What is cost insurance and freight?
Cost insurance and freight or CIF is one of the incoterms where the vendor arranges the shipping and insurance for your goods. They pack, load, and deliver them to the port, handle export clearance, and get them loaded onto the ship. At that point, the risk passes to the buyer.
The buyer is provided with a reasonable amount of cover from risk before shipping due to the vendor being responsible for all steps up to the carriage to your port of choice and purchasing minimum level of insurance that covers the goods during ocean transit:
Buyers using sea freight could benefit from this incoterm because although the responsibility for the goods only transfers to them once they’re loaded on the ship, at least the goods are insured against any disasters on the way while they’re on board (such as lost containers, ships, hijackings, etc) as the vendor has also purchased insurance.
Who is responsible for what when shipping with a cost insurance and freight agreement?
The responsibilities are weighted in favor of the buyer, as the vendor takes a lot of the strain if this incoterm is agreed upon.
- Manufacture the goods to your specifications
- Pack the goods in export packaging complete with shipping marks and labelling to your specification.
- Make the goods available for collection at an agreed-upon location, such as their factory or warehouse.
- Cover the loading charges and transport from their facility to the port.
- Handle the export charges and complete any paperwork required by customs related to fees, duties, etc.
- Pay the OTHC (origin terminal handling charges).
- Cover the loading charges to get your goods from the dock onto the ship.
- Arrange and pay for the sea freight.
- Arrange and pay for the minimum insurance that covers the goods on board until they arrive at your port of choice and are unloaded.
- Provide proof of delivery.
- Inspections before shipment at the vendor’s facility (unless agreed otherwise).
- Insuring the goods from the point of unloading (if the buyer decides to do so).
- DTHC (destination terminal handling charges).
- Unloading fees at the port upon arrival.
- Import charges, duties, fees, and customs paperwork.
- Domestic delivery fees, such as truck or rail delivery to your warehouse or distribution center.
- Unloading at your final destination/s from truck or train.
Why would you agree on CIF with a supplier?
CIF isn’t an incoterm likely to be used by more experienced importers, however, it may be helpful for those who’re new to importing and arranging to ship from a certain location (this may be due to genuine lack of experience or simply a lack of experience in dealing with suppliers from a certain country).
Placing cost insurance and freight in the hands of your supplier is a double-edged sword. On the plus side, it takes the pressure off of less experienced importers and buys them time to understand the process. But on the minus side, you lose control over who’s shipping and insuring your goods, and, importantly, visibility over the cost of them!
- Good for less experienced importers who aren’t equipped to handle the shipping from their suppliers country (yet) and don’t want the hassle of organizing shipping, insurance, or to take full responsibility for the goods during their entire journey.
- The buyer can rest assured that the products can be imported because the vendor has to take care of the export process, customs documentation, etc. If there are issues at this time they will fix them, and if, in the worst case, the products can’t be exported due to lack of compliance, the vendor is still responsible.
- The products are insured so you have peace of mind that any issues that may occur whilst in transit will be covered up to the point of unloading.
- The buyer hands a lot of control to the vendor and, if you’re unlucky, they will select cheaper freight forwarders who provide an inferior service (slower, less secure) while charging you more. For example, they may select less optimal shipping arrangements such as LCL (loose cargo) rather than a full container (FCL). The latter affords your goods more protection as they’re handled less and not packed in with other assorted shipments.
- The risks still transfer to the buyer once the goods have been loaded onto the ship, so during the long transit period and at your destination port you still bear a lot of risks.
- If the vendor has insured the goods and they get damaged, they are probably the beneficiary and so making a claim and getting financial retribution will involve working with them and, possibly, getting funds sent from their country (if they even agree to it).
- Importers often end up paying almost double for the freight (once to their supplier, and then again in abnormal port & terminal charges). This is where the freight forwarder has struck a deal with your supplier for them to book with them, maybe even paid them a kickback, and then claws back the costs in these charges from the buyer.
- The incoterm only requires a basic level of insurance cover to be purchased by the vendor, but can you be sure that it’s enough for the goods? Many vendors will only spend the absolute minimum. Also, the insurance is only for the goods while they’re on board the ship.
It is for the above reasons that Sofeast don’t advise our clients to use CIF.
CIF VS CIP
Many importers prefer to agree on CIP with their suppliers rather than CIF.
The key difference is the insurance cover, as CIF only insures the goods while they’re on the ship, whereas CIP includes insurance all the way up to local delivery to your final destination. Naturally, due to additional insurance coverage for the goods, CIP reduces the buyer’s risks more than CIF does (and it can be used for all kinds of shipments, not only sea freight).