CIP(Carriage and Insurance Paid To) is a common term in international trade that outlines what the seller is responsible for. Under CIP, the seller must deliver the goods to the agreed-upon carrier and pay for the freight costs to get them to the destination. The seller must also purchase insurance to protect the buyer while the goods are in transit.
One of the advantages of CIP is its flexibility—it allows for various transportation methods, making it a good fit for many different trade situations. However, it’s important to note that once the goods are handed over to the first carrier (usually the one who starts the shipping process), the risk of loss or damage shifts from the seller to the buyer.
Responsibilities of the Seller and Buyer Under CIP Terms
Seller Responsibilities:
- Delivery According to Contract: The seller must deliver the goods per the terms set out in the sales contract.
- Packaging and Marking: The seller is responsible for properly packaging the goods to meet transport requirements and applying appropriate markings.
- Export Licenses and Formalities: The seller must obtain all necessary export licenses and handle customs formalities required for export.
- Transportation Contract: The seller must arrange and pay for the transportation of the goods to the agreed destination.
- Insurance Contract: The seller must purchase transport insurance that complies with the contract. This usually means comprehensive coverage, such as Institute Cargo Clauses (A), with the insured amount at least 110% of the contract value. The seller must provide the buyer with the insurance policy or proof of coverage.
- Delivery to Carrier: The seller must deliver the goods to the carrier (typically the first carrier) at the agreed place and time, fulfilling the delivery obligation.
- Transfer of Risk: Risk transfers from the seller to the buyer once the goods are handed over to the carrier.
- Provision of Transport Documents: The seller must provide the buyer with the necessary transportation documents so the buyer can receive the goods at the destination.
- Notice to Buyer: The seller must promptly notify the buyer when the goods have been shipped.
- Loading Costs: The seller is typically responsible for loading the goods onto the means of transport.
Buyer Responsibilities:
Inspection Rights: The buyer can inspect the goods at the agreed time and place.
Payment: The buyer must pay the purchase price as agreed in the sales contract.
Receipt of Goods: The buyer must receive the goods upon arrival at the destination.
Assumption of Risk: Once the goods are handed over to the carrier, the buyer bears all risks of loss or damage.
Import Licenses and Formalities: The buyer is responsible for securing all necessary import permits and completing any required customs procedures. The buyer must also pay any applicable import duties and taxes.
Unloading Costs: Unless otherwise agreed, the buyer bears the cost of unloading the goods at the destination.
Additional Insurance: If the buyer wants insurance coverage beyond the seller’s, the buyer must cover the extra cost.
When to Use CIP
CIP (Carriage and Insurance Paid To) can be used with any type of transport, including road, rail, air, sea, or a combination of these (multimodal transport). This term is especially useful when the buyer wants the seller to arrange for the goods to be transported and to purchase insurance for the shipment, but is willing to take responsibility for any problems that might arise once the goods are handed over to the first carrier.
Differences Between CIP and CIF
CIP (Carriage and Insurance Paid To) and CIF (Cost, Insurance, and Freight) are Incoterms requiring the seller to pay for freight and insurance. However, they differ in several important ways:
1. Applicable Mode of Transport
- CIP: Can be used with any mode of transport, including multimodal (e.g., truck-to-ship-to-rail).
- CIF: Limited to sea and inland waterway transport only.
2. Transfer of Risk
- CIP: Risk transfers to the buyer when the seller hands the goods to the first carrier.
- CIF: Risk transfers to the buyer when the goods pass the ship’s rail at the port of shipment.
3. Insurance Coverage
- CIP: The seller must obtain comprehensive insurance coverage, typically under Institute Cargo Clauses (A) or equivalent, with a coverage amount of at least 110% of the contract value.
- CIF: The seller is only required to obtain minimal insurance, usually under Institute Cargo Clauses (C) or similar, unless a higher level is specifically agreed upon.
CIP reduces the buyer’s risk
Under CIP terminology, the seller bears the cost of transportation and insurance, thereby reducing these costs for the buyer. Additionally, by arranging insurance, the buyer can mitigate risks during transportation, thereby providing peace of mind throughout the transaction.
At the same time, when the goods are delivered to the designated carrier, the risk is transferred to the buyer, and the seller’s liability is reduced accordingly. However, care must be taken in pricing as the seller bears the entire cost, including insurance and transportation costs.
Incoterms 2020 changed the insurance coverage under CIP terms to require the seller to carry the highest level of insurance (ICC-A). This change means that CIP terms provide more comprehensive insurance coverage, further enhancing the buyer’s risk aversion.
What is the difference between CIP and CIF?
CIP and CIF are both important terms in international trade, each with its own distinct characteristics.
This article compares and explains the scope of application, cost and risk bearing points, insurance coverage and other important differences between CIP and CIF.
What is CIF?
CIF (Cost, Insurance, and Freight) is a trade term in which the seller bears the costs of transporting, insuring, and delivering the goods to the buyer’s destination. Under
Under this term, the seller assumes the risk of loss of or damage to the goods during transportation until the goods arrive at the port of destination. However, once the goods arrive at the buyer’s designated port, the risk of loss or damage passes to the buyer.
The CIF term is primarily used in transactions involving sea and inland waterway transportation, offering advantages, especially when the importer is unfamiliar with the transportation process and insurance procedures, and the buyer has no control over the mode of transportation or the quality of insurance chosen by the seller.
Scope of application
- CIP (Carriage and Insurance Paid To) is applicable to all modes of transportation. This means that it can be applied to land, air, and sea freight, making it very flexible for transactions that combine multiple modes of transportation.
- CIF (Cost, Insurance and Freight) is a trade term that applies only to ocean freight. It is designed primarily for ocean freight and cannot be used for other modes of transportation. This difference makes CIP suitable for transactions that require multiple modes of transportation.
Timing of Cost and Risk Assumption Transfers
CIP and CIF differ in the timing of cost and risk transfer.
- Under CIP, the seller bears the cost of transportation and insurance of the goods to the named destination, but the risk is transferred to the buyer when the goods are delivered to the carrier. In other words, the buyer bears the risk only after the goods are delivered to the carrier.
- In contrast, under CIF conditions, the risk is transferred at the port of export. The seller assumes the risk up to the port of export and pays for transportation and insurance from the port of export to the port of destination. Thus, under CIF terms, the seller is responsible up to the port of destination, so the point in time for risk management is different.
Insurance Coverage
- Another important difference between CIF and CIP is insurance coverage. Under Incoterms 2020, CIF requires the lowest level of insurance (ICC-C), which provides the minimum insurance coverage for basic risks.
- CIP, on the other hand, now requires the highest level of insurance (ICC-A), which provides comprehensive insurance coverage for a wider range of risks. This change enables buyers choosing CIP to enjoy more comprehensive insurance coverage and enhanced protection against risks during transportation.
Choosing the right terms according to the content and purpose of the transaction
CIP and CIF also differ in the details of the applicable rules and conditions. For example, CIP requires more stringent insurance arrangements, requiring the seller to select appropriate insurance and provide the buyer with a certificate of insurance. CIF, on the other hand, requires only basic insurance and has a more limited scope of coverage.CIP
CIP is also often used as a broader trade term to encompass modes of transportation other than ocean freight. CIF, on the other hand, is designed for ocean transportation and is therefore more suitable for trade transactions that primarily involve ocean transportation.
described in this section, there are significant differences between CIP and CIF in terms of their scope of application, cost and risk-bearing points, and insurance coverage. Needless to say, the choice of the appropriate terminology (CIP or CIF) is crucial, depending on the content and purpose of the transaction.
The CIP (Carriage and Insurance Paid) process in trade
Finally, we will look at the flow of trade transactions using CIP (Carriage and Insurance Paid To). We will explain the important points and procedures in each step, from the conclusion of the contract to the arrangement of transportation and insurance, to the commencement of transportation, to the reception of the goods at the destination, and to after-sales service.
① Conclusion of Contract
Firstly, the buyer and seller select CIP terms as the trade terms and sign a contract. At this stage, both parties agree on details such as transportation costs, insurance coverage and risk transfer points. In particular, if you are using Incoterms 2020, ensure that you specify the insurance coverage (ICC-A) applicable to CIP.
② Transportation and Insurance Arrangements
After the contract is signed, the seller will arrange transportation to the designated destination and insurance of the goods. The mode of transportation shall be chosen to ensure that the goods arrive at the destination safely and efficiently.
For insurance, the seller will choose ICC-A insurance, which provides comprehensive coverage in accordance with Incoterms 2020 to ensure adequate protection against risks during transportation. Upon completion of the arrangement, the seller will provