CIF (Cost, Insurance and Freight): Rules, Insurance and Risks

CIF under Incoterms 2020: the seller pays freight and minimum Clauses (C) insurance, but risk passes on board at origin. Costs, example, CIF vs CIP and CFR.

CIF, Cost, Insurance and Freight, is the maritime rule of Incoterms® 2020 in which the seller pays both the sea freight to the destination port and an insurance policy covering the voyage. Despite this, the seller's risk ends early: delivery, and the transfer of risk, happen when the goods are on board at the port of shipment. The buyer bears the risk during the voyage, but with an insurance policy in its hands to claim against.

CIF is the oldest and best-known C rule, used massively in commodity trades and in documentary credits. Its 2020 version keeps a modest minimum level of insurance, which every buyer should understand. This lesson explains what CIF gives you and what it does not.

When should you use CIF?

CIF is for sea and inland waterway transport, when the goods are loaded on board by or for the seller:

• bulk and liquid cargo: oils, cereals, sugar, fertilisers, metals;
• break-bulk cargo and goods traded in strings, where the bill of lading and insurance certificate are sold on during the voyage;
• deals paid by letter of credit, where the bank expects freight-prepaid bills of lading and an insurance document.

Do not use CIF for containers handed over at a terminal, or for air, road or multimodal transport. Use CIP, which also requires much broader insurance. And if the buyer's country requires imports to be insured locally, use CFR.

Where does delivery happen and when does risk pass?

The seller delivers by placing the goods on board the vessel at the port of shipment, or by procuring goods already shipped. Risk passes then. The term names the destination port, as in "CIF Livorno", which tells you where the freight and insurance run to, not where risk passes. Name the port of shipment in the contract as well.

What insurance does the seller have to buy under CIF?

Unless the parties agree otherwise, the seller must obtain, at its own cost, cargo insurance that:

1. complies at least with Institute Cargo Clauses (C) or similar clauses, which cover a list of major casualties such as fire, stranding, sinking, collision and jettison;
2. is placed with insurers of good repute and lets the buyer claim directly;
3. covers at least 110% of the contract price, in the currency of the contract;
4. runs from the point of delivery to at least the named port of destination.

The seller gives the buyer the policy or insurance certificate. At the buyer's request and cost, it must add war or strikes cover if obtainable. The parties can of course agree higher cover, such as Clauses (A), in the contract.

Who pays what under CIF?

Documents and payment

The seller provides the usual transport document for the destination port, normally a full set of clean on-board bills of lading marked "freight prepaid", plus the insurance policy or certificate, the invoice and the other agreed documents. Under a letter of credit governed by UCP 600:

• the insurance document must be issued by an insurer, underwriter or their agent, not a broker's cover note;
• unless the credit says otherwise, it must be in the currency of the credit and cover at least 110% of the CIF value;
• its effective date must not be later than the shipment date on the bill of lading.

These three points cause a large share of insurance-related discrepancies.

Worked example: bulk olive oil from Sfax to Livorno

A Tunisian exporter in Sfax sells 1,000 tonnes of extra virgin olive oil in bulk to an Italian bottler, CIF Livorno, loading at Sfax, Incoterms® 2020. The oil travels in a parcel tanker.

The total contract value is EUR 4,152,000, insured for EUR 4,567,200. On arrival, 40 tonnes are found contaminated by sea water that entered through a faulty valve. Risk had passed at Sfax, so the loss is the buyer's. The buyer turns to the insurance certificate: under Clauses (C), sea water entry is not a covered peril, so the claim fails. Under Clauses (A), or even (B), it would have been paid. The buyer's only route is a claim against the carrier, with the burden of proof and limits that implies. Next season, the buyer's contract specifies "CIF, insurance Institute Cargo Clauses (A)".

CIF compared with CFR and CIP

Remove the insurance and you have CFR. Compare all eleven rules in the Incoterms matrix.

Common mistakes with CIF

• Believing CIF means the seller is responsible until arrival: it bears the cost, not the risk.
• Assuming CIF insurance is all-risks: in 2020 that is CIP, not CIF.
• Using CIF for containers, where CIP fits the handover and gives better cover.
• Insurance in the wrong currency or for less than 110%, rejected under the credit.
• An insurance certificate dated after the bill of lading.