Key Takeaways

  • Risk of loss determines which party—buyer or seller—bears financial responsibility when goods or property are damaged or destroyed during a transaction.
  • In insurance contracts, the insurer assumes risks, but certain exclusions apply (e.g., suicide in life insurance, forbidden trade in marine insurance).
  • Sales contracts shift risk once the contract is binding, though exceptions exist if delivery is delayed by either party.
  • The Uniform Commercial Code (UCC) provides default rules: sellers often retain risk until delivery, unless goods are shipped under different terms.
  • Real estate transactions vary by state: in some, the buyer bears risk upon signing the sales contract, even before possession.
  • Parties can minimize disputes through clear contract terms, insurance coverage, and risk-allocation clauses like “FOB shipping point” or “FOB destination.”
  • Courts may step in when contracts are silent, but express terms usually prevail, making careful drafting essential.

What Is a Risk?

Possibility that an investment's actual return will be different than expected; includes the possibility of losing some or all of the original investment. Measured by variability of historical returns or dispersion of historical returns around their average return.

A danger, a peril to which a thing is exposed. The subject will be divided by considering, 1. Risks with regard to insurances. 2. Risks in the contracts of sale, barter, etc.

How Does Risk Apply to Contract of Insurance?

In the contract of insurance, the insurer takes upon him the risks to which the subject of the insurance is exposed, and agrees to indemnify the insured when a loss occurs. This is equally the case in marine and terrestrial insurance. But as the rules which govern these several contracts are not the same, the subject of marine risks will be considered, and, afterwards, of terrestrial risks.

What Are Marine Risks?

Marine risks are perils which are incident to a sea voyage or those fortuitous events which may happen in the course of the voyage. It will be proper to consider, 1. Their nature. 2. Their duration.

A Closer Look at Risks

The nature of the risks usually insured against. These risks may be occasioned by storms, shipwreck, jetsom, prize, pillage, fire, war, reprisals, detention by foreign governments, contribution to losses experienced for the common benefit, or for expenses which would not have taken place if it had not been for such events. But the insurer may by special contract limit his responsibility for these risks. He may insure against all risks, or only against enumerated risks; for the benefit of particular persons, or for whom it may concern. The law itself has made some exceptions founded on public policy, which require that in certain cases men shall not be permitted to protect themselves against some particular perils by insurance; among these are, first, that no man can insure any loss or damage proceeding directly from his own fault.

Secondly, nor can be insure risks or perils of the sea, upon a trade forbidden by the laws. Thirdly, the risks excluded by the usual memorandum contained in the policy. As the insurance is upon maritime risks, the accidents must have happened on the sea, unless the agreement include other risks. The loss by accidents which might happen on land in the course of the voyage, even when the unloading may have been authorized by the policy, or is required by local regulations, as where they are necessary for sanitary measures, is not borne by the insurer.

Duration of Risks

As to the duration of the risk. The commencement and end of the risk depend upon the words of the policy. The insurer may take and modify what risks he pleases. The policy may be on a voyage out, or a voyage in, or it may be for part of the route, or for a limited time, or from port to port.

Risks In Insurances Against Fire

In insurances against fire, the risks and losses insured against, are all losses or damages by fire; but, as in cases of marine insurances, this may be limited as to the things insured, or as to the cause or occasion of the accident, and many policies exclude fires caused by a mob or the enemies of the commonwealth. The duration of the policy is limited by its own provisions.

Risks In Insurance On Lives

In insurances on lives, the risks are the death of the party from whatever cause, but in general the following risks are excepted, namely:

1. Death abroad or in a district excluded by the terms of the policy.

2. Entering into the naval or military service without the consent of the insurer.

3. Death by suicide.

4. Death by duelling.

5. Death by the hands of justice. See Insurance on lives.

The duration of the risks is limited by the terms of the policy. As a general rule, whenever the sale has been completed; the risk of loss of the things sold is upon the buyer; but until it is complete, and while something remains to be done by either party, in relation to it, the risk is on the seller; as, if the goods are to be weighed or measured.

Risks In Sales

In sales, the risks to which property is exposed and the loss which may occur, before the contract is fully complete, must be borne by him in whom the title resides: when the bargain, therefore, is made and rendered binding by giving earnest, or by part payment, or part delivery, or by a compliance with the requisitions of the statute of frauds, the property, and with it the risk, attaches to the purchaser.

