A cost, insurance, and freight (CIF) agreement is a type of international shipping contract used to carry products between buyers and sellers. It is one of the eleven international commerce terms (Incoterms) created by the International Chamber of Commerce (ICC) in 1936.
The specific definitions vary somewhat in every country, but the contract generally specifies the origin and destination information that is used to determine where liability officially begins and ends. It also outlines the responsibilities of buyers to sellers, as well as sellers to buyers. Only products transported by waterway, sea, or ocean are subject to cost, insurance, and freight.
Overview of CIF
When goods are purchased or sold by “Cost, Insurance, and Freight” (CIF), the seller is responsible for delivering the products to a ship, loading the goods aboard, and insuring the consignment until it arrives at the port of destination. This insurance is based on the minimum coverage, which is the product’s commercial worth plus 10%. The seller is also responsible for all necessary export documentation and licensing. In addition, the seller is liable in the event of any inspections.
In other words, the items are shipped to the buyer’s specified port in the sales contract. The seller is responsible for any loss or damage to the merchandise until it is delivered to the buyer’s destination port. Furthermore, if the product necessitates extra customs fees, export documentation, inspections, or rerouting, the seller is obligated to cover these costs.
But, after the products arrive at the buyer’s port of destination, the buyer is responsible for any fees or costs. This includes the ones incurred during the unloading and delivery of the shipment to the final destination. CIF is comparable to carriage and insurance paid to (CIP). But, CIF is exclusively used for sea and waterway shipments, whereas CIP can be used for any form of transportation, including trucking.
What is Each Party Responsible for Under CIF Incoterms?
CIF terms require the seller to get export licenses for the product, provide product inspections, and pay any charges or fees for shipping and loading the goods to the seller’s port. Additional responsibilities of the seller include:
- Packaging charges for exporting cargo,
- Customs clearance, duty, and tax charges (for exporting),
- The cost of transporting freight by sea or river from the seller’s port to the buyer’s port of destination,
- The cost of insuring the shipping until it arrives at the buyer’s final destination.
- In order to cover the costs of any damage or destruction to the products,
- The seller must deliver the products to the ship on time and show documentation of delivery and loading.
When the items arrive at the buyer’s target port, the customer accepts responsibility for the costs of importation and delivery. Among these expenses are the following:
- Unloading the cargo at the port terminal,
- Transferring the merchandise within the terminal and to the delivery location,
- Customs duties and other fees related to importing goods,
- Charges for shipping, unloading, and delivering items to their final destination.
What are the risks that come with CIF?
As with every trade transaction, CIF also comes with risks. Let’s take a look at what kind of hazards it poses to the seller and buyer respectively.
Risks and Costs for the Seller
The seller is in charge of arranging and paying for transportation to and from the port of destination. All export formalities are also the seller’s responsibility. While the seller pays for transportation and insurance to the final port, the buyer assumes responsibility for the cargo once it is loaded into the vessel. The seller is responsible for all charges related to exporting the shipment from the country of origin.
The risk is relatively low because it is shifted to the buyer after the shipment is loaded. The seller is responsible for any loss or damage until the shipment is loaded.
Risks and Costs for the Buyer
When the shipment is loaded aboard the vessel, the buyer assumes responsibility for it. The buyer is responsible for unloading the goods at the final port. They are responsible for the costs of offloading and onward transportation at the port of destination. The buyer is liable for all charges associated with importing the shipment into the country of destination.
Only unloading and transportation to the final location are handled by the seller. Because the buyer controls the majority of the expenditures, there is a risk of overcharging. The seller may also choose more expensive transportation methods than the buyer.
Utilization of Cost, Insurance, and Freight
CIF can be used for both international and domestic water transportation. It transports big cargo, oils, and oversized items. When the seller has direct access to the vessel for loading, CIF should be used. It is preferable to employ Carriage and Insurance Paid (CIP) when shipping containerized items.
CIF Under Incoterms 2020
The new Incoterms 2020, introduced by the ICC in early 2020, are already in effect and will remain so until 2030. The Incoterms 2010 will remain in effect as the Incoterms 2020 made no modifications to Cost, Insurance, or Freight.
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