CIF Cost, Insurance & Freight Incoterms 2020 is one of the most used Incoterms in the world. And it is not difficult to see why:
- It is an old Incoterm, one of the original rules published by the International Chamber of Commerce in its first publication of the Incoterms in 1936, therefore it is widely known by merchants worldwide.
- It is a maritime Incoterm: given that 90% of global trade runs by sea, all maritime Incoterms are usually widely used.
- It is a Group-C Incoterm: while sometimes confusing and contradictory, Group-C Incoterms allow the seller to charge additional services without adding risk and are therefore deemed very convenient.
Even if CIF was widespread, in 1980 the ICC introduced a similar Incoterm, CIP Carriage & Insurance Paid To.
While similar, the two Incoterms carry important differences. We are going to look at these from the perspective of:
- Mode of transport
- Containerized cargo
- Transport obligations
- Transfer of risk
- Insurance
Mode Of Transport
The main difference here is that CIF should be used only for waterway transport, whereas CIP can be used with any mode of transport (waterway, road, railway, airway).
You can see this in the way the two Incoterms are written:
- CIF Cost, Insurance & Freight (named port of destination).
- CIP Carriage & Insurance Paid To (named place of destination).
Accordingly, if you use CIF you must state the port where the goods are going to be shipped, whereas if you opt for CIP you can state whatever place you want at destination: it can be a port, an airport, a train station, etc.
Containerized Cargo
The problem with the original Incoterms, including CIF, is that they were devised twenty years before the invention of the container. As such, they should not be used for containerized cargo.
Therefore, while not mandatory, CIF should not be used in case of containerized cargo, whereas that is well possible under CIP.
Transport Obligations
The difference in the wording of «port» and «place» makes a significant difference in case of transport obligations.
In fact, port means that the seller’s transport obligations must be fulfilled up to the port destination. In case of place, it means that the parties can agree to any place at destination where the seller must deliver the goods to.
Therefore, in case of CIF, the seller’s transport obligations end necessarily at the port of destination. With CIP, they can end anywhere at destination, including the buyer’s premises.
Transfer Of Risk
Since CIF and CIP are both Group-C Incoterms, we know that in both cases the transfer of risk occurs at origin, i.e. in the seller’s country.
The risk shifts from the seller to the buyer when the goods are places on the carrier for shipment. Now, in the case of CIF this is pretty straightforward: being a maritime Incoterm, the carries must be the ship at the port of origin.
Yet, this gets more nuanced with CIP: supposes that you are shipping goods to the buyer’s premises by airway. Who is the carrier? Is it the plane? The truck that delivers the goods from the seller’s warehouse to the airport?
To avoid confusion, the ICC specified that the risk shifts from the seller to the buyer when the goods are placed on the first carrier, i.e. the truck that comes to collect the goods at the seller’s premises.
The following pictures recap transport obligations an transfer of risk for CIF and CIP.
Insurance
Perhaps the most recognized feature of both CIF and CIP is the obligation on the seller to provide insurance for the goods. Both Incoterms refer to the Institute Cargo Clauses, but the minimum insurance coverage required by the two is widely different:
- CIF requires Institute Cargo Clauses (C): this is the least comprehensive insurance coverage, and essentially covers nothing more than general average.
- CIP requires Institute Cargo Clauses (A): this is the most comprehensive insurance coverage, as it covers «all risks».
Conclusions
CIF is a widely used Incoterm, very entrenched in merchants’ practices, and will continue to be very popular. However, CIP represents a more complete and flexible alternative: while the two Incoterms are similar in nature, they show significant differences. Since CIP is more updated, it should be preferred to CIF in most circumstances.
Globartis Research
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