In Louisiana, as soon as the contract of sale is completed, the thing sold is at the risk of the buyer, but with the following modifications: Until the thing sold is delivered to the buyer, the seller is obliged to guard it as a faithful administrator, and if through his want of care, the thing is destroyed, or its value diminished, the seller is responsible for the loss. He is released from this degree of care, when the buyer delays obtaining the possession: but he is still liable for any injury which the thing sold may sustain through gross neglect on his part.

If it is the seller who delays to de-liver the thing, and it be destroyed, even by a fortuitous event, it is be who sustains the loss, unless it appears that the fortuitous event would equally have occasioned the destruction of the thing in the buyer's possession, after delivery.

Uniform Commercial Code and Risk of Loss

The Uniform Commercial Code (UCC) governs the allocation of risk of loss in most sales of goods in the United States. Under the UCC, the point at which risk shifts depends on the delivery terms and whether the parties agreed otherwise:

  • Shipment contracts (FOB shipping point): Risk passes to the buyer once the seller delivers goods to the carrier.
  • Destination contracts (FOB destination): Risk passes only when the goods arrive at the buyer’s location.
  • Merchant vs. non-merchant sellers: If the seller is a merchant, risk passes when the buyer actually receives the goods. If not, risk passes upon tender of delivery.
  • Identified goods: If goods are damaged before delivery but after being identified to the contract, the loss may fall on the buyer depending on contract terms.

These rules apply unless the contract specifies a different arrangement. Buyers and sellers often rely on shipping terms and insurance to manage this transition of responsibility.

Risk of Loss

In a sales transaction (esp. real estate) many states consider the buyer to be the owner of the land once the sales contract is signed, and the "owner" just to be "babysitting". Therefore, in some states, the "risk of loss" in case of destruction of the property is passed to the buyer, even though they have not paid for the property.

Contract Clauses That Manage Risk

Because risk of loss can shift responsibility unexpectedly, contracts frequently include provisions to allocate it clearly. Common clauses include:

  • Force majeure provisions: Excuse performance for uncontrollable events like natural disasters.
  • Insurance requirements: Mandating one or both parties to maintain adequate coverage until delivery or closing.
  • Risk-allocation terms: Explicitly stating whether the buyer or seller carries the risk during shipment, storage, or pending transfer.

When disputes arise, courts usually enforce the written terms over default UCC or state rules. Therefore, precise contract drafting is the most reliable way to prevent costly disagreements about who bears a loss.

Risk of Loss in Real Estate Transactions

In real estate, risk of loss is especially important because of the significant value involved. Many states follow the equitable conversion doctrine, which treats the buyer as the property’s equitable owner once the contract is signed. This means that if the property is damaged before closing, the buyer may bear the loss, even without possession.

To address this, many jurisdictions have adopted laws that protect buyers until closing. For example:

  • If the property is materially damaged before transfer, buyers may have the right to rescind the contract or demand repairs.
  • Some states place the risk on the seller until the deed is delivered, ensuring the property is transferred in substantially the same condition as when contracted.
  • Purchase agreements often contain risk-of-loss clauses that clarify responsibility for events like fire, flood, or vandalism.

Homebuyers are encouraged to obtain insurance coverage effective as of the contract date to protect against unexpected losses during this gap period.

Frequently Asked Questions

  1. What does “risk of loss” mean in a contract?
    It refers to which party must bear financial responsibility if goods or property are damaged or destroyed before the buyer takes full possession.
  2. How does the UCC handle risk of loss?
    The UCC provides default rules: in shipment contracts, risk passes when goods are given to the carrier; in destination contracts, when goods reach the buyer.
  3. Does the buyer always bear the risk in real estate sales?
    Not always. Some states follow equitable conversion, placing risk on buyers at signing, while others require sellers to bear it until closing.
  4. Can parties change risk of loss rules?
    Yes. Contracts can override default rules with specific clauses that allocate risk differently, often backed by insurance requirements.
  5. How can buyers protect themselves?
    Buyers should ensure contracts contain clear risk-of-loss provisions and obtain insurance coverage effective from the contract date.

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