Who Pays the Hormuz War Risk Surcharge? Reading Incoterms When Premiums Top $10m a Voyage

For most of the last decade, the war risk additional premium on a Gulf voyage was a number nobody in the finance team looked at. It sat inside the freight quote, it moved by fractions of a basis point, and it never changed a landed cost calculation. That is no longer true. Lloyd's List reported in 2026 that war risk cover for a single VLCC transit of the Strait of Hormuz had topped 10 million dollars, as renewed US-Iran hostilities and Houthi attacks pushed insurers to reprice Gulf exposure from scratch.

The percentage move is the part that matters for contract drafting. S&P Global Commodity Insights, reporting on 22 July 2026 and citing Marsh, put the additional war risk premium for Middle East transits at 7.5 to 10 percent of hull value, up from a range of 1 to 3 percent. A charge that used to be absorbed silently inside a freight rate is now large enough that whoever ends up paying it will notice in their margin.

The volatility is as awkward as the level. Lloyd's List Intelligence's Strait of Hormuz Brief of 5 August 2026 recorded 84 transits in the week of 27 July to 2 August against 45 the week before, with pricing swinging alongside traffic. A surcharge that can double or halve between the day a sale contract is signed and the day the vessel sails is not something a fixed-price CIF quote can absorb without a mechanism.

Indian buyers and sellers are finding out, one shipment at a time, that their contracts never allocated this cost. The Incoterm was chosen years ago for reasons of financing and customs, not for war risk. The insurance clause says "seller to arrange marine insurance" and stops there. When the surcharge lands, there is no clause to point at.

The phrase "war risk surcharge" covers two different charges that reach an Indian trader through two different routes. Confusing them is the first drafting error.

The hull and freight route

The shipowner buys hull war risk cover separately from ordinary hull cover, because the Institute Time Clauses (Hulls) exclude war and warlike operations. When the vessel enters an area listed by the Joint War Committee, the war underwriter charges an additional premium, usually quoted as a percentage of insured hull value for a seven-day period in the area. That is the number that moved from 1 to 3 percent to 7.5 to 10 percent. The owner does not absorb it. It comes back to the cargo interest as a war risk surcharge on the freight invoice, or as an additional premium recoverable under the charter party war clauses (CONWARTIME for time charters, VOYWAR for voyage charters).

The cargo route

Separately, the goods themselves need war and strikes cover. The Institute Cargo Clauses (A), (B) and (C) all exclude war. Cover comes back through the Institute War Clauses (Cargo) and Institute Strikes Clauses (Cargo), written as an add-on at a rate set by the war risk rating committee for the voyage. When the Gulf rate moves, the cargo war premium moves with it, and on a high-value parcel that is a real number.

Incoterms 2020 answers three questions: who arranges carriage, where risk transfers, and who is obliged to insure. Only two of the eleven rules impose an insurance obligation at all, and neither of them mentions war risk in the base obligation.

Under CIF and CIP, the seller must procure cargo insurance for the buyer's benefit, covering at minimum the price plus 10 percent, in the contract currency, from the point of delivery to the named destination. Under CIF the minimum is Institute Cargo Clauses (C), the restricted named-perils form suited to bulk commodities. Under CIP, Incoterms 2020 raised the default to Institute Cargo Clauses (A), the all-risks form. Every other rule, including FOB, CFR, FCA, DAP and DDP, imposes no insurance obligation on either party. Each side insures its own risk position or chooses not to.

The part traders miss is what the rules say next. Under CIF and CIP the seller must, at the buyer's request, at the buyer's risk and expense, provide any additional cover the buyer asks for, and both rules name war and strikes cover as the example. So the default position under a bare CIF contract is that the seller's insurance obligation does not include war and strikes at all, and if the buyer wants it, the buyer asks for it and pays for it.

CIF is still the default in Indian commodity and project-cargo contracts, and it is the term where a Hormuz surcharge does the most damage.

The seller's obligation is a floor, not a ceiling: Institute Cargo Clauses (C), price plus 10 percent. ICC (C) is a named-perils form. It responds to fire, explosion, stranding, sinking, collision, general average sacrifice and jettison, and little else. It does not cover war, it does not cover strikes and civil commotion, it does not cover malicious damage, and it does not cover theft or non-delivery. On a Gulf transit in the current environment, an ICC (C) certificate leaves the buyer holding almost exactly the peril that is actually live.

This produces a familiar dispute. The buyer receives the insurance certificate with the shipping documents under the letter of credit, sees a valid marine policy, and pays. Something happens in or near the Strait, the war exclusion in ICC (C) bites, and the buyer discovers the cover it paid for in the CIF price does not answer. The seller's response is correct as a matter of Incoterms: the contract said CIF, CIF requires ICC (C), the seller complied, and war cover was available on request.

The practical fixes are contractual, and they belong in the sale contract rather than in the insurance certificate:

1. Name the clause set expressly. Write "CIF Nhava Sheva (Incoterms 2020), insurance on Institute Cargo Clauses (A) including Institute War Clauses (Cargo) and Institute Strikes Clauses (Cargo)" instead of relying on the default.
2. Say who pays the war and strikes premium, and at what rate basis.
3. Require the seller to furnish the war rate applied, so the buyer can test it against the market rather than accept a bundled figure.
4. Mirror all of it in the letter of credit's insurance document requirement, so the bank checks the same thing the contract promised.

For the mechanics of cargo cover generally, our [guide to marine cargo insurance for Indian exporters](/insurance-products/marine-cargo-insurance-indian-exporters-guide) walks through valuation, clause sets and claims documentation.

FOB and CFR are the terms where the freight-side surcharge, the one driven by the hull war additional premium, decides the outcome.

Under FOB, the buyer contracts the carriage. The carrier's war risk surcharge is billed to the buyer as freight payer, and the buyer also insures the goods from the moment they are placed on board onward, including buying war and strikes cover if it wants it. The allocation is clean. The buyer's exposure is that it priced the purchase on a freight assumption taken before the Gulf rate moved, and carrier tariffs generally reserve the right to impose or revise a war risk surcharge on sailings after a stated notice period. An FOB buyer with a fixed resale price downstream absorbs the whole move.

Under CFR, the seller contracts and pays freight, but risk passes on loading. If the carrier imposes a war risk surcharge between the date of the sale contract and the sailing, it lands on the seller, who has already quoted a delivered-to-port price. Meanwhile the buyer carries the risk of loss from loading and has no insurance obligation from the seller at all. So on a CFR Gulf shipment with no added clauses, the seller eats a surcharge that can now run into seven figures on a large parcel, and the buyer carries an uninsured war peril unless it bought its own war and strikes cover. Both sides are worse off than they think.

The question that settles a CFR exposure is not the Incoterm but the carrier tariff. Ask the line, in writing, which surcharges it may revise after booking and on what notice period. The answer tells you how much of the rate volatility you have actually agreed to carry, and whether a sailing booked today can be repriced before it loads.

D terms move the delivery point to destination, which means the seller carries risk and cost through the entire voyage. For an Indian exporter selling DAP to a Gulf or onward destination, or an Indian importer buying DAP from a supplier who routes through Hormuz, every element of the surcharge sits with the seller.

There is no insurance obligation under DAP or DDP, which surprises people. The seller insures because it is carrying the risk, not because Incoterms tells it to. That has a practical consequence: there is no certificate flowing to the buyer, no agreed clause set, and no visibility for the buyer into whether war and strikes cover was bought at all. If the seller self-insures the war peril to save premium and the goods are lost, the buyer's remedy is a claim against the seller for non-delivery, which is a credit exposure rather than an insurance recovery.

For sellers, the pricing discipline is straightforward and often skipped. A DAP price quoted three months out on a Gulf-routed shipment contains an embedded short position in war risk rates. When the additional premium moves from 1 to 3 percent of hull value to 7.5 to 10 percent, and cargo war rates move alongside, that position is called. Either the quote carries a validity period short enough to reprice, or it carries a surcharge pass-through clause, or the seller is running an unhedged commodity position it never intended to take.

Where the underlying route risk is the question rather than the contract mechanics, our analysis of marine war risk insurance in the Persian Gulf covers Joint War Committee listed areas, hull war cover and charter party war clauses in more detail.

Allocating war risk cost is a drafting problem with a small number of moving parts. Five clauses cover most of it.

1. A war risk surcharge pass-through clause. State which party bears any war risk additional premium, war risk surcharge, emergency risk surcharge or equivalent charge levied by carriers, hull war underwriters or cargo war underwriters in respect of the voyage, and state it separately for the freight-side charge and the cargo-side premium. Silence defaults to whoever happens to receive the invoice, which is an accident rather than a decision.

2. A baseline and a sharing mechanism. Fix a baseline rate as at the contract date, expressed as a percentage of insured value or a per-container figure. Allocate movement above the baseline, either wholly to one party or shared. A common structure is a collar: the seller absorbs movement up to an agreed number of basis points, and anything above passes through at cost against documentary evidence of the underwriter's charge.

3. A rate evidence requirement. Whoever passes the charge through must produce the underwriter's or carrier's debit note. Bundled "war risk" line items with no supporting rate are where disputes start, because the receiving party cannot test whether it is paying an insurance cost or a margin.

4. A route and deviation clause. Say what happens if the vessel is rerouted around the Cape or holds outside the Strait. Reroute adds freight and time but may remove the war premium; holding adds war premium exposure by extending time in the area. Allocate the incremental cost of each, and address whether the buyer may require or refuse a Gulf transit.

5. A cancellation and cover-continuity clause. Cargo war cover is written with a short cancellation provision, and war underwriters can withdraw or reprice at notice. Provide for what happens if war cover becomes unavailable or is cancelled mid-voyage: who is obliged to replace it, at whose cost, and whether the contract may be suspended.

These five sit alongside the exclusion mapping every Indian corporate programme should already have done. Our war, marine and aviation exclusion gap audit sets out how war exclusions in property, liability and marine wordings interact, which is the other half of this problem.

The work is not large, and it is mostly reading contracts you already have.

1. Pull every open sale or purchase contract with a Gulf-routed shipment in the next two quarters and record the Incoterm, the insurance clause, and whether war and strikes cover is named.
2. For each CIF contract, check whether the certificate is on ICC (C) or ICC (A), and whether war and strikes are attached. If the certificate is ICC (C) with no war cover, the buyer is carrying the live peril unnamed.
3. Quantify exposure at current rates rather than at budget. Take the insured value, apply the war rate your broker quotes today, and compare it against the gross margin on the shipment. If the surcharge exceeds a meaningful share of margin, the contract needs a pass-through clause before the next fixture.
4. Ask your carriers, in writing, which surcharges are revisable post-booking and on what notice.
5. Insert the five clauses into your standard terms, and brief the commercial team that the Incoterm alone no longer allocates this cost.
6. Confirm with your broker whether your open cover or marine insurance programme carries a war and strikes extension, at what rate basis, and whether the war rate is fixed for the policy period or moves with market rates.

The Hormuz rate will keep moving in both directions. Lloyd's List Intelligence's 5 August 2026 brief showed transits nearly doubling week on week, and pricing followed. A contract that allocates the cost explicitly is indifferent to which way it moves next. A contract that does not turns every rate change into a negotiation with a counterparty who has the opposite interest.