[3]

• Costs for the transport (transportation) of imported goods to the place of arrival at the customs territory of the Eurasian Economic Commission (the "EEC"), [4] or to another location determined by the EEC depending on the mode of transport and specific transportation features;
• Costs for loading, unloading, or handling imported goods and other operations related to their transport (transportation) to the place of arrival at the customs territory of the EEC, [5] or to another location determined by the Commission.

Selecting an Insurance Company for International Trade

Despite the abundance of insurance providers, selecting a company is a key factor when dealing with foreign partners in international shipments. Not every insurance company can provide coverage for foreign trade transactions. To ensure an effective insurance process and fruitful cooperation, parties should consider the following aspects when choosing an insurer:

• Experience in the insurance industry, specifically regarding international cargo;
• The quality of the insurer's service and established relationships;
• The specific insurance contract offered by the company.

Furthermore, it is important to note that online popularity and ratings do not always indicate the quality of an insurance company's work. An insurer may earn its rating in other types of insurance rather than international cargo. Insufficient experience in this niche can significantly hinder the process if a claim arises following cargo damage.

The International Insurance Contract

The insurance contract and the underlying insurance rules are critical aspects of interacting with an insurer. Parties must review these before signing. The "Insurance Risks" section requires the closest attention. The phrase "liability for all risks" does not guarantee that the policyholder will receive a payout for any event involving the cargo. Generally, such clauses include a provison: "except for cases specified in Section...". Many policyholders ignore these exclusions, which often cover the very events that actually occur. A policyholder may believe they have insured absolutely all risks while failing to account for contract exclusions, leading the insurer to deny the claim.

Parties should also note risks that involve payouts with provisos or only upon the occurrence of specific events. These points must be carefully studied during contract negotiations so that each party interprets the conditions identically. Another vital aspect of the insurance contract is the deductible (franchise), [6] which is the portion of losses defined by federal law and/or the insurance contract that the insurer does not compensate to the policyholder or other insured party. It is established either as a specific percentage of the insured amount or as a fixed amount.

For example, under Article 190(5) of the Merchant Shipping Code of the Russian Federation No. 81-FZ dated April 30, 1999, a carrier and passenger may agree to limit the carrier’s liability by a deductible. This deductible may not exceed 300 units of account in the event of damage to a vehicle and 135 units of account per passenger for the loss of or damage to other baggage. These amounts are deducted from the total damage caused. In this context, the "unit of account" refers to the Special Drawing Right (SDR) as defined by the International Monetary Fund.

Furthermore, according to insurance terms, a deductible may be conditional or unconditional. In a conditional deductible, the insurer is released from compensating a loss if its size does not exceed the deductible amount but compensates it in full if the loss exceeds that amount. In an unconditional deductible, the insurer pays the difference between the total loss and the deductible amount.

Before beginning cargo transportation, a party must:

• Properly draft transport documents;
• Provide full and accurate information for the transport of the cargo; [7]
• Verify the information specified in the documents.

A well-drafted insurance contract and properly executed documents accelerate the payout process or prevent the insurer from denying a claim when an insured event occurs.

Documentation in International Trade

A prerequisite for receiving an insurance payout is the correct execution of shipping and transport documents. When filling these out, parties must ensure:

• The sender and driver both sign upon cargo acceptance;
• The documents reflect all circumstances occurring during transportation;
• The recipient and driver both sign upon cargo delivery;
• If losses are discovered, parties must make a notation in all copies of the transport document and draft a joint act with the driver. This act should specify the date, exact address, description of the cargo and damage, transport participants, and the transport document, and it must include the signatures of the parties.

When an insured event occurs, the following documents are essential for obtaining a payout:

• The insurance contract or insurance policy;
• Confirmation of the insured event (e.g., a cargo acceptance act noting deficiencies);
• Evidence of the liability of the party involved in the transportation (transport documents, carriage contract);
• Evidence of the damage caused (loss amounts);
• A claim (demand letter) addressed to the counterparty;
• An application for the insurance indemnity payment;
• Other documents confirming the occurrence of the insured event.

Correct documentation is a fundamental condition for interacting with an insurance company. Errors in these forms may result in the insurer refusing to issue the insurance payout.

International Incoterms Rules and Cargo Insurance

Given that most foreign trade contracts utilize the international Incoterms rules, it is important to note that not all delivery bases distribute cargo insurance obligations between the parties. Usually, insurance is an optional feature that the parties negotiate separately and reflect in a dedicated section of the foreign trade contract.

Under Incoterms, insurance is specifically addressed in the following delivery bases:

• CIF (Cost, Insurance, and Freight to the named port of destination). [8] This basis obligates the seller to insure the goods. CIF applies only to sea and inland waterway transport. Under the latest Incoterms 2020 revision, CIF requires only minimum insurance coverage. However, parties may agree on higher levels of coverage in their contract. In this case, cargo insurance is transparent and justified, as it minimizes the risk of loss or damage while the goods are in transit.
• CIP (Carriage and Insurance Paid to the named place of destination).[9] Under this basis, the seller is obligated to insure the cargo. Risks of loss and damage transfer when the seller delivers the goods to the carrier. CIP applies to any mode of transport, including multimodal transport and cases where the buyer uses its own vehicles. Incoterms 2020 introduced changes to CIP regarding the insurance amount, which increased to 110% of the value of the insured goods (it was previously minimum coverage). These changes are justified because CIF is typically used for bulk sea transport (raw materials, minerals, etc.) where the per-kilogram value is low and maximum coverage would significantly inflate the final cost. CIP is beneficial for the buyer, as the insurance coverage compensates for losses or damage incurred.

