Cost, Insurance and Freight - CIF

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 rulesIncoterms 2010on 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.