Contract Price Clause
The contract price clause provides that damaged or destroyed goods already subject to a sale contract are indemnified on the basis of the agreed contract price rather than market value or the cost of manufacture.
- Clause type
- Definition
- Origin/Market
- International programme
- Favours
- Neutral
- Negotiability
- Negotiable
Purpose
Where insured goods that have already been sold to a customer, but not yet delivered, are damaged or destroyed, a question arises as to which value should form the basis for the indemnity. General market value can differ significantly from the price already agreed under the sale contract, for instance because of intervening movements in raw material or sales prices. The contract price clause therefore confirms that, for goods subject to an existing sale contract, the agreed contract price governs the indemnity.
Effect and limits
Where the contract price exceeds the market value or cost of reinstatement that would otherwise apply, this clause puts the policyholder in the position it would have been in had the goods been sold and delivered at the full contract price, so that it does not need to claim the lost profit under the supply contract separately under business interruption cover. Conversely, where the contract price is lower than market value, the clause correspondingly caps the indemnity at the lower contract price, so that the insurer does not pay more than the policyholder would actually have earned.
Negotiation and practice
The clause is particularly relevant for export-oriented manufacturers and trading companies with longer-term fixed-price supply contracts. When negotiating the clause, it is worth clarifying at what point in the production and delivery process a “contract” exists for the purposes of the clause (for example, on a binding order or only on order confirmation), since this materially affects the clause’s scope of application.