Risk of loss: Overview, definition, and example
What is risk of loss?
Risk of loss refers to the responsibility for bearing the financial impact of damage, destruction, or loss of goods during a transaction or under a contract. It determines which party—buyer or seller—is liable for the goods at various stages of the transaction, such as during shipment or storage. The allocation of the risk of loss is typically outlined in the contract and may depend on delivery terms like FOB (Free on Board) or CIF (Cost, Insurance, and Freight).
For example, in a sales agreement with FOB shipping terms, the buyer assumes the risk of loss once the goods are loaded onto the shipping vessel.
Why is risk of loss important?
Risk of loss is important because it clarifies which party is financially responsible if goods are damaged, lost, or destroyed during transit or storage. This reduces disputes, ensures accountability, and allows businesses to plan for insurance and risk management.
For businesses, understanding and properly allocating the risk of loss helps prevent unexpected financial burdens and aligns with their operational and logistical strategies.
Understanding risk of loss through an example
Imagine a retailer orders furniture from a supplier under FOB shipping terms. Once the supplier delivers the furniture to the shipping company, the risk of loss transfers to the retailer. If the goods are damaged during transit, the retailer bears the financial responsibility.
In another example, a vendor sells goods to a client under CIF terms, which include the cost of insurance. In this case, the vendor bears the risk of loss until the goods are delivered to the buyer’s port and can claim insurance if the goods are damaged in transit.
An example of a risk of loss clause
Here’s how a risk of loss clause might look in a contract:
“The risk of loss for the Goods shall transfer to the Buyer upon delivery to the carrier at the Seller’s facility. The Seller shall not be liable for any damage or loss occurring during transit, and the Buyer is responsible for obtaining appropriate insurance coverage.”
Conclusion
Risk of loss allocates responsibility for goods in the event of damage or loss during a transaction. It is critical for reducing disputes, ensuring clarity, and managing financial risks effectively.
By including a clear risk of loss provision in agreements, businesses can align expectations, protect their interests, and create a framework for handling potential disputes or financial liabilities related to the transaction.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.