International Commercial Terms (Incoterms) are standardized trade rules published by the International Chamber of Commerce (ICC) defining the responsibilities of buyers and sellers in international transactions. These rules specify who manages and pays for shipment, insurance, documentation, and customs clearance. Cost, Insurance, and Freight (CIF) is an Incoterm 2020 rule intended exclusively for sea and inland waterway transport. CIF outlines the seller’s obligations to deliver goods to a named port of destination while absorbing specific costs during transit.
Defining Cost, Insurance, and Freight
The CIF designation clearly delineates the three primary cost responsibilities the seller must undertake up to the named port of destination.
The “Cost” component represents the agreed-upon price of the goods in the sales contract.
The “Freight” portion refers to the expense of securing the main carriage. The seller must contract and pay for the ocean or waterway transport to the buyer’s specified port, including loading charges and the cost of the international voyage. The seller also handles all export formalities and pre-carriage to the port of loading.
The “Insurance” element mandates that the seller procure marine insurance to protect the buyer against loss or damage during transit. Under Incoterms 2020, this coverage must be at least the minimum level (Clause C of the Institute Cargo Clauses). The policy must cover a minimum of 110% of the goods’ value and extend until the goods reach the named port of destination.
Allocation of Responsibility and Risk Transfer
CIF is a two-point clause where the transfer of cost and the transfer of risk occur at different locations. The seller pays for carriage and insurance all the way to the named port of destination, managing the logistics chain up to that point. The buyer is responsible for all subsequent costs, including unloading fees, import customs clearance, duties, and onward transport.
The transfer of risk, however, shifts from the seller to the buyer the moment the goods are loaded onto the vessel at the port of shipment. Although the seller pays for the main voyage, the buyer bears the risk of loss or damage while the vessel is at sea. If cargo is damaged during transit, the buyer must file a claim against the insurance policy provided by the seller.
Required Shipping Documentation
Under CIF terms, the seller must provide the buyer with the necessary documents to take possession of the goods at the destination port. The seller must furnish the transport document, typically a Bill of Lading, covering transport to the named port of destination. This document allows the buyer to claim the goods from the carrier upon arrival.
The seller must also provide the commercial invoice, which is required for the buyer’s import customs procedures. Finally, the mandatory marine insurance policy or certificate proves that the minimum required coverage has been purchased for the buyer’s benefit.
Practical Applications and Limitations
CIF is most suitable for non-containerized cargo, such as bulk commodities or oversized equipment loaded directly onto the vessel. It is often preferred by buyers new to importing or those lacking the expertise to arrange international shipping contracts. Using CIF simplifies procurement by providing the buyer with a total price that includes the cost of goods and shipping to their port.
Incoterms 2020 strongly recommends against using CIF for modern containerized cargo, which is the most common form of international shipping. This limitation exists because containers are often delivered to a terminal days before loading, but the risk transfers only when the goods are placed on board the vessel. This time gap creates a liability “grey area.” For containerized shipments, Carriage and Insurance Paid To (CIP) is recommended because the risk transfers earlier, when the goods are handed over to the first carrier at an inland location.
Comparing CIF to Free On Board (FOB)
CIF and Free On Board (FOB) are frequently used Incoterms for sea and inland waterway transport, creating distinct divisions of cost and logistical control. The primary difference is who pays for the main carriage: the seller pays the freight to the destination port under CIF, while the buyer contracts and pays for the international transport under FOB.
The point of risk transfer is the same for both terms, occurring when the goods are loaded onto the vessel at the port of shipment. Under CIF, the seller must purchase minimum insurance coverage for the buyer’s benefit. Under FOB, the buyer is responsible for arranging their own insurance, which is not mandatory. FOB gives the buyer greater control over shipping logistics and carrier selection, potentially leading to better freight rates. CIF, conversely, gives the seller control over the shipping process.