Cargo Insurance and Liabilities in International Transport Contracts: Legal Requirements and Practical Considerations

In international trade, the transportation of goods constitutes one of the most critical stages in the execution of commercial contracts. Any damage or delay occurring during transit may result in significant financial loss. Therefore, cargo insurance and a precise definition of the parties’ liabilities in international transport contracts bear substantial importance. Cargo insurance functions as a mechanism for risk distribution and mitigation, while international legal frameworks establish specific provisions governing the liabilities of carriers, consignors, and consignees.

Legal Foundations of Cargo Insurance

Cargo insurance, also referred to as transport insurance, is a key instrument in commercial risk management. Under such insurance, the insurer undertakes, in consideration of the premium paid, to indemnify the insured for any loss or damage sustained by the goods during transit. This insurance thereby ensures the financial security of the contracting parties and prevents heavy financial disputes or losses.

Types of Cargo Insurance in International Transport

 Marine Cargo Insurance
As the oldest and most extensive form of cargo insurance, it is governed by international frameworks such as the Hague–Visby Rules and the Hamburg Rules of 1978.

• It covers risks such as ship sinking, collision, fire, leakage, theft, or cargo collapse.
• Standard conditions, including the Institute Cargo Clauses (A, B, and C), determine the risk coverage levels.
• Clause A provides the broadest coverage (all risks except specific exclusions), while Clause C offers the narrowest protection.

Land Cargo Insurance
This applies to goods transported by road or rail and is governed by the CMR Convention (1956).
Under CMR, the carrier is liable for loss or damage to goods except in exceptional cases (e.g., consignor’s fault or force majeure).
The insurance typically covers risks such as traffic accidents, overturning, fire, theft, or damage resulting from improper unloading.

Air Cargo Insurance
In air transport, cargo insurance is influenced by the Warsaw Convention (1929) and the Montreal Convention (1999).
These conventions limit the liability of air carriers, while insurers play the primary role in compensating for damages.
Covered risks include aircraft crashes, variations in air pressure, delivery delays, and damage caused by improper handling.

Essential Elements of Cargo Insurance Contracts

A cargo insurance contract, similar to other insurance agreements, is based on the mutual consent and agreement of the parties, yet it contains specific elements essential for its validity and effectiveness:

Goods and Route Specifications: The type, value, transport route, mode, and duration must be clearly stated in the insurance policy.

Extent of Coverage: Insurers typically cover up to a predetermined percentage of the goods’ value (often 110% of the invoice amount), allowing for the seller’s potential profit.

Covered Risks: Depending on the insurance form, coverage may include natural risks (storm, earthquake, sinking, fire) and human risks (theft, collision, loading errors).

Documentation for Claims: The insurer generally requires documents such as the insurance certificate, bill of lading, purchase invoice, survey report, and damage certificate to process claims.

Compensation Process and Subrogation Right: Upon indemnification, the insurer may exercise the right of subrogation against the party responsible (e.g., the carrier).

Distinction Between Cargo Insurance and Carrier’s Liability Insurance

In simple terms, cargo insurance safeguards the goods, while liability insurance protects the carrier against potential claims. Practically, it is recommended to include both forms of insurance within international transport contracts to ensure comprehensive risk coverage.

Practical Points in Concluding Cargo Insurance

• Selecting the Policy Type: For high-value or sensitive goods, Clause A (all-risks) is advisable.
• Reviewing Exclusions: Risks such as war, civil unrest, government seizure, or delay are typically excluded unless specifically covered by endorsement.
• Aligning Insurance with Incoterms: Under CIF or CIP terms, the seller is obligated to procure adequate insurance coverage.
• Verifying Policy Authenticity: Buyers must ensure that the insurance policy is issued by a reputable international insurer and enforceable in the destination country.

Liabilities in International Transport Contracts

International transport of goods is a crucial component of the global supply chain, and any defect therein may cause substantial financial and commercial damage. Clearly defining liabilities in transport and insurance contracts plays a vital role in risk management and dispute prevention. Hence, awareness of international conventions, insurance rules, and contractual terms (including Incoterms) is imperative.

