What Is Cost, Insurance, and Freight (CIF)?
Cost, Insurance, and Freight (CIF) is an international shipping agreement where the seller covers the costs, insurance, and freight of the buyer’s order during transit over waterways, seas, or oceans. It applies solely to goods transported via these routes.
Under CIF, the goods are shipped to the port designated in the sales contract by the buyer. Once loaded onto the vessel, the risk of loss or damage shifts from the seller to the buyer, while insuring the cargo and paying for freight remains the seller’s responsibility.
For clarity, CIF is reminiscent of Carriage and Insurance Paid To (CIP), but it specifically pertains to sea and waterway shipments, whereas CIP can be used for any mode of transport, including trucking.
Understanding Cost, Insurance, and Freight (CIF)
CIF contract terms outline the transition from the seller’s liability to the buyer’s, effective only for overseas or waterway goods shipping.
In this arrangement, the seller shoulders the cost and freight of delivering the goods to the buyer’s destination port. Generally, exporters with direct access to ships choose CIF, while the buyer also holds specific responsibilities, as detailed below.
Seller’s Responsibilities
Seller obligations under CIF include:
- Obtaining export licenses
- Conducting product inspections
- Handling charges for shipping and loading to the port
- Packaging expenses for export
- Customs clearance fees, duties, and taxes (for exports)
- Shipping freight costs from the seller’s port to the buyer’s destination port via sea or waterway
- Insurance coverage costs until the buyer’s port of destination
- Assuming responsibility for any damage or loss to the goods
Timely delivery of goods to the ship within the agreed timeframe and providing proof of delivery and loading are also seller responsibilities under CIF.
Buyer’s Responsibilities
Upon goods’ arrival at the buyer’s destination port, the buyer assumes responsibility for the costs related to import and delivery. These costs include:
- Unloading the goods at the port terminal
- Transferring goods within the terminal and to the delivery site
- Customs duties and import-related charges
- Charges for transporting, unloading, and delivering to the final destination
Transfer of Risk
International shipping involves various risk and cost transfer points based on the shipping agreement. Under CIF, risk transfer differs from cost transfer. The contract specifics dictate when liability shifts from seller to buyer regarding goods.
Cost transfer transpires upon goods’ arrival at the buyer’s port, whereas risk transfer occurs when goods are loaded onto the vessel. Note that although the seller procures insurance, ownership transfers upon loading the goods onto the ship. If damage occurs in transit, the buyer must file a claim with the seller’s insurer.
Special Considerations
CIF may not suit all scenarios, such as containerized cargo shipments where goods sit in containers before vessel loading. With CIF, the buyer assumes risk as goods are uninsured in containers awaiting loading, making it unsuitable for such situations.
CIF, distinct from Cost and Freight (CFR), does not mandate insuring goods in transit.
The ICC and Cost, Insurance, and Freight (CIF)
CIF, part of Incoterms governed by the International Chamber of Commerce (ICC), involves trade rules for international commerce setup by the ICC in 1936. These terms regulate international shipping policies and responsibilities of buyers and sellers. They resemble domestic terms but have a global application.
The ICC confines CIF usage to goods exclusively transported via inland waterways or seas. The official CIF definition by the ICC states:
“The seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under ‘Carriage and Insurance Paid To,’ the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”
Incoterms 2020
In 2020, the ICC updated Incoterms rules, altering security requirements for shipments.
Incoterms 2020 also modified insurance coverage requisites under CIF terms, mandating sellers acquire enhanced or more comprehensive insurance coverage than previously stipulated in Incoterms 2010.
Know Your Incoterms
There are seven Incoterms rules for all transport types and four for sea and inland waterway transports.
CIF vs. Free on Board (FOB)
Cost, Insurance, and Freight (CIF) and Free on Board (FOB) are international shipping agreements, each with distinct differences. The choice between them depends on individual experience in international trade, as they cover differing circumstances.
Cost, Insurance, and Freight (CIF)
CIF involves the seller handling the costs, insurance, and freight for sea or waterway shipments, with the buyer assuming possession once goods are loaded onto the boat or ship.
Consequently, until goods reach the buyer’s destination port, the seller shoulders the transportation expenses, export customs clearance, duties, and taxes.
At this juncture, the buyer is accountable for the agreed price of goods, import fees, taxes, custom duties, as well as transportation, inspection, licensing, and delivery costs to the final destination.
Free on Board (FOB)
Under Free on Board, the seller is responsible for delivering and loading the product onto the ship, including associated costs. Upon loading the goods onto the ship, responsibilities transfer to the buyer.
Seller duties under FOB entail:
- Cost of packing the exported items
- Charges for loading the product on trucks and delivering to the seller’s port
- Export taxes, customs duty, and related fees
- Transfer, handling, and loading charges to load the product onto the ship
Buyer responsibilities under FOB encompass:
- Freight charges for shipping cargo from the seller’s port to the buyer’s port of destination
- Cost of insuring the freight, with the buyer having the choice of not procuring insurance
- Costs for unloading at the buyer’s port and delivering to the final location
- Import duties, taxes, and customs clearance charges
Multiple FOB agreements exist, allowing negotiation between the buyer and seller regarding insurance coverage, where the seller might pay marine insurance while the buyer covers freight or delivery costs.
CIF and FOB are crucial for delineating freight responsibilities during shipment, detailing which party handles insurance, freight costs, and accountability in case of goods damage during transit.
Example of Cost, Insurance, and Freight (CIF)
As an illustration, suppose Best Buy orders 1,000 flat-screen TVs from Sony using a CIF agreement, shipping to Kobe, Japan. Sony prepares the order at the port and loads it onto the ship. With loading complete, risk transitions from Sony to Best Buy, with Sony covering insurance, freight, and shipping costs until goods reach the buyer’s destination port.
During the voyage, a fire damages the cargo in a cargo bay. Best Buy, under the CIF pact, can file an insurance claim to cover the damaged goods costs.
What Does CIF Mean in Shipping Terms?
Cost, Insurance, and Freight (CIF) refer to an international shipping agreement for sea or waterway freight. Seller responsibility covers costs, insurance, and freight until arrival at the buyer’s destination port, where buyer responsibility commences.
Who Pays CIF Freight?
The seller is liable for freight transfer and shipping costs, including cargo insurance until goods reach the buyer’s port.
Does CIF Include Duty?
The seller assumes duty charges for exporting goods from the seller’s port of destination. However, import duties at the buyer’s port are the buyer’s responsibility.
When Should I Use CIF?
CIF applies solely to ocean or waterway shipments, excluding air freight. It can benefit buyers seeking to avoid the hassle of obtaining insurance, paying freight charges, and taking on full shipping responsibilities internationally.
The Bottom Line
Cost, Insurance, and Freight (CIF) constitutes an international shipping term portraying the seller’s responsibility for shipping costs, freight charges, and cargo insurance for ocean or waterway shipments. CIF entails the seller managing transportation expenses and procuring insurance to safeguard against damages during transit. Buyer obligations begin once goods reach the destination port.
CIF differs from Cost and Freight (CFR) wherein the seller manages shipping and freight costs without the insurance responsibility. Various international shipping agreements, including CIF, Free on Board (FOB), and Cost and Freight (CFR), necessitate a comprehensive understanding of their legal terms before engaging in international trade.
Correction: April 30, 2023—A previous version of this article inaccurately stated ownership transfer from seller to buyer occurring upon arrival at the destination port. Actually, ownership transfers upon loading goods onto the ship.