What is 'Cost, Insurance and Freight - CIF'
Cost, insurance and freight (CIF) is a trade term requiring the seller to arrange for the carriage of goods by sea to a port of destination, and provide the buyer with the documents necessary to obtain the goods from the carrier.
BREAKING DOWN 'Cost, Insurance and Freight - CIF'
Contracts involving international transportation often contain abbreviated trade terms that describe matters such as the time and place of delivery, payment, when the risk of loss shifts from the seller to the buyer and who pays the costs of freight and insurance. The most commonly known trade terms are called Incoterms, published by the International Chamber of Commerce (ICC). These are often identical in form to domestic terms (such as the American Uniform Commercial Code), but have different meanings. As a result, parties to a contract must expressly indicate the governing law of their terms.
According to the ICC, the official definition of CIF stipulates that, "The seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of 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," adding that the seller is also responsible for insuring the goods to cover the risk of loss or damage during carriage. Further insurance beyond the required minimums must be agreed upon between the buying and selling parties, or must be arranged for separately by the buyer. It is also important to note that the term applies only to sea and inland waterway transport.
Application of Incoterms
Incoterms consist of the 13 international commerce terms developed by the ICC in 1936 that aim to govern the shipping policies and responsibilities of the buyers and sellers who engage in international trade. By communicating contract models, these pre-defined commercial terms function to facilitate orderly trade, procurement processes and other international transactions across country lines and language barriers. Recognized by governments, legal authorities and practitioners worldwide, the terms strive to reduce or outright remove variations on interpretations of sales contracts. The three-letter trade terms, which each cover a common contractual sales practice, are primarily intended to communicate clearly and consistently the tasks, costs and risks associated with the delivery and transport of goods. The ICC published its eighth and most recent version of the rules–Incoterms® 2010–on January 1, 2011.
Each Incoterm specifies the parties responsible for goods in transit, insurance coverage and freight charges. The contracts also denote the point at which a seller's obligation is complete and the buyer assumes responsibility. This transfer of responsibility and liability is known as the delivery, even though the goods may still be in transit. As a point of comparison, below we have outlined the distinctions between CIF and several similar Incoterms:
CIF vs. CFR
Cost and Freight (CFR), like CIF, requires the seller to pay the costs and freight necessary to transport goods to the named port of destination. Risk responsibility for lost or damaged goods, as well as any additional costs, gets transferred from the seller to the buyer once the goods are onboard the ship in the port of shipment. CFR requires the seller to clear the goods for export. CFR and CIF are similar agreements; the exception being that, under CIF, the seller is obligated to insure the goods while in transit for 110% of their value.
CIF vs. CIP
Carriage and Insurance Paid (CIP) is also similar to CIF in that the seller is responsible for providing insurance coverage for the goods while in transit for 110% of their value. However, CIP applies to all modes of transport, while CIF can only be used for non-containerized sea freight.
CIF vs. FOB
With a Free on Board (FOB) agreement, the seller arranges for the transport of goods to a designated port or other point of origin. Once the seller releases the goods to the buyer, when the goods are onboard the ship, the delivery is considered accomplished. Unlike CIF, however, the point at which responsibility shifts from the seller to the buyer occurs when the shipment reaches the point of origin. With a CIF agreement, the seller assumes responsibility and pays costs until the goods reach the buyer's chosen port of destination. Furthermore, unlike CIF, FOB contracts are not limited to sea freight, and may also be used for inland and air shipments.
Terms of CIF
The specific stipulations of a CIF agreement are as follows (it is important to realize that because this is a legal term, its exact definition is much more complicated and differs by country; contact an international trade lawyer before using any trade term):
Under the terms of CIF, the seller's responsibilities include the provision of the goods and commercial invoice in conformity with the contract of sale, the acquisition and cost of any and all export licenses and other official authorizations, as well as the contracts and costs of the carriage of goods and insurance coverage. The seller is also responsible for the delivery of goods aboard the ship at the port of destination and during the stipulated timeframe, as well as the risk of lost or damaged goods up until the point of delivery, and the division of freight, customs and other associated costs. Further, the seller must give sufficient notice of delivery to the buyer, provide the buyer proof of delivery, cover checking, packaging and marking costs, and fulfill any other stipulated obligations.
Meanwhile, the buyer is responsible for the payment of the price agreed upon in the contract, the acquisition of necessary licenses and other authorizations, the reception of goods at the point of delivery and the transfer of risk at that juncture, assuming responsibility at that point for any and all losses or damages of the goods. The buyer is further responsible for the division of costs relating to the goods including duties, taxes, customs and other official charges, as well as for payment of the pre-shipment inspection of goods. The buyer must give notice for timing of delivery to the seller, provide proof of delivery and fulfill and other necessary obligations, including providing the seller with the necessary information for procuring insurance. The buyer has no contractual obligations for the carriage of goods.