Carrier’s Liability

Carriers are principally responsible for safeguarding goods from the time of their receipt until delivery to the consignee. The extent and nature of their liability vary depending on the mode of transport:

• Maritime Transport: Under the Hague–Visby Rules, the carrier is liable only when loss or damage results from their negligence or fault. This system recognizes limitation of liability and specifies maximum compensation limits.
• Land Transport: Under the CMR Convention, the carrier is presumptively liable unless they prove that the loss resulted from causes beyond their control, such as natural events or third-party acts.
• Air Transport: Under the Montreal Convention of 1999, liability is limited to specific thresholds, generally calculated based on cargo weight. This aims to balance fairness and curtail prolonged litigation.

Additionally, the carrier must observe safety standards, proper packaging, and adequate protection of goods. Any failure in these duties may render them liable for related losses.

Liability of the Consignor and Consignee

The consignor must package and prepare the goods in accordance with international transport standards and provide accurate details concerning their nature, weight, and value. Failure to do so may subject the consignor to liability for any resulting loss.
The consignee must inspect the goods upon receipt and promptly notify any damage or deficiency. Failure to report such damage within the prescribed time can preclude or limit the right to claim compensation.

Insurer’s Liability

The insurer is obligated to compensate the insured in the event of a covered loss. Key aspects include:

• After indemnifying the insured, the insurer may exercise the right of subrogation against the carrier.
• Coverage details—such as included risks, liability limits, exclusions, and force majeure—must be expressly defined.
• Disputes may arise between the insurer and carrier regarding the cause of loss or the degree of negligence involved.

The Role of Incoterms in Allocating Responsibilities and Insurance Obligations

Incoterms play a crucial role in apportioning risks, costs, and insurance obligations between buyer and seller:

• CIF (Cost, Insurance, and Freight): The seller must insure the goods and bears responsibility up to the port of destination.
• EXW (Ex Works): The buyer bears all responsibility for transport and insurance.
• DDP (Delivered Duty Paid): The seller assumes all costs and insurance obligations until delivery at the final destination.
  Improper selection of Incoterms may lead to legal and financial disputes; hence, precise understanding of these terms is essential for drafting robust contracts.

Disputes Related to Cargo Insurance

Disputes commonly arise around three core issues:

1. Determining the cause of loss and whether it falls within the scope of coverage;
2. The insurer’s refusal or delay in indemnification, which may affect liquidity and cash flow;
3. Contention between the insurer and carrier concerning fault or negligence.
   To initiate a claim, it is necessary to provide valid supporting documents such as the insurance policy, bill of lading, purchase invoice, and survey report. Many international contracts include ICC or LCIA arbitration clauses, favored for their speed and expertise over traditional litigation.

Practical Considerations in Drafting Transport and Insurance Contracts

• Define precisely the type, coverage, and insurer in the contract.
• Include a dedicated clause on exclusions (war, unrest, delay, natural disasters).
• Insert a force majeure clause specifying its interaction with insurance and carrier obligations.
• Verify policy authenticity and the extent of coverage before contract execution.
• Clearly allocate liabilities among the seller, buyer, and carrier.

Comparison of Iranian Law and International Frameworks

In Iranian law, cargo insurance is governed by the Insurance Act of 1937 and relevant regulations of the Central Insurance Authority. The carrier’s liability, under the Commercial Code and Civil Liability Act, arises from proven negligence. However, full implementation of international conventions such as CMR or the Montreal Convention has not yet been uniformly achieved in Iran.
By contrast, international regimes provide detailed and explicit standards defining the limits of carrier and insurer responsibility, thereby ensuring equilibrium between the parties’ interests. These frameworks contribute to reducing protracted disputes and enhancing legal certainty in global commerce.

Conclusion

Accurate determination of cargo insurance and liabilities within international transport contracts is essential for mitigating commercial risks and protecting the parties’ interests. Comprehensive familiarity with Incoterms, policy terms, and international conventions such as CMR and the Montreal Convention—is indispensable for drafting reliable, professional contracts. Obtaining legal consultation prior to contract formation and incorporating well-defined insurance and liability clauses can effectively prevent costly and prolonged disputes.