International commercial transactions rely on standardized trade rules to clearly define the responsibilities, costs, and risks between a seller and a buyer. These rules are known globally as Incoterms, published by the International Chamber of Commerce (ICC). Among the eleven terms in the Incoterms 2020 set, CIP stands for Carriage and Insurance Paid To, and it is a popular rule for transactions involving manufactured goods and multimodal transport.
Defining Carriage and Insurance Paid To (CIP)
The Carriage and Insurance Paid To (CIP) rule is a “C-group” Incoterm. It requires the seller to arrange and pay for the carriage of goods to a specified destination and purchase insurance cover against the buyer’s risk of loss or damage during transit. CIP is suitable for any mode of transport, including air, rail, or road, making it a multimodal term. The seller’s obligation to pay for transport and insurance extends to the named destination.
The seller delivers the goods by handing them over to the contracted carrier. Although the seller retains responsibility for the cost of transport and insurance to the agreed destination, the buyer assumes the risk of loss or damage much earlier. This separation of cost and risk is a key feature of CIP. CIP is recommended for containerized cargo, as it allows for a clearly defined point of delivery at a terminal.
The Seller’s Allocation of Costs and Responsibilities
Under the CIP rule, the seller is responsible for arranging and paying for the main international transport. This requires the seller to contract and pay the freight charges necessary to bring the goods to the named place of destination. The seller must also handle all export clearance formalities, including any duties, taxes, and security requirements associated with exporting the goods.
The seller must pay the mandatory insurance premium, covering the goods for the buyer’s benefit. They are also responsible for the costs of loading the goods onto the first carrier and providing the buyer with necessary transport documents, such as the bill of lading. Furthermore, if the contract of carriage includes costs for transit or unloading at the destination, the seller must bear these charges.
The Buyer’s Allocation of Costs and Responsibilities
The buyer covers all costs incurred once the goods arrive at the named place of destination. This includes arranging the final leg of transport from that point onward to their final facility. The buyer must also handle and pay for all import clearance procedures. These procedures include duties, taxes, and any other governmental charges levied by the destination country.
The buyer is responsible for any costs outside the seller’s contracted carriage, such as potential storage or demurrage fees at the destination terminal. Although the seller provides insurance, the coverage extends only to the named destination. The buyer may need to purchase additional insurance for the final movement if they desire broader protection.
The Critical Point: Transfer of Risk
The defining characteristic of CIP is the separation between the transfer of cost and the transfer of risk. While the seller pays for carriage to the named destination, the risk of loss or damage transfers to the buyer much earlier. This transfer occurs when the seller hands the goods over to the first carrier they have contracted, not upon arrival at the final destination.
Once the goods are in the possession of the initial carrier, the buyer assumes all risk. If the goods are lost or damaged halfway through the journey, the buyer is liable for the loss, though they are covered by the seller-purchased insurance policy. This distinction means the buyer manages and claims for transit risk, even though the seller paid the freight charges.
Mandatory Insurance Coverage Requirements
CIP is one of only two Incoterms requiring the seller to provide cargo insurance for the buyer’s benefit. The seller must obtain the highest level of coverage, complying with the Institute Cargo Clauses (A) or an equivalent. This is often referred to as “all risks” coverage.
The policy must cover the goods for a minimum of 110% of the contract price (invoice value plus 10 percent). This extra percentage covers the buyer’s potential costs and profit should a total loss occur. The seller must name the buyer as the beneficiary and ensure coverage extends at least from the point of delivery (handover to the first carrier) to the named destination.
CIP Compared to Other Key Incoterms
Comparing CIP to other terms clarifies its function, particularly CPT and CIF. CPT (Carriage Paid To) is identical to CIP regarding the division of costs and the point of risk transfer, but it lacks mandatory insurance. Under CPT, the seller pays for carriage, and risk transfers upon handover to the first carrier, but the buyer must arrange and pay for their own insurance coverage.
CIF (Cost, Insurance, and Freight) also mandates seller-provided insurance but is restricted solely to sea and inland waterway transport. CIF requires a lower level of coverage, specifically Institute Cargo Clauses (C). This minimal coverage is suitable for bulk commodities. CIP, conversely, requires the higher ‘all risks’ Clause (A) coverage, which is appropriate for high-value manufactured goods. CIP’s multimodal nature and higher insurance mandate make it a more robust option than CIF for complex logistics.
Practical Applications of CIP
Traders select CIP when shipments involve multiple modes of transportation, which is common for containerized cargo. Its flexibility suits international logistics chains that do not rely solely on port-to-port movement. The high level of insurance coverage mandated under CIP makes it a preferred choice for shipping high-value or fragile goods.
The “all risks” policy covering 110% of the goods’ value benefits the buyer, who assumes risk early in the journey. When utilizing CIP, both parties must clearly and precisely name the destination point in the contract. This location dictates the extent of the seller’s cost obligation and helps prevent disputes over costs like terminal handling or final delivery fees.