According to CIF and CIP terms, the seller must insure the cargo at its own expense. A critical element of this group of terms is the condition releasing the seller from further costs and risks after they have fulfilled their contractual obligations by concluding a carriage contract, delivering the goods to the carrier, and insuring the cargo. [10]

The existence of an insurance contract does not guarantee full reimbursement for the value of the goods if they are lost or damaged during delivery. To receive a payout under an international trade contract, parties must consider all critical aspects when concluding the insurance contract, select the right insurance company, and study the contract details—especially risk exclusions. This approach ensures that a party can actually receive an insurance payout and compensate for potential losses when an insured event occurs.

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References

1. Article 2(1) of Law of the Russian Federation No. 4015-1 dated November 27, 1992, On the Organization of Insurance Business in the Russian Federation.
2. Paragraph 11 of Resolution of the Plenum of the Supreme Court of the Russian Federation No. 20 dated June 27, 2013, On the Application by Courts of Legislation on Voluntary Property Insurance of Citizens.
3. Article 40 of the Customs Code of the Eurasian Economic Union.
4. Decree of the Arbitration Court of the Moscow District dated October 6, 2022, No. F05-23897/2022 in Case No. A40-246599/2021, On the Recognition as Illegal of the Customs Authority's Decision to Amend (Supplement) the Declaration for Goods, the Decision on the Complaint, and the Order to Restore the Amount of Customs Security to the Unified Personal Account. The customs authority considered it impossible to apply the first method of determining the customs value of the goods declared by the entrepreneur, as the parties to the contract had changed the price of the goods, which had already passed into the entrepreneur's (buyer's) ownership. The claim was satisfied because the customs value of the goods declared by the entrepreneur and the information relating to its determination were based on accurate, quantitatively determinable, and documentarily confirmed information.
5. Decision of the Arbitration Court of the Primorsky Krai dated September 28, 2022, in Case No. A51-2796/2022, On the Recognition as Illegal and Annulment of the Decision of the Vladivostok Customs. In accordance with Article 40(1)(6) of the Customs Code of the EAEU, when determining the customs value of imported goods based on the transaction value, insurance costs related to the carriage of the imported goods to the place of arrival of such goods at the customs territory of the Union are added to the price actually paid or payable for these goods. The goods arrived at the territory of the Russian Federation at the port of Vladivostok by sea, as confirmed by the presented through and sea bills of lading. The cargo was not insured during sea carriage to the territory of the Russian Federation. The declaration for goods for the delivery was submitted to the customs authority, as confirmed by the DT reference number, and the release of the goods was also performed by the customs authority. Meanwhile, the insurance policy referred to by the customs authority was issued for the transport carrying the cargo across the territory of the Russian Federation with a specific validity period. Consequently, by virtue of the aforementioned legal norm, the insurance premium under the insurance policy was rightfully not added to the customs value of the goods imported by the company. This document was presented to the customs authority upon the customs authority's request to "Provide the bill of lading for the full carriage route (linear and through), information on the place of final delivery of the goods on the territory of the EAEU." Explanations were also provided to the customs authority that only the part of the route after crossing the border of the Russian Federation along the Vladivostok – Chekhov route was insured; therefore, this expense was not included in the customs value, and in connection with this, the insurance policy for transport insurance across the territory of the Russian Federation was presented. Thus, all documents regarding the amount and payment of freight were presented to the customs authority, and explanations were provided. The claim was satisfied in part.
6. Article 10(9) of Law of the Russian Federation No. 4015-1 dated November 27, 1992, On the Organization of Insurance Business in the Russian Federation.
7. For example, in accordance with Article 5 of Federal Law No. 87-FZ dated June 30, 2003, On Freight Forwarding Activities, the client is obliged to provide the forwarder in a timely manner with complete, accurate, and reliable information about the properties of the cargo, the conditions of its carriage, and other information necessary for the forwarder's performance of the duties stipulated by the transport expedition contract, as well as documents necessary for performing customs, federal state transport supervision, and other types of state control (supervision).
8. Decree of the Arbitration Court of the North-Caucasus District dated December 28, 2021, No. F08-11845/2021 in Case No. A32-9720/2021. Requirement: On the recognition as illegal of a resolution to hold accountable under Part 2 of Article 16.2 of the Code of Administrative Offenses of the Russian Federation for declaring inaccurate information about the customs value of goods, which served as a basis for understating the amount of customs payments (non-inclusion of goods transportation costs in the structure of the customs value), as well as the decision based on the results of the appeal of the resolution. Decision: The claim was denied because the presence of the elements of the charged offense in the company's actions was confirmed. There is no evidence of the company taking a full range of measures aimed at complying with the requirements of the current legislation, or of the presence of objective reasons preventing compliance with these requirements.
9. Decree of the Arbitration Court of the Moscow District dated March 23, 2023, No. F05-3597/2023 in Case No. A40-146366/2022. Requirement: On the recognition as illegal of the customs authority's decision to amend (supplement) the information declared in the declaration for goods, and the order to eliminate the committed violation of rights and legitimate interests. Circumstances: The customs authority concluded that the documents and information presented for customs clearance were not based on quantitatively determinable and documentarily confirmed information and were insufficient to confirm the declared customs value of the goods under the first method. Decision: The claim was satisfied because the company presented a full package of documents for the reliable confirmation of the declared customs value, as well as additional documents and information at its disposal.
10. Judicial Practice Review, Appendix to Letter of the Federal Customs Service (FTS) of the Russian Federation No. 01-06/2037 dated September 30, 2004, Review of Judicial Practice in Cases on Compensation for Harm (Losses) Caused by Illegal Decisions, Actions (Omissions) of Customs Authorities and Their Officials.