Cost insurance and freight

What Is Cost Insurance and Freight?

Cost insurance and freight (CIF) is an international shipping term, known as an Incoterm, that dictates when the responsibility for goods transfers from the seller to the buyer. Within the realm of international trade and shipping finance, CIF specifies that the seller is responsible for arranging and paying for the transportation of goods to a named port of destination, as well as for obtaining and paying for marine insurance against the buyer's risk of loss or damage during transit. The seller fulfills their obligation when the goods pass the ship's rail at the port of shipment. While the seller covers the freight and insurance costs to the destination port, the risk of loss or damage to the goods transfers to the buyer once the goods are loaded onto the vessel at the origin port.

History and Origin

The concept of standardizing commercial terms to facilitate global commerce dates back decades. Cost insurance and freight, along with other key shipping terms, emerged from the efforts of the International Chamber of Commerce (ICC) to create a universally understood set of rules for international transactions. The first iteration of what would become the Incoterms rules, including terms like C&F (Cost and Freight), a direct predecessor to CIF, was published by the ICC in 1936. These rules were developed to address the discrepancies in interpreting trade terms used by merchants across different countries, aiming to foster greater clarity and reduce disputes in the burgeoning international marketplace. The ICC has periodically revised the Incoterms rules to reflect changes in global logistics and commercial practices.⁴

Key Takeaways

Cost insurance and freight (CIF) designates the seller's responsibility for arranging and paying for freight and marine insurance to the destination port.
Under CIF terms, the risk of loss or damage to the goods transfers from the seller to the buyer once the goods are loaded onto the vessel at the port of shipment.
The seller is typically responsible for export clearance, while the buyer handles import clearance and any costs incurred at the destination port.
CIF is primarily used for sea or inland waterway transport.
It is one of the "C" group Incoterms, indicating the seller pays costs to a certain point, but risk transfers earlier.

Interpreting the Cost Insurance and Freight

When a contract specifies Cost insurance and freight (CIF) terms, it means the exporter (seller) pays for the shipping costs and insurance coverage to bring the goods to the agreed-upon port of destination. However, it is crucial for both parties to understand that the transfer of risk occurs much earlier. The moment the goods are loaded onto the vessel at the port of shipment, the risk of loss or damage shifts to the importer (buyer). This distinction is vital for understanding liabilities; even though the seller covers the initial transport and insurance, the buyer bears the risk for the majority of the journey. Consequently, the buyer must consider their own insurance needs beyond what the seller provides, especially for unforeseen events after loading.

Hypothetical Example

Imagine a furniture manufacturer in Vietnam, "VinaFurn," sells a shipment of wooden chairs to a retailer in the United States, "HomeGoods," under Cost insurance and freight (CIF) New York Port, USA.

Seller's Responsibility (VinaFurn): VinaFurn arranges for the chairs to be transported from its factory to the port of Ho Chi Minh City, Vietnam. It then hires a carrier, pays for the ocean freight to New York, and purchases marine insurance to cover the journey. VinaFurn also handles all export customs clearance procedures in Vietnam and provides HomeGoods with the necessary documents, including the bill of lading and commercial invoice.
Risk Transfer: Once the chairs are safely loaded onto the cargo ship at Ho Chi Minh City, the risk of any damage or loss to the chairs transfers from VinaFurn to HomeGoods. If a storm damages the ship en route to New York, it is HomeGoods' responsibility to file a claim with the insurance provider VinaFurn arranged.
Buyer's Responsibility (HomeGoods): Upon arrival at the Port of New York, HomeGoods is responsible for unloading the chairs from the ship, handling all import customs duties and fees in the U.S., and arranging the onward transportation from the port to its warehouse.

In this scenario, while HomeGoods benefited from VinaFurn handling the primary shipping and insurance arrangements, the financial exposure to transit risks shifted early in the journey.

Practical Applications

Cost insurance and freight is widely applied in supply chain management, particularly for bulk cargo, raw materials, and goods transported by sea. It simplifies the initial arrangements for the buyer, as the seller handles the primary freight forwarding and insurance up to the destination port. This term is frequently seen in contracts for commodities trading, where standardized procedures are essential.

Governments and international bodies actively work to streamline global trade processes, which impacts how terms like CIF are applied. For instance, the World Trade Organization (WTO) enacted the Trade Facilitation Agreement (TFA) to reduce trade barriers and improve customs procedures worldwide. The TFA aims to make import and export processes easier and less costly, which can directly affect the administrative burdens and costs associated with fulfilling CIF terms.³ Additionally, national customs agencies, such as U.S. Customs and Border Protection, set regulations for imported goods, including how duties and taxes are assessed, which directly impacts the buyer's final costs under a CIF agreement.²

Limitations and Criticisms

While Cost insurance and freight (CIF) offers convenience by having the seller manage initial shipping and insurance, it presents several limitations and criticisms for the buyer. A primary concern for the buyer is the limited control over the choice of carrier and the specific terms of the marine insurance policy. Since the seller selects the insurer and policy, the coverage may be minimal (often Institute Cargo Clauses (C) under Incoterms 2010/2020), which might not fully protect the buyer against all potential risks. This can leave the buyer exposed to unexpected losses if they do not arrange supplementary coverage.

Furthermore, despite the seller paying for insurance and freight to the destination port, the buyer often ends up paying for these costs indirectly through a higher product price. More importantly, import customs duties are frequently calculated based on the CIF value of the goods, meaning the buyer pays duties on the cost of the product plus the insurance and freight. This can inflate the total landed cost. For example, U.S. import duties are often calculated on the total CIF value of the shipment.¹ This can be a disadvantage for buyers seeking to minimize their overall expenses, as they have little negotiation power over the shipping and insurance costs embedded in the CIF price that later influence duty calculations. The transfer of risk of loss at the port of shipment also places a significant burden on the buyer, who must handle any claims for damage occurring during the main carriage, even if the seller arranged the initial insurance.

Cost Insurance and Freight vs. Free on Board

Cost insurance and freight (CIF) and Free on Board (FOB) are two of the most commonly used Incoterms in maritime shipping, but they assign responsibilities and transfer points of risk differently. Under CIF, the seller is responsible for the cost of freight and insurance to the named port of destination. The seller also bears the risk until the goods are loaded onto the vessel at the port of shipment. In contrast, under FOB terms, the seller's responsibility for costs and the risk of loss transfers to the buyer much earlier—as soon as the goods are loaded onto the vessel at the port of shipment. With FOB, the buyer is responsible for arranging and paying for all subsequent shipping costs and insurance from that point onward. The key difference lies in who controls the main carriage and who bears the cost and risk for that leg of the journey; CIF places more responsibility on the seller for arranging and paying for the journey, while FOB places it on the buyer.

FAQs

What does CIF mean in shipping?

CIF stands for Cost insurance and freight. It means the seller pays for the freight and insurance to get the goods to a named port of destination, but the buyer takes on the risk of loss or damage once the goods are loaded onto the ship at the origin port.

Who is responsible for customs clearance under CIF terms?

Typically, the seller is responsible for export customs clearance in the country of origin, while the buyer is responsible for import customs clearance and any associated customs duties and taxes in the destination country.

Is CIF good for buyers or sellers?

CIF can be convenient for buyers who prefer the seller to handle the complexities of international shipping and insurance up to the destination port. However, it can be less ideal for buyers who want more control over carrier selection, shipping costs, and insurance terms, or who wish to minimize the basis for import duties. Sellers might prefer CIF if they have established relationships with carriers and insurers, or if they want to offer a seemingly "all-inclusive" price to the buyer.

Can CIF be used for air transport?

No, Cost insurance and freight (CIF) is specifically designed for sea and inland waterway transport. For other modes of transport, such as air freight, the comparable Incoterm is Carriage and Insurance Paid To (CIP), which is suitable for any mode of transport.