Why Ex Works (EXW) shipping terms could leave buyers exposed

Why Ex Works (EXW) shipping terms could leave buyers exposed

The use of Ex Works (EXW) Incoterms® in international trade arrangements is frequently associated with cost efficiency and minimal seller obligations. However, this simplicity can mask complex legal and insurance consequences for buyers, particularly in relation to the timing of risk transfer and the attachment of cargo insurance coverage.

It’s important to understand the implications of EXW terms on the risk of loss or damage to goods, specifically the interaction between the moment of delivery, the seller’s limited responsibilities, and the commencement of cargo insurance coverage under the Institute Cargo Clauses (A).

Risk transfers early, but insurance may not…

Under EXW (Ex Works) as defined in Incoterms® 2020, delivery occurs when:

“…the seller places the goods at the disposal of the buyer at a named place (factory, warehouse, etc.), not loaded on any collecting vehicle, and not cleared for export, on the agreed date or within the agreed period.”

This means that the risks of loss of, or damage to the goods transfers from the seller to the buyer once the goods are placed at the buyer’s disposal at the agreed location, prior to loading.

Be especially mindful that: 

• The seller has no obligation to load the goods.
• Even if the seller does assist with loading as a courtesy or by separate arrangement, the risk of loss/damage remains with the buyer from the very moment the goods are placed at their disposal.

The potential disconnect between risk transfer and actual commencement of transport has significant implications for insurance arrangements.

The cargo insurance gap: a latent risk for buyers

The Institute Cargo Clauses (A), which are widely adopted in international cargo insurance policies, specify that the transit insurance applies from the time the goods are first moved in the warehouse or at the place of storage, for the purpose of immediate loading into or onto the carrying vehicle for the commencement of transit.

As such, there may be a window of time between the moment of Delivery (and transfer of risk from seller to buyer) under EXW and the point at which cover under the cargo insurance attaches.

Solutions:

1. Property Insurance Extension: buyers may hold property insurance that include provisions covering goods prior to transit. However, such policies may exclude offsite locations or impose sub-limits.
2. Cargo Insurance Endorsement: a tailored solution that covers goods before loading starts.
3. As an alternative to EXW, consider “FCA (named place of Delivery)”, with the named place of Delivery being the seller’s premises.  On this basis, Delivery is completed when the goods are loaded on the means of transport at the seller’s premises, and the risks of loss of, or damage to the goods transfers from the seller to the buyer once the goods are loaded.
4. Buyers using EXW terms must consult with their insurance advisors to ensure this period of uninsured risk is addressed.

Packing problems and potential insurance implications

A further complication arises from the packing and preparation exclusion contained in the Institute Cargo Clauses (A). This exclusion reads:

“Loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject-matter insured to withstand the ordinary incidents of the insured transit, where such packing or preparation is carried out by the Assured or their employees or prior to the attachment of this insurance.”

This exclusion creates a packing dilemma. The seller packs the goods, but the buyer’s insurance may exclude damage caused by poor packing, especially if it happens before the insurance attaches. 

Two risks to watch out for:

• Goods damaged due to insufficient/inadequate packing/preparation may not be covered under the buyer’s cargo policy.
• Packing may be unsuitable for actual transit: the seller doesn’t know the buyer’s route or transport mode(s), so packaging may not withstand the journey. The seller prepares goods based on their assumptions (or domestic standards), whereas the Buyer transports goods under potentially more rigorous or extended conditions (e.g. multiple transshipments, rough handling, etc.).

Smart risk management for buyers using EXW

Buyers electing to use EXW should take proactive steps to mitigate risk exposures:

• Specify packing standards
  Incorporate detailed packing specifications into the sales contract, referencing the anticipated mode(s) of transport, handling conditions, and the intended routing.
• Pre-attachment insurance extension
  Ensure the cargo or property insurance policies contains a clause extending coverage to attach from the time goods are placed at the buyer’s disposal.
• Inspection rights
  Where feasible, arrange for third-party inspection of packaging prior to shipment. Access to the goods should be included in the sales contract.
• Review insurance coverage
  Ensure the cargo policy wording is providing leniency when goods are being packed/prepared for shipment prior to the attachment of cover under the policy.

Conclusion: EXW includes several risks that need to managed

EXW Incoterms® may simplify things for sellers, but for buyers, it can result in uninsured exposures and blind spots if not carefully managed. The early transfer of risk, non-obligation to load, and insufficiency/inadequacy of packing/preparation exclusions in cargo insurance wordings impose a layer of additional consideration to the EXW buyer.

Buyers should engage with both their legal counsel and insurance advisors to ensure that contractual arrangements, risk transfer points, and insurance coverage are harmonised.