Title, Risk of Loss, and Insurable
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGrawHill Education.
• LO22-1: What is the concept of title? How
does it pass?
• LO22-2: What is insurable interest?
• LO22-3: What are the different kinds of
sales contracts, and how does each type
affect title passing, risk of loss, and
Chapter 22 Hypothetical Case 1
• Daisy Jennings either is or was the owner of a beautiful two-carat diamond ring. Last Wednesday,
she took her ring to A Cut Above Jewelry Sales and Service, Inc. ("A Cut Above") for repair of its
setting. John Dagenhart, A Cut Above's proprietor, assured her that after the repair, Jennings's
treasure would look "as good as new."
The next morning, Amy Wolton, a sales clerk, arrived for work at A Cut Above. She periodically
assisted her husband at the shop, especially during peak times. By mistake, Wolton placed
Jennings's ring in the estate jewelry case for sale.
Later that day, Mandy Turner came to A Cut Above looking for yet another addition to her
burgeoning diamond ring collection. Turner chose Jennings's ring for purchase, and Wolton rang
up the sale. At the time of purchase, Turner did not know that the ring belonged to Jennings.
Wolton paid $3,500 for the ring. Six months ago, when Jennings last had the ring appraised, its
value was assessed at $3,750.
On Saturday afternoon, Jennings came in to A Cut Above to pick up her repaired diamond ring.
Dagenhart was perplexed as to the whereabouts of the ring, but he soon found out in a telephone
conversation with Wolton, who was not in that day. Via phone, Wolton apologized profusely to
both Dagenhart and Jennings for her mistake. Neither Dagenhart nor Jennings elected to forgive.
• Who has rightful ownership of the two-carat diamond ring: Daisy Jennings or Mandy Turner?
Chapter 22 Hypothetical Case 2
• Federated Parcel Service, Inc. is a common carrier with operations across the globe,
including deliveries in all fifty of the United States. Holly McGuire, owner of McGuire
Cards and Collectibles, Inc., has made arrangements for Federated to deliver a mintcondition Mickey Mantle baseball card to the home of James Horton, who recently
was the top bidder for the card in an online auction hosted by ePort, Inc. Per the
terms of the contract between McGuire Cards and Collectibles and Horton, McGuire
Cards and Collectibles has the delivery obligation. Horton has already paid the
$58,000 contract price for the card using the online pay service PayBuddy.
Two weeks pass, and Horton is anxious that the card has not arrived. Horton contacts
McGuire, who states that Federated should have already delivered the card to his
home. Horton tracks his shipment online, and discovers that Federated states the card
was delivered last Monday to his residential address, 660 Ash Street, San Francisco,
• Who is responsible for the lost or stolen card? Federated Parcel Service, Inc., the
carrier? McGuire Cards and Collectibles, Inc., the seller? Holly McGuire, the corporate
seller's owner? James Horton, the buyer?
Categories of Title
• Good title: Acquired from someone who
already owns the goods free and clear
• Void title: Not true title
• Example: Purchase of stolen goods
• Voidable title: Occurs in certain situations
in which contract between original parties
would be void, but goods have already
been sold to third party
UCC Article 2 Rules Regarding
• Good title: Acquired from someone who has
• Void title: Results when someone acquires
possession of stolen goods.
• Voidable title results when:
Buyer deceived seller regarding his/her identity
Buyer wrote bad check
Buyer committed criminal fraud in securing goods
Buyer and seller agreed title would not transfer until
• Buyer is a minor
Acquiring Good Title
• General rule: If third-party purchaser
makes good-faith purchase for value,
he/she gets good title (not void/voidable
• If owner entrusts possession of goods to
merchant who deals in goods of that kind,
merchant can transfer all rights in the
goods to a buyer in the ordinary course of
UCC Terminology Regarding
Transfer of Title
• Ownership: Transfer of title
• Encumbrance: Goods used as collateral for
• Loss: Refers to which party has risk of loss
when goods damaged/destroyed
• Insurable interest: Right to insure goods
against any risk exposure
Types of Sales Contracts
• Simple delivery: Buyer and seller contract, buyer gets
goods at time of sale or some time later by seller's
• Title transfers to buyer when contract executed
• Risk of loss transfers to buyer when buyer takes possession
• Buyer has insurable interest upon receiving title
• Common-carrier delivery: Buyer and seller contract,
seller then places goods with common carrier
• Shipment contract: Title transfers to buyer at time and place
of shipment; buyer bears risk of loss while goods in transit
• Destination contract: Seller bears risk of loss until seller
delivers goods to stipulated destination
Types of Sales Contracts
• Goods-in-bailment: Identifies goods in storage
• Rules regarding passage of title, risk of loss, and insurable
interest vary, depending on whether seller has negotiable
• Conditional sales
• Sale-on-approval: Title and risk of loss with seller until
buyer notifies seller of approval
• Sale-or-return: Buyer has insurable interest once goods
identified in contract; title and risk of loss transfer depend
on whether goods in bailment, delivered by common
carrier, or delivered by seller
Shipping Terms Specifying
Requirements for Delivery
• FOB (free on board): Selling price includes
transportation costs, and seller has risk of loss to
either place of shipment, or place of destination
• FAS (free alongside): Seller, at seller's expense,
delivers goods alongside ship before risk transferred
• CIF or CF (cost, insurance, and freight; cost and
freight): Seller places goods in possession of carrier
before risk passes to buyer
• Delivery ex-ship (delivery from carrying vessel): Risk
of loss passes to buyer when goods leave ship
Risk of Loss upon
Breach of Contract
• Seller in breach (by failing to deliver goods):
• Buyer may accept nonconforming goods as is, or
reject goods (subject to seller's right to cure)
• Risk of loss remains with seller until buyer accepts
goods, or deficiencies corrected
• Buyer in breach (buyer refuses to accept
conforming goods and goods later lost or
• Risk of loss depends on type of contract between
buyer and seller
Chapter 22 Hypothetical Case 3
• Fine Furniture, Inc. is a furniture manufacturer located in Norfolk, Virginia. Fine
Furniture enters into a contract with Jaguar Interiors, LLC in Jacksonville, Florida,
agreeing to sell Jaguar Interiors 1,000 dining-room chairs at a total contract price of
$100,000. The contract's shipping term designates "F. O. B. Destination," and
stipulates that Darnell Shipping International will transport the furniture from Norfolk
Darnell Shipping has retained the services of a ship steward, Joe Birchtree, to captain
the ship en route to Jacksonville. Birchtree has history of alcohol abuse, but his
professional record is clear of any mishaps.
On a clear day, with calm waters, blue skies, and the absence of wind, Birchtree runs
the ship aground, and all the cargo is ruined as a result of water damage. Evidence
indicates that Birchtree was intoxicated at the time of the accident.
• Which company held title to the chairs when the ship ran aground: Fine Furniture or
Jaguar Interiors? Who bears the loss of the chairs? Ultimately, does Darnell Shipping
bear legal responsibility for the chairs?
Chapter 22 Hypothetical Case 4
• Regina Flay contracts to purchase a bedroom set
from Upside Bedrooms, a bedroom furniture
retailer. The bedroom set in question will be
shipped to Flay directly from the warehouse of
the set's manufacturer, Priority Furniture.
• What type of contract is this sales contract:
simple delivery, common-carrier delivery, goodsin-bailment, or conditional sales? Explain your
response in detail.