Understanding Cost, Insurance, and Freight (CIF)
Cost, insurance, and freight (CIF) is an international shipping agreement that outlines the charges paid by a seller to cover the costs, insurance, and freight of a buyer’s goods while in transit. CIF specifically applies to goods transported via waterways, such as seas or oceans.
Once the goods are loaded onto the vessel at the seller’s port, the risk of loss or damage transfers to the buyer. However, insuring the cargo and paying for freight remains the seller’s responsibility until the goods arrive at the buyer’s destination port.
CIF is closely related to Carriage and Insurance Paid To (CIP), but CIF is exclusive to sea and waterway shipments, whereas CIP is applicable to any mode of transport.
Key Highlights
- Shipping Method: CIF is exclusively for sea or waterway shipments.
- Seller’s Responsibility: The seller covers the cost, insurance, and freight until the cargo reaches the buyer’s port.
- Buyer’s Risk: Risk transfers from seller to buyer once goods are loaded onto the vessel.
- Insurance Claims: In the event of damage, the buyer must file a claim with the seller’s insurance company.
Roles And Responsibilities
Seller’s Responsibilities
Under CIF terms, sellers must:
- Purchase export licenses
- Provide product inspections
- Cover shipping and loading costs to the seller’s port
- Pay for customs clearance, duties, and taxes for exporting
- Handle costs for packaging and freight shipping to the buyer’s port
- Cover insurance costs until the cargo reaches the buyer’s port
- Bear costs for any damages until the goods reach the vessel
Buyer’s Responsibilities
Once the goods arrive at the buyer’s destination port, the buyer is responsible for:
- Unloading products at the port terminal
- Transferring products within and from the terminal to the delivery site
- Custom duties and import taxes
- Logistics for transporting the goods to the final destination
Risk and Cost Transfers
In a CIF agreement, the cost transfer occurs when the goods reach the buyer’s port, while the risk transfer happens when the goods are loaded onto the vessel. Although the seller manages shipping, freight, and insurance costs, risk ownership to the buyer starts at the point of loading.
Practical Considerations
CIF may not be apt for particular scenarios like containerized cargo, especially if they sit in containers awaiting ship loading. The reason being, the buyer’s coverage won’t commence until loading onto the vessel, thereby accumulating risks during pre-loading storage.
Understanding Incoterms and CIF
CIF is part of the Incoterms, international trade policies established by the International Chamber of Commerce (ICC) in 1936. These terms set the standards for shipping responsibilities and policies for international trade.
Incoterms 2020 Update
The latest Incoterms 2020 brought changes in insurance requirements under CIF, ensuring sellers obtain more comprehensive coverage than previously mandated.
Comparing CIF and Free On Board (FOB)
CIF Basics
In a CIF agreement, the seller handles all costs related to transporting goods until they reach the buyer’s port. Despite possession transferring to the buyer once goods are loaded on the ship, cost, insurance, and freight responsibilities remain with the seller.
FOB Basics
Free on Board (FOB) means sellers are responsible only until the goods are loaded onto the ship. From that point, freight costs, insurance, and import duties fall to the buyer.
Key Differentiators
- CIF includes logistics costs until goods reach the buyer’s port, while FOB shifts costs earlier in the process once goods are loaded.
- Under CIF, the seller must handle insurance until the destination; in FOB, buyers may opt not to insure post-loading transit.
Example Scenario of CIF
Consider that Best Buy orders 1,000 flat-screen TVs from Sony to be shipped to the port of Kobe, Japan, under a CIF agreement. Sony handles costs until the TVs arrive at Kobe: including freight, shipping, and insurance. Should damages occur during sea transit, Best Buy can claim against the insurance Sony arranged.
Key Considerations for Buyers and Sellers
Understanding CIF in detail helps businesses decide if it suits their transportation needs, especially given the risk allocation, insurance coverages, and cost responsibilities involved.
Frequently Asked Questions (FAQ)
What Does CIF Mean in Shipping Terms?
CIF is a shipping agreement where sellers cover the costs, insurance, and freight for transporting goods via sea or waterway.
Who Pays CIF Freight?
The seller covers freight costs until the goods arrive at the buyer’s destination port.
Does CIF Include Duty?
Export duty is handled by the seller, while the buyer handles import duties at the destination port.
When Should I Use CIF?
CIF is ideal for sea transport, offering a simplified approach for buyers managing fewer logistical headaches.
By understanding the advantages and limitations of CIF, businesses can establish clearer, more efficient agreements, ensuring smoother international trade transactions.
Related Terms: FOB, CFR, Incoterms, carriage and insurance paid to (CIP).
References
- IncoDocs.com. “IncoTerms 2020 Explained—The Complete Guide”.
- International Chamber of Commerce. “Incoterms Rules”.
- International Chamber of Commerce. “Incoterms 2010”.
- Trade Finance Global. [“Incoterms® 2020 – 7 Key Changes You Need to Know [“Update"]”](https://www.tradefinanceglobal.com/posts/incoterms-2020-7-key-changes-you-need-to-know/).
- International Chamber of Commerce. “Incoterms 2020”.
- Trade.gov. “Know Your Incoterms”.
