What Is Cost Insurance and Freight? (With Examples)

Cost, insurance, and freight (CIF) is an international shipping agreement, which represents the charges paid by a seller to cover the costs, insurance, and freight of a buyer’s order while the cargo is in transit. Cost, insurance, and freight only applies to goods transported via a waterway, sea, or ocean.

What is Cost Insurance and Freight (CIF)

What are incoterms?

The International Chamber of Commerce, also known as the ICC, created the common trade rules known as Incoterms. They specify what obligations sellers and buyers have when engaging in international trade. CIF is an incoterm designed specifically for shipping through international waters or the oceans. Buyers and sellers can use any of the additional 10 internationally recognized incoterms when shipping goods. These options are:

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What is cost insurance and freight?

Cost insurance and freight (CIF) is a shipping contract that specifies who is responsible for the product as it travels across international borders. By agreeing to a CIF, you can divide shipping costs and know when you are in charge of your items during the shipping process. A CIF is an internationally recognized trade agreement.

What are the seller’s responsibilities under CIF?

A CIF agreement states that the seller is in charge of the product up until it arrives at the buyer’s port. Within the predetermined time frame, the seller delivers the goods to the ship and provides proof of delivery documentation. They also charter a boat and oversee the loading process.

Other seller responsibilities under a CIF agreement include:

Transfer of cost vs. transfer of risk

Cost and risk transfer take place at different points in a CIF agreement. When the cost of an item is transferred from the seller to the buyer, this is known as the transfer of cost. Transfer of cost under CIF happens when the product reaches the buyers port. Before that time, the seller is in charge of any costs associated with the product.

When the accountability for lost or damaged items shifts, there has been a transfer of risk. This transfer occurs in a CIF agreement following the loading of the goods onto the ship. This means that while a product is in transit, the seller bears the cost of shipping, but the buyer bears the cost of any damage to the product.

What are the buyer’s responsibilities under CIF?

As soon as the ship carrying the goods docks in their port, the buyer takes responsibility. Buyer is accountable for paying any fees associated with the goods between port of entry and final destination. Here are some examples of a buyers responsibilities:

When should you use CIF?

When shipping goods internationally across an ocean or major waterway, you should use CIF. For buyers who don’t want to worry about fees like freight charges or trip insurance, CIF may be more convenient. If the seller does not mind covering the cost of transportation but prefers that the buyer assume all risks, they may agree to a CIF agreement.

Best alternatives to CIF

If you choose not to sign a CIF agreement, the following incoterm agreements are your best alternatives:

Free on board

The difference between FOB and CIF is that once the goods are on the boat, the buyer is in charge of the shipment. They therefore have greater responsibility for the goods while they are in transit, including paying any fees incurred or bearing blame for any product loss until the goods arrive at their intended location.

Free alongside ship

In an FAS contract, the seller is only responsible for delivering the desired product to the port and completing any necessary delivery paperwork. The product is no longer the carrier’s responsibility because of this agreement because the carrier does not load the product onto the ship. No export/import fees or lost goods are the seller’s concerns.

Ex works

EXW works for all modes of transportation, so it might be effective if you need to transport items by both air and sea. Under EXW, the seller makes sure the item gets to a transportation hub, like a port or an airport. The buyer is then responsible for handling the product’s loading and transportation costs.

Examples of CIF

Here are some examples of how freight and cost insurance work:

Example 1

200 kites are sent from a kite shop in Spain to a museum in San Paolo. Shipping the kites requires an export license. CIF stipulates that the kite shop pay the licensing fee since it is the seller.

Example 2

Mr. The London-based Smiths Lunchbox Company consents to send Augusts Grocery in Toronto 500 lunchboxes. The lunchboxes are delivered to a port in Toronto with the recently implemented lunchbox tax. In a CIF agreement, Augusts Grocery pays this fee.

Example 3

A Sydney-based carrot farmer is shipping ten crates of carrots to a Parisian restaurant. While loading the crates, hes offered transportation insurance. He must pay for the transportation of the carrots in accordance with a CIF agreement, and if he accepts that coverage, he must also pay the insurance premiums.

Example 4

Atlanta’s Happy Tunes Music Store buys 150 brand-new tubas from Lagos More people are needed to move the tubas than work at the music store. Happy Tunes must pay for additional unloading assistance because CIF stipulates that buyers are responsible for goods once they arrive at their port.

Example 5

10,000 popsicles are being shipped by Popsicle World from Houston to an ice cream parlor in Tokyo. The cooling systems fail and the popsicles melt as they travel across the ocean. The ice cream shop accepts all risk associated with transportation as a result of their agreement to a CIF. However, Popsicle World handles the costs of shipping, including insurance. For the melted popsicles, the ice cream shop can submit a claim to Popsicle World’s insurance provider.

FAQ

What does FOB and CIF mean?

The acronyms CIF and FOB stand for “cost, insurance, and freight,” respectively. These terms are used in international trade in relation to shipping, where goods must be transported by maritime shipping from one location to another. The terms are also used for inland and air shipments.

What is CIF mean?

Under the terms of a CIF (Cost, Insurance and Freight) agreement, the seller ships the merchandise that has been granted export clearance onboard a vessel at the port of shipment, pays for its delivery to the port of destination, and secures and pays for the merchandise’s minimal insurance coverage during the transportation to the named port.

What does Cost and Freight price mean?

Cost and freight (CFR) is a cost incurred when cargo is transported by land, water, or air. When CFR is involved, the seller is responsible for organizing and covering the cost of transporting the cargo to the designated port.

What is CIF and CIP?

CIF stands for Cost Insurance and Freight (followed by a destination), which means that the cost of the goods, insurance, and freight up to the specified destination are included in the value of the goods sold. CIP means, Carriage and Insurance paid (up to named destination).

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