Cost, Insurance and Freight (CIF)

Cost, Insurance, and Freight (CIF) are the expenditures that the seller bears to cover not just the regular costs but also the charges about the freight and insurance for securing the losses (if any) that could arise out of probable damage or theft of a customer's order while the same is in transit for being delivered to the port that is provided in the contract.

In simple words, it is an expense incurred by the supplier for covering all the costs, such as freight and insurance against the loss of goods due to damage, theft, etc., to a purchaser's order when the goods are in transit. CIF contract term defines that the liability of a buyer begins from the time when the liability of a seller ends.

Cost, insurance, and freight are confined to commodities transported by the inland waterway or sea. In this, a seller will need to arrange and pay for expenses for the transportation of goods to the export port mentioned in the sales contract. The contract seller will deliver the goods specified in the sales contract. The risk of the goods will remain with the seller until the buyer does not receive the goods from the export port.

The seller is responsible for all the related costs and liabilities (if any) until the buyer receives the goods. Once the buyer receives the goods, the risk passes on to the buyer of the goods. It means that the moment the goods are received by the buyer, the seller's responsibility will end, and the buyer's responsibility will begin. The contract seller will not be liable for the loss, damage, or theft of goods once loaded onboard for being transported to the export port provided in the sales contract.

The rules of cost insurance and freight contract are as follows:

1. General Obligations- The seller must abide by the rules of CIF and must necessarily provide a commercial invoice to the buyer of the goods.
2. Delivery- The delivery of the goods will start when the goods are loaded on the board and not when the goods reach the export port mentioned in the sales contract.
3. Transfer of Risk- The seller will have to bear all the risks of the loss, theft, or damage of goods until and unless the buyer does not receive the same.
4. Carriage- The seller will be responsible for the carriage of the contracted goods from his place to the export port.
5. Insurance- The seller is also responsible for the insurance of goods, and he will need to get it all done at his own expense.
6. Delivery or Transport Document- The seller is also responsible for providing the buyer of the goods with the documents about transport or delivery.
7. Export or Import Clearance- The seller will have to take care of all the formalities about export at his risk and expenses.
8. Checking or Packaging or Marking- The seller will have to pay the costs of checking the goods' quality, packaging, or marking.
9. Allocation of Costs- The contract seller must bear all the expenses till the time goods are not delivered to the buyer. These costs will also include expenses for freight and insurance.
10. Notices- The contract seller must issue a notice to the buyer confirming the delivery of the goods.

Let us take an example to understand the concept clearly. We assume that AB Ltd, which is a seller of electronic goods and is based in the US, has to ship some products to CD Ltd, based in UK.

So, They decide that the entire transaction will be done based on CIF contact. As per the terms of the contract, AB Ltd will sell 400 products to CD Ltd, as a price of $40 per item.  Here, AB Ltd, who is the seller, will take the responsibility of arranging for transportantion of the goods and also the insurance from US to the UK. The total value of the goods is $16000. So the seller arranges for the freight charges and pays for the insurance policy.

Now if we assume that the goods were loaded properly but due to some unforeseen situation, there is severe damage to may of the products, then AB Ltd will have the responsibility to file for insurance claim for the damaged products, which happened in transit.

After the packages arrive in UK, AB Ltd, the seller will not have any further responsibility. Now everything has to be managed by the buyer, CD Ltd, who is in UK. This example clearly demonstrates how the CIF agreements operates.

Let us study the various advantages of the concept of cost insurance and freight contract in detail.

• The seller is being charged with making the arrangements for carriage, and insurance of the goods will have an added opportunity to enhance his profit figures.
• The seller will not have to bear any risk during the time the goods are in transit.
• The seller has full rights to retain the transportation of goods until and unless the buyer does not pay for the goods.
• The buyer will not need to stress about the transportation of the goods.
• It proves to be a simple process for the buyer with very little responsibility as the seller is responsible for most of the tasks.
• It also proves to have very little risk for the buyer since the seller pays for the insurance and is responsible for goods in transit till they reach the respective destination.

Now let us study the disadvantages of the same, as follows:

• It can be an expensive option for the buyer of the goods. It is because the seller might charge the buyer of the goods more to earn more profits from the transaction.
• The buyer may negotiate for better price and rates in case of free on board, but it is not possible in this case.
• The buyer and seller of a contract might also face communication issues.
• They may have discrepancies and opinion mismatch regarding the quality of the insurance coverage or the way the goods are handled. This may give rise to unnecessary problems.
• The buyer might also have to bear extra costs at the export port about custom fees and dock fees before the clearance of the goods.
• The control in the hands of the buyer is less as compared to the seller because the freight and insurance carriers are typically arranged by the seller.
• After the goods reach the destination and offloading is done, the entire responsibility after this step comes on the buyer. The buyer will have to bear all risks and associated costs of the goods.

Thus, the above are some advantages and disadvantages of the concept.

The full form of CIF is cost, insurance, and freight. In this option, the contract seller will take responsibility for the goods and ensure that the same are insured against loss, theft, or damage when these are loaded onboard to be transported to the export port specified in the sales contract.  The seller will take care of the expenses about the costs, insurance, and freight of the goods, and as soon as the buyer receives the goods, the responsibility will pass on to the buyer. The seller will be relieved of this responsibility.

Both the above are two different forms of international shipping agreements where the cost sharing and the rules and responsibilities of both buyer and seller of goods are defined. However, let us learn more about the differences between them.

• It is the short term used for Cost, Insurance, and Freight, whereas FOB is the short form used for Free on Board. In this system, it is the responsibility of the seller to bear all the costs and liabilities of the goods till the time the buyer does not receive the same, whereas, in a FOB or free onboard mechanism, things are quite the opposite since it is the buyer who is responsible for bearing the costs and liabilities about goods transported and not the contract seller.
• Cost, Insurance, and Freight option gets relatively more expensive for buyers than the Free Onboard Option. The former puts a burden on the seller for the shipped goods. Whereas the latter, in a way, relieves the stress of the seller once the goods are loaded on board.
• From the above point it can be derived that in case of the former, the seller has the responsibility of paying for the insurance of the goods during transit so as to protect them against any loss, not the buyer. But in the case of the latter, the buyer is responsible for everything.

Thus, the main difference lies in the responsibility regarding the cost and the risks at different levels of transit and shipment. It is important to understand the differences so that the concept can be used successfully under appropriate circumstances

This article has been a guide to Cost Insurance & Freight (CIF) and its meaning. We explain it with example, differences with Free On Board & advantages. You can learn more about it from the following articles –

• CIP Stands For?
• General Obligation Bond
• Operating Expenses List
• Job Order Costing
• Revenue vs Income