What Is the Incoterm CIF (Cost, Insurance and Freight)?

What Is CIF (Cost, Insurance, and Freight)?

The incoterm CIF is a rule written for sea and inland waterway transport. Under this arrangement, the seller bears a majority of the responsibility. They arrange for and cover the costs of transport of goods until they reach the destination port. As an additional responsibility, the seller must also pay to have the goods insured against loss or damage during the main carriage.

Key Features of CIF

Here are the core aspects of the CIF incoterm:

Seller’s Obligations Under CIF

CIF requires the seller to prepare and mark the goods for export and pay for their pre-carriage to the origin port. They must also arrange and pay for the main transport to the destination port. This includes covering insurance during the primary carriage. 

The seller is responsible for loading the shipment onto the vessel and handling all export formalities, including customs clearance, duties, and obtaining an export license. They also have to pay for any pre-shipment inspection charges to clear the goods for export.

The sellers must prepare a commercial invoice and obtain all necessary documentation, including proof of delivery.

Buyer’s Responsibilities

The buyer assumes minimal responsibility under CIF compared to the seller. They cover all costs after the goods arrive at the destination port. This includes paying for the goods, as specified in the contract, and covering all discharge, handling, and transport costs until the final delivery point. 

The buyer undertakes all import formalities, including customs clearance, duties, and taxes. They also cover the cost of pre-shipment inspection for import clearance.

Inclusion of Insurance Coverage and Its Implications

The CIF incoterm requires the seller to pay for the main shipping and cover the minimum insurance costs. The buyer does not assume any expenses until the goods arrive at the destination port. 

However, the seller’s liability ends once the goods are loaded onto the vessel. Since the goods are then considered the buyer’s property, it is their responsibility to claim any loss or damage incurred during the main carriage.

Advantages of CIF

Here are the benefits of using CIF:

For the Seller

• Clear transfer of risk once the goods are loaded onto the vessel

• Freedom to choose a shipping arrangement, simplifying logistics

• Financial security and flexibility by negotiating favorable insurance terms

• More bulk shipping opportunities, increasing overall profit margins

• Competitive edge — an all-inclusive service typically appeals to more buyers

For the Buyer

• Comprehensive insurance coverage during transit

• Reduced risk during maritime transportation

• Not undertaking any costs until the goods reach the port of destination

• No responsibility to ensure that goods are cleared for export  

• Reduced administrative burden as destination port shipping is arranged by the seller

• Improved financial planning as the seller quotes all costs in advance

Disadvantages of CIF

These are the possible disadvantages of CIF for buyers and sellers:

Challenges for the Seller

• Bearing a majority of the upfront costs, including shipping and insurance

• Undertaking all export formalities, obtaining licenses, and handling taxes

• Increased administrative burden, having to arrange a carrier and ensure proper delivery

• Assuming all risk until the goods are loaded onto the vessel

• Vulnerability to fluctuating freight rates, possibly harming profit margins

Challenges for the Buyer

• Assuming all risks once the goods board the vessel, coping with any loss or damage

• Complications in making insurance claims to cover losses

• Exposure to certain risks — sellers are only required to provide minimum insurance coverage

• Inflated overall costs as sellers often add markups to the carrier and insurance charges

• Handling all import duties, taxes, and other obligations

• No control over logistics planning, leading to unfavorable service and charges

When to Use CIF

CIF is only suitable when seas or inland waterways are the primary mode of transportation. This shipping arrangement is typically used for oversized, non-containerized goods as these can be delivered directly to a port and do not have to be taken to a container yard beforehand. 

CIF can appeal to buyers who have no knowledge or contacts to facilitate logistics in the exporting country. It is also beneficial when buyers prefer that sellers handle most of the responsibility, covering transport and insurance services.

FAQ

What is cheaper, FOB or CIF?

The FOB (Free On Board) incoterm can be cheaper for the buyer than CIF. In the former, they control the shipping logistics. They can negotiate the best prices and include as much insurance coverage as needed. In CIF, sellers can inflate transport and insurance costs, keeping commissions.

Does CIF include duty?

In CIF, the seller covers the export duties, documentation, and taxes, while the buyer covers all import formalities.

Who pays for CIF insurance?

In CIF, the seller is obligated to pay for the minimum insurance coverage.   

What is the difference between CIF and FOB?

FOB and CIF are both maritime transport incoterms. In FOB, the seller is generally required to cover all costs until the goods are aboard the vessel. After that, the buyer assumes all risks and expenses. In CIF, the seller must also pay for the main carriage and cover insurance. In FOB, buyers have more control over logistics as they can choose their preferred carrier.

What is the difference between CIF and CIP?

The primary difference between CIF and CIP (Carriage and Insurance Paid to [destination]) is that the latter can be used for any mode of transport.

In CIF, the seller covers the minimum cost of insurance for the goods while they are aboard the vessel. In CIP, the seller covers the cost of carriage to a specified location in the destination country and obtains insurance for the full transport, covering all risks. In CIF, the seller’s liability ends once the goods board the vessel, while in CIP, it ends when the goods transfer to the first carrier in the origin country.