Incoterms decide who bears the loss, not who owns the goods

The eleven rules themselves are a lookup, and a lookup belongs in a table. So all of them are compared here: by transport mode, by who pays the freight, by where risk passes and by who clears customs. This post is about something the table cannot show you, because it is not in the rules at all.

Risk and ownership are different questions

An Incoterm answers three questions: who pays for what, where the risk passes, and who handles export and import clearance. It does not answer who owns the goods. It never has.

So it is normal to carry the risk on goods you do not yet own. It is also normal to own goods whose loss is someone else's problem. If a container goes overboard between Shanghai and Rotterdam, the Incoterm tells you who bears that loss. It does not tell you who owned the cargo at the time.

Ownership (in legal terms, title) passes when your sales contract says it does. Commonly that is on full payment, sometimes on shipment, and occasionally on delivery. If the contract does not say, the law of whichever country governs the deal will decide. That may not be the answer you expected.

Why the gap is expensive rather than academic

The two questions separate most sharply under the C rules. There, the seller pays for the main carriage and the buyer carries the risk during it. Under CIF Rotterdam, the seller has booked and paid for a voyage on which the buyer bears the loss. If the payment terms are open account, the seller may also still own the cargo.

Now suppose the container is lost. The buyer has the risk. The seller may have the ownership, and with it the insurable interest a claim needs. The insurer asks who suffered the loss and who owned the goods, and gets two different names. The claim stops while people who did not write the contract read it.

This is not an unusual case. It is the normal result of agreeing a delivery term and assuming it settled ownership as well.

What to actually write down

Put three separate lines in the sales contract:

1. The delivery term, with the named place and the version. For example CIF Rotterdam, Incoterms 2020. The place is not optional. The same three letters describe two different deals depending on what follows them.
2. When ownership passes, in its own clause, stated clearly.
3. Who insures, and to what level. Only CIF and CIP require the seller to insure. The two now require different levels of cover. Under the other nine rules, if nobody arranges insurance, the cargo is not insured.

Then make the documents agree

The Incoterm belongs on the quotation, because a price without one does not say what is included. It belongs on the purchase order and the sales confirmation, because that is where it becomes part of the contract. And it belongs on the commercial invoice, because customs uses it to decide whether freight and insurance are part of the declared value.

If those four documents disagree about the delivery terms, the shipment is often held. This kind of error usually only shows up once the goods are already moving.