What Is Cost, Insurance and Freight (CIF)?
Cost, Insurance and Freight (CIF) is an expense paid by a seller to cover the costs, insurance, and freight against the possibility of loss or damage to a buyer's order while it is in transit to an export port named in the sales contract. Until the loading of the goods onto a transport ship is complete, the seller bears the costs of any loss or damage to the product. Further, if the product requires additional customs or export paperwork or requires inspections or rerouting, the seller must cover these expenses. Once the freight loads, the buyer becomes responsible for all other costs.
Terms of Cost, Insurance and Freight
The contract terms of Cost, Insurance and Freight will define when the liability of the seller ends and that of the buyer begins. CIF is a conventional method of shipping goods for importers. It is similar to Free on Board (FOB) shipping with the primary difference being who is responsible for bearing the expenses up to the point of loading the product onto the transport vessel. Usually, exporters who have direct access to ships will use CIF.
Under the terms of CIF, the seller is responsible for providing specific protections for an order. The seller's responsibilities include:
- Purchasing export licenses as needed for the product
- Covering the cost and contracts of moving or carrying the goods
- Insurance to protect the value of the order
- Providing for inspections as required for the products
- Paying for the price of damage or destruction of all goods ordered
The seller must deliver the goods aboard the ship within the agreed-upon time frame. They must also give the buyer sufficient notice of delivery and provide proof of delivery and loading.
The exact details of the sales contract will determine when the liability for the goods transfers from seller to buyer. In most cases, the seller's obligation ends once cargo loading is complete. However, a buyer may stipulate that the seller be responsible until the goods reach a port of import or even their final destination.
Following the terms agreed to in the contract of sale, once the goods transfer hands, the buyer must pay the agreed price and must, now, cover any additional transportation, inspection and licensing costs. Other typical expenses include duties, taxes, customs and the shipment of goods to their final location.
The ICC and Cost, Insurance and Freight
CIF is one of the international commerce terms known as Incoterms which are common trade rules developed by the International Chamber of Commerce (ICC) in 1936. The ICC established these terms to govern the shipping policies and responsibilities of buyers and sellers, who engage in international trade. Incoterms are often identical to domestic terms (such as the U.S. Uniform Commercial Code) but have different meanings. As an example, the parties to a contract must state the locale of the governing law for their terms. The ICC limits the use of CIF to transport goods to only those which move via inland waterways or by sea.
The ICC's official definition of CIF reads,
“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. The seller is also responsible for insuring 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."
- Cost, Insurance and Freight (CIF) is a common method of import and export shipping.
- CIF determines when the responsibility for goods transfers from the seller to the buyer.
- CIF is one of the international commerce terms known as Incoterms.
Real World Example
Consider this hypothetical example: Best Buy ordered 100 containers of flat-screen televisions from Sony using CIF to the Kobe, Japan port. Sony delivered the order to the port and loaded them unto the Yantian Express. Once loading was complete, Best Buy became liable for all cost associated with getting the ordered goods to their final destination. However, as the container ship was en route, a fire broke out in one of the cargo bays. The Best Buy television order received damage from water during fire fighting efforts. Since the company used CIF shipping, they were responsible for ensuring the product is safe against damage during the voyage.