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Created by the International Chamber of Commerce, Incoterms are a series of three-letter designations that define responsibilities between buyers and sellers around the sale of goods, specifically related to transportation costs and liability. If you’re looking for more information on Incoterms, check out our other articles on this topic:
The Complete Guide to All 11 of the 2010 Incoterms Rules
Incoterms 2020 Rules: Everything You Need to Know
Protect Your Bottom Line by Understanding These 5 Common Incoterms
Contract language between buyers and sellers can feel complex—but we’re here to clear some of it up, at least when it comes to your Incoterms®. These handy three-letter designations act as shorthand for whopays for whattransportation costs when buyingor sellinggoods. When you understand your Incoterms, you’ll be able to negotiate your contracts with confidence. (And you’ll be able tobetter calculateyour real costs!)In this article, we’ll explain everything you need to know about theCIFIncoterm.
What DoesCIFMean?
CIFstands forCost,Insurance,andFreight.Along withFAS,FOB, and CFR, it’s one of four Incoterms that applies only togoodsthat move via sea and inland waterway.
The CIF Incoterm is very similar to CFR, in thatthe sellerpays for all the costs up to and includingthe ocean freight to adestinationport of the buyer’s choosing.
However, in addition, the seller is also responsible for purchasing insuranceprotecting the buyer againstloss of or damage to the goods duringtransitto the named port.
Once the vessel arrives at the port, the buyerpays for all the transportation costs to move the goods to the final destination.
Is CIF Included in the Incoterms 2010 Rules?
Yes
Is CIF Included in the Incoterms 2020 Rules?
Yes
What Modes of Transport Does CIF Apply To?
Only goods that move via sea and inland waterway
When Does Risk Transfer from Seller to Buyer?
Onboard the vessel
What Is theSellerResponsibleforUnder theCIFIncoterm?
Under the CIF Incoterm, the seller agrees to1)payforall the costsrelated to moving goodsto adestinationport of the buyer’s choosingand2)insure the goodsuntil they arrive at that port.For example, if the contract states “CIF Port of Long Beach,” the seller will payto movethegoods to the origin port, clear any export procedures,andload thegoodsonavesselbound for Long Beach,pluscoverthe ocean freight tothe destination port.
Additionally, the seller agrees to pay for insurance that covers the goods through to arrival the Port of Long Beach. Keep in mind, though, that, under CIF, the seller is only required to purchase minimum coverage, as defined by Clause C of the Institute Cargo Clauses.
What Is theBuyerResponsiblefor Under theCIFIncoterm?
Once the shipment arrives at the destination port, the buyerpaysforeverythinggoing forward.That includes charges associated with unloading the cargo, handling charges at the destination terminal, and carriage to the final destination.
Buyersshould carefully review the insurance coverage offered.Because only the minimum level of coverage is required under CIF,buyersmay want to 1) negotiate with thesellerfor higher levels of coverage or 2) obtain additional insurance coverage of their own.
The risk and cost transfer on CIF are not quite aligned.Under several Incoterms, the risk is transferred from seller to buyer at the same point that thecosts are transferred. For example, look at DPU (Delivered at Place Unloaded). Thesellerpays for the goods to be deliveredand unloaded atthe final destination, and that’s when their ownership of the cargo ends.
However, when it comes to CIF, that’s not the case. Although the seller pays for cargo to reach the named destination port, the ownership of the cargo (and the risk) passes to the buyer once the goods are onboard the vessel. However, since CIF includes insurance coverage, if goods are damaged while the goods are on board the vessel, insurance will reimburse the person who had ownership at the time—i.e., the buyer.It’s a relatively minor legal detail, but it can be an important one, especially if you’re the buyer experiencing the loss.
If you’re considering a contract with theCIFIncoterm,talk to one of our experts.In addition to helping youarrangefreight solutions, a forwarder can also help youestimate costs so you have an accuratesense of yourmargins.
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