Risk of Loss
The allocation between buyer and seller of responsibility for goods that are damaged or destroyed during transit or before delivery.
While straightforward in theory, many businesses fail to actively track obligations tied to this concept - often resulting in missed deadlines, unintended renewals, penalties, or loss of contractual rights.
US Law · For business owners and foundersWhat is a Risk of Loss?
Risk of loss determines which party - buyer or seller - bears the financial consequences if goods are damaged, destroyed, or lost during transit or before the buyer takes possession. If the risk of loss has passed to the buyer when goods are destroyed, the buyer still owes the purchase price even though they never received the goods. If risk remains with the seller, the seller must replace or refund.
Under UCC § 2-509, if the contract requires the seller to ship goods by carrier, risk of loss generally passes to the buyer when the seller delivers the goods to the carrier (a "shipment" contract) or when the goods arrive at the destination (a "destination" contract). For non-shipment contracts, risk passes to a merchant seller only when the buyer takes physical possession.
In international trade, risk of loss is typically allocated using Incoterms (International Commercial Terms) published by the International Chamber of Commerce. Common terms include: EXW (Ex Works - buyer bears risk from seller's premises), FOB (Free On Board - risk passes when goods are loaded on the vessel), CIF (Cost Insurance Freight - seller arranges freight and insurance to destination port), and DDP (Delivered Duty Paid - seller bears all risk to buyer's named destination).
In practice, many teams rely on a contract expiry tracking system to stay on top of dates and obligations tied to clauses like this.
Key Elements
Shipment vs. Destination Contract
A shipment contract passes risk to the buyer on delivery to the carrier. A destination contract keeps risk with the seller until arrival at the destination.Incoterms Designation
Specifying an Incoterm in the contract (e.g., "FOB Chicago") precisely defines when risk passes and who arranges transportation and insurance.Insurance
The party bearing the risk of loss should carry adequate insurance. In CIF terms, the seller is obligated to obtain insurance for the buyer's benefit.Breach and Risk
Under UCC § 2-510, a seller's breach can shift risk back to the seller - if the seller tenders non-conforming goods, risk remains with the seller until the defect is cured or the buyer accepts.Real-World Example
A buyer in New York orders $50,000 of electronics from a seller in California under an FOB Seller's Warehouse contract. Goods are damaged in transit. Who bears the loss?
Under FOB Seller's Warehouse (a shipment contract), risk of loss passed to the buyer when the seller handed the goods to the carrier. The buyer bears the $50,000 loss and must pursue the carrier's insurance. Had the contract specified FOB Buyer's Warehouse (destination contract), the seller would bear the loss and must reship or refund.
This is why many businesses adopt automated deadline tracking to ensure no critical dates are missed before they pass.
Sample Clause Language
Risk of Loss ClauseWatch Out For
FOB terms are frequently misunderstood
"FOB" means different things under UCC (domestic) and Incoterms (international). Always specify which framework applies and define the exact point of delivery to avoid ambiguity.Uninsured transit risk is a business exposure
The party bearing risk of loss during transit should always carry cargo insurance. Do not assume the carrier's standard liability coverage is sufficient - it is typically very limited.Don't let risk of loss deadlines catch you off guard
Key dates tied to risk of losss - renewal windows, expiry cutoffs, notice periods - can easily slip through the cracks when tracked manually. Missing them triggers automatic extensions, penalties, or lost rights. ExpiryEdge tracks every critical deadline and sends automated reminders before they're due - so nothing slips.
Instead of relying on spreadsheets or manual follow-ups, a centralized renewal reminder system ensures every deadline is visible, tracked, and actioned automatically.
How to Use This in Your Favor
Negotiate destination contracts for high-value goods
As a buyer, push for FOB Destination or DDP terms so the seller retains risk until you receive the goods. This eliminates the need to chase carriers for insurance claims.Specify Incoterm version and edition
Always specify which version of Incoterms applies (e.g., "Incoterms 2020") in international contracts, as terms and definitions have changed between editions.Frequently Asked Questions
If goods are stolen from the carrier, who pays?
The party bearing risk of loss at the time of theft bears the financial loss. They can then seek recovery from the carrier (subject to carrier liability limits) or their own cargo insurance.
Does title transfer at the same time as risk of loss?
Not necessarily. Under the UCC, title and risk of loss are separate concepts and can pass at different times. The contract should address each explicitly to avoid confusion.