CIF, or “Cost, Insurance, and Freight,” is a common sea freight incoterm which means the seller must ship the goods and have them cleared so they can be exported on a vessel when the items are shipped. The seller initially pays for the movement and shipping of the products to the necessary port. Also, the seller must insure the product from damage while in-transit.
Is CIF for sea freight only? Yes, CIF is for sea freight only. “Cost, Insurance, and Freight” only occurs when one utilizes maritime shipping. CIF maintains that it’s the seller’s responsibility to pay for moving the freight and getting the items to the port that the buyer specifies.
Since there isn’t much information available on the Internet today regarding CIF for sea freight, we created this article to help you. Below we’ll discuss what CIF is and what the terms are for CIF transport.
Is CIF for Sea Freight Only?
Yes, CIF is used exclusively for ocean or inland waterway shipping. With CIF product risk transfer of the goods occurs when the products are placed onto the vessel. Once on-board the vessel, most sellers using CIF purchase insurance to manage their risk on the sea. CIF is most commonly used when shipping bulk product by sea freight. Instead of CIF, CIP would be the incoterm used for shipping containerized cargo by sea freight.
What Does CIF Mean?
CIF means the seller delivers the goods, cleared for export, onboard the vessel at the port of shipment, pays for the transport of the goods to the port of destination and also obtains and pays for minimum insurance coverage on the goods through their journey to the port of destination. The buyer assumes risk once the goods are on-board the vessel for carriage, but they are not responsible for any costs until the freight arrives at the port of destination.
Depending on where the product is being shipped to, some of the expenses involved for the seller can also include:
- Inspections
- Export paperwork
- Rerouting
If any of these issues occur, then the seller must pay the costs for these additional expenses. However, once the products are fully loaded into the ship, then the responsibility for the risk of the products becomes the buyer’s responsibility.
Breaking Down CIF
- Cost, insurance, and freight is a traditional method many buyers and sellers use for importing and exporting products.
- CIF helps define when the products are the seller’s responsibility, and when the products are the buyer’s responsibility.
- CIF is a term that’s used in international commerce, which is traditionally called Incoterms.
Contract Terms and CIF
CIF traditionally dictates that there be an established contract between the seller and the buyer. The standard contract terms you’ll see for most CIF transports establish where the seller’s liability is, and where the buyer’s responsibility is. Many importers use CIF as a standard method for shipping their products. CIF resembles FOB, or free on board shipping, with one difference.
Free On Board Shipping means an agreement where the seller is responsible for the products until they come to the assigned port, or they are sent “past the ship’s rail.” As soon as the items are loaded and on the move, the responsibility of the products then shifts to the buyer.
The primary difference between CIF and FOB shipping is where the responsibility lies for the expenses and the products until they are loaded onto the ship. If an exporting company has its access to boats, it’ll traditionally use CIF. If they don’t have access to their vessels, then FOB shipping is more common.
When it comes to CIF, the seller is responsible for many specific things, as outlined in the standard CIF contract. Those items include:
- Paying for the cost and commitments that apply when moving the products
- Buying the necessary export licenses for the items
- Allowing for the products to be inspected
- Purchasing insurance to cover the cost of the items in the order
- Paying for damages or destruction of the goods until the pieces are loaded onto the ship.
Also, the seller has to meet the demands of the buyer and ship the items in the timeframe the two parties agreed to utilize. On top of this, the seller also has to provide plenty of notice of delivery to the buyer. Once the items are delivered, the seller must also contribute to the buyer’s proof of delivery and confirmation of loading.
Liability Terms Under CIF Contracts
Depending on the details that are written in the sales contract, liability will often be stated in the agreement. The traditional CIF contract would dictate that the seller’s responsibility ends as soon as all of the items are loaded onto the ship. However, a buyer can still revise these terms in a contract and ask that the seller be responsible for the products until those items reach a specific port or even their final destination.
While changing the standard CIF liability terms is not common, it does happen every so often, so it’s worth mentioning. Also, depending on what appears in the sales contract, once the products are given to the buyer, it’s the buyer’s turn to pay whatever price was agreed upon in the contract. After that point, the buyer must pay for any other:
- Transportation
- Inspection, and
- Licensing costs
So, as soon as the goods exchange hands, the buyer starts assuming the liability for the costs of the products. Buyers sometimes also must pay for other types of things after the goods change hands, including:
- Taxes
- Customs duties
- Shipment
CIF as an Incoterm
We mentioned earlier that CIF is an Incoterm, which means an international commerce term. These terms were established to work as standard trade rules and were put in order in 1936 by the International Chamber of Commerce. The ICC came up with these standard definitions to help dictate traditional shipping policies and also outline the obligations of both the buyers and sellers that use international trade.
Incoterms resemble many domestic terms, like the U.S. Uniform Commercial Code, for example. However, Incoterms also provide some international application standards that make shipping and exchanges between buyers and sellers more obvious. When using CIF, both parties must have something stated in their contract about the locale that is governing the laws for their agreements. ICC only allows CIF to be used when products are traveling by sea.
Should You Use CIF?
CIF does offer several benefits that are well worth considering. Many buyers enjoy using CIF because it’s a convenient way to transport their products in bulk to an international destination. Buyers are excluded from worrying about the following:
- Freight concerns
- Risks and
- Claims
So, since the buyer doesn’t have any liability for much of the process, many buyers love using CIF. CIF works very well when somebody becomes a new importer and doesn’t know the ins and outs about how to ship items overseas.
Importers with large batches of cargo to ship also prefer to use CIF. CIF isn’t traditionally used for smaller quantities of cargo because the cost of insuring the lower volumes can sometimes be more costly than the seller’s fees. However, when CIF is used for a small batch of cargo (and sometimes it is), the buyer benefits substantially from this process.
Sellers that do have large quantities of freight to ship also benefit from using CIF because they will have more for the cost of their insurance. Also, they are typically able to create higher profit margins by exporting a more significant amount of the products more quickly. Still, there is plenty of risk for the seller since most of the liability resides with the seller during transportation.
Drawbacks of CIF
CIF can be an expensive agreement for buyers, and FOB can sometimes be a cheaper route for them. That’s because sellers sometimes decide to invoice their buyers for the price of the shipping and what the insurance costs. That can make the use of CIF pricey for buyers at times but increase the profit margin of the sellers. So, depending on the standards of the contract, buyers may pay more for shipping than they could have with an FOB agreement.
