CIF Cost, Insurance And Freight Incoterms 2020 is the second Incoterm of the C group after CFR Cost & Freight, and it is one of the most used Incoterms by both exporters and importers.
As per CFR, also CIF was among the original Incoterms of the first ICC publication in 1936; as such, it was not meant for containerized cargo and it was intended for maritime transport only, along with the logistics of the time.
Delivery and transportation under CIF
CIF is written: CIF Cost, Insurance And Freight (named port of destination).
In the same way as CFR works, the port of destination to be named in a CIF Incoterms 2020 contract is the port up to where the seller must arrange and pay for transportation of the goods.
However, CIF is a C-group Incoterm, and you might remember from our article how to deal with Group C Shipment Contracts that under this category of Incoterms delivery and transportation are two different concepts.
Therefore, delivery, i.e. transfer of risk of loss or damage from the seller to the buyer, takes place at origin when the goods are loaded on the vessel. Yet, as we just wrote, the seller remains responsible to pay for transportation up to destination.
CIF’ special feature: insurance
One big difference between CFR and CIF is that, as it appears in the name of this Incoterm, CIF incorporates insurance. Accordingly, not only the seller has to arrange and pay for transportation, but he also have to provide insurance for the goods during transportation on behalf of the buyer.
This is a critical point and we highlight it for a reason: the seller must provide insurance for goods that, from a risk of loss or damage perspective, he is not responsible for anymore.
If you read our article about the C Group Of Shipment Contracts you will notice that we refer at this group as the C standing for confusing and contradictory. Now you see why.
Anyway, under the updated version Incoterms 2020, there is a minimum cover insurance that the seller must provide to the buyer (Institute Cargo Clause C insurance). Minimum cover insurance really means minimum cover: essentially the minimum insurance required by CIF Incoterms 2020 covers just general average. We will not go into much details here (for more information on this topic you can read our article on Institute Cargo Clauses), but minimum coverage does not include theft, damage, missing pieces, basically anything other than general average will not be covered under the mandatory requirement.
Of course, the insurance coverage can be upgraded as agreed by the parties, i.e. it must be negotiated.
This is an important point: we wrote in previous articles that the Incoterms are always viewed from the seller’s perspective, i.e. how much risk and obligations the sellers has to bear and perform. Under the E and F groups, these obligations are limited; under the C group, the seller starts to be involved in a number of obligations that could be also called services. At the end of the day, there is a big difference on buying something and having to arrange for everything by yourself, and having it delivered to your door.
What that means is that, as we move from the E and F groups to the C and D groups, the seller has to provide more services and can negotiate a higher price, if he is willing to enter into such contracts.
A practical example
Let’s go back to the example we made in our article about CFR Incoterm: a German company selling new machinery to a South African firm for USD 100,000. The terms of the contract are now regulated by CIF Incoterms 2020:
CIF Cost, Insurance And Freight (Durban).
In this situation, the USD 100,000 that the South African company pays must include: the machinery, transportation up to the port of Durban, and insurance for the goods.
If the price of the same sale under CFR Incoterms 2020 is still USD 100,000, something is wrong: is the seller aware he must provide insurance? Does the seller even want to enter into a transaction whereby he must provide such additional services?
The C and D terms give the seller the opportunity to provide additional services and to negotiate a higher price, but this makes sense only if the seller is able to do so and is willing to enter into such a sale contract. If not, then the seller should avoid these terms or expect higher costs.
A good principle under Incoterms is always to know what you are getting into, in order to avoid surprises, such as bills that you were not even aware of, later on.
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