Definition of CIF (Cost insurance and Freight)
Incoterms 2020 dictates that the CIF Incoterm, or “Cost, Insurance and Freight”, is exclusive to maritime shipping.
Under CIF, the seller is responsible for the cost and freight of bringing the goods to the port of destination specified by the buyer.
CIF risk transfer takes place when the merchandise is loaded onto the shipping vessel and is recommended for situations in which the seller is able to access the vessel directly, such as in the case of bulk cargo shipping. This makes CIF unsuitable for containerized cargo.
Revisions of CIF (Cost insurance and Freight) under Incoterms 2020
This rule too dates back to the early days of international shipping an is largely unchanged since then.
The difference between CIF and CFR is that while the risk of loss or damage at delivery becomes the buyer’s, the seller is obliged to take out insurance for that risk and provide the buyer with a document which allows the buyer to claim against that insurance. This typically will be an original insurance policy covering just that transaction or a certificate issued by the insurer under the seller’s existing open marine policy. Both of these will normally show the seller as the “insured” or “assured” and will require the seller to endorse the document on the reverse such that the buyer or any bona fides holder with an insurable interest in the goods at the time of loss or damage occurred can claim.
Under CIF, the seller is contractually obliged to provide insurance for the transport of the goods. Together with CIP, these are the only two Incoterms that stipulates that insurance must be provided by the seller.
In common practice, the CFR Incoterm is often preferred by buyers if they are able to secure better cargo insurance coverages. This is because unlike CIF, insurance isn’t a seller’s obligation under CFR and can also be acquired by the buyer.
Where Is The Named Place For Handing Over Responsibility From The Seller To The Buyer?
This incoterm works exactly like CPT, excepting the seller is also responsible for arranging main carriage insurance.
CIF Incoterm Buyer & Seller Obligations
- Goods, commercial invoice and documentation
- Export packaging and marking
- Export licenses and customs formalities
- Pre-carriage and delivery
- Loading charges
- Delivery at named port of destination
- Proof of delivery
- Cost of pre-shipment inspection
- Minimum insurance coverage
- Payment for goods as specified in sales contract
- Discharge and onward carriage
- Import formalities and duties
- Cost of import clearance pre-shipment inspection
CIF unsuited for containerized cargo
Unlike some other Incoterms, the risk transfer point of the CIF Incoterm is not the same point as the cost transfer point. With CIF, risk is transferred only when the goods are loaded on board the ship at origin.
This makes CIF unsuitable for containerized cargo, which is usually dropped off at terminal days prior to loading. This creates a grey area during which cargo could unknowingly suffer damages.
Given the nature of containerized cargo, which remains unopened until destination, it would be nearly impossible to know when merchandise gets damaged in the event that it does. When dealing with containerized cargo, CIP is the recommended alternative to CIF
This rule and CIP (Carriage & Insurance Paid to) are the only two rules that place an obligation on the seller to arrange insurance for the consignment.
Note that this insurance covers the buyer’s risk, because risk will pass from the seller to the buyer before the main carriage.
As with the other “C” rules, a good choice for transactions involving letters of credit.
Advantages and Disadvantages of CIF – Cost insurance and Freight
The advantage to the seller is that it can often obtain cheap insurance and then build a larger amount into its selling price.
The advantage to the buyer is that it does not have to worry about declaring the shipment to its own insurer.
The disadvantage to the buyer can be that the insurer may well not be too enthusiastic about meeting any claim.
Note that some countries do not permit CIF imports, requiring the buyer to insure with an insurer in its own country.
CIF (Cost insurance and Freight) and Letters of Credit
With letters of credit, just as for FOB and CFR, the banks seem to have no problem, except they sometimes make a complete mess of the insurance clause. Examples are requiring presentation of a policy but not a certificate of marine insurance; inserting nonsense words and requirement because “that is how the have always done it”. A seller would be prudent to state in the contract not just they will provide an insurance document but state specific wording such as “One original insurance policy or certificate of marine insurance, for 110 percent of the invoice value, blank endorsed, covering Institute Cargo Clauses (C), Institute War Clauses (Cargo) and Institute Strikes Clauses (Cargo).” Anything more than that in an LC is just superfluous and often meaningless.
Differences between CIF and FOB
The major difference between FOB and CIF is when liability and ownership transfers. In most cases of FOB, liability and title possession shifts when the shipment leaves the point of origin. With CIF, responsibility transfers to the buyer when the goods reach the point of destination.
In most cases, we recommend FOB for buyers and CIF for sellers. FOB saves buyers money and provides control, but CIF helps sellers have a higher profit. However, we recommend that new buyers use CIF as they get accustomed to the importing process.
FCA Tips And Tricks
- Refer to CPT, obviously excepting the tip on the buyer arranging insurance.
- The seller need only arrange minimum insurance cover, to the invoice value of the goods. If the buyer considers that this level of cover is not sufficient, an agreed level of cover can be included elsewhere in the contract of sale.
- Although the seller is responsible for insurance, the risk transfers to the buyer before the main carriage.
- The seller is not obliged to arrange insurance for pre-carriage in the export country or carriage in the import country unless this is specified elsewhere in the sales contract.