Created by the International Chamber of Commerce, Incoterms are a series of three-letter designations that define responsibilities between buyers and sellers around the sale of goods, specifically related to transportation costs and liability. If you’re looking for more information on Incoterms, check out our other articles on this topic:
The Complete Guide to All 11 of the 2010 Incoterms Rules
Incoterms 2020 Rules: Everything You Need to Know
Protect Your Bottom Line by Understanding These 5 Common Incoterms
Contract language between buyers and sellers can feel complex—but we’re here to clear some of it up, at least when it comes to your Incoterms®. These handy three-letter designations act as shorthand for who pays for what transportation costs when buying or selling goods. When you understand your Incoterms, you’ll be able to negotiate your contracts with confidence. (And you’ll be able to better calculate your real costs!) In this article, we’ll explain everything you need to know about the CIF Incoterm.
What Does CIF Mean?
CIF stands for Cost, Insurance, and Freight. Along with FAS, FOB, and CFR, it’s one of four Incoterms that applies only to goods that move via sea and inland waterway.
The CIF Incoterm is very similar to CFR, in that the seller pays for all the costs up to and including the ocean freight to a destination port of the buyer’s choosing.
However, in addition, the seller is also responsible for purchasing insurance protecting the buyer against loss of or damage to the goods during transit to the named port.
Once the vessel arrives at the port, the buyer pays for all the transportation costs to move the goods to the final destination.
What Is the Seller Responsible for Under the CIF Incoterm?
Under the CIF Incoterm, the seller agrees to 1) pay for all the costs related to moving goods to a destination port of the buyer’s choosing and 2) insure the goods until they arrive at that port. For example, if the contract states “CIF Port of Long Beach,” the seller will pay to move the goods to the origin port, clear any export procedures, and load the goods on a vessel bound for Long Beach, plus cover the ocean freight to the destination port.
Additionally, the seller agrees to pay for insurance that covers the goods through to arrival the Port of Long Beach. Keep in mind, though, that, under CIF, the seller is only required to purchase minimum coverage, as defined by Clause C of the Institute Cargo Clauses.
What Is the Buyer Responsible for Under the CIF Incoterm?
Once the shipment arrives at the destination port, the buyer pays for everything going forward. That includes charges associated with unloading the cargo, handling charges at the destination terminal, and carriage to the final destination.
Buyers should carefully review the insurance coverage offered. Because only the minimum level of coverage is required under CIF, buyers may want to 1) negotiate with the seller for higher levels of coverage or 2) obtain additional insurance coverage of their own.
The risk and cost transfer on CIF are not quite aligned. Under several Incoterms, the risk is transferred from seller to buyer at the same point that the costs are transferred. For example, look at DPU (Delivered at Place Unloaded). The seller pays for the goods to be delivered and unloaded at the final destination, and that’s when their ownership of the cargo ends.
However, when it comes to CIF, that’s not the case. Although the seller pays for cargo to reach the named destination port, the ownership of the cargo (and the risk) passes to the buyer once the goods are onboard the vessel. However, since CIF includes insurance coverage, if goods are damaged while the goods are on board the vessel, insurance will reimburse the person who had ownership at the time—i.e., the buyer. It’s a relatively minor legal detail, but it can be an important one, especially if you’re the buyer experiencing the loss.
If you’re considering a contract with the CIF Incoterm, talk to one of our experts. In addition to helping you arrange freight solutions, a forwarder can also help you estimate costs so you have an accurate sense of your margins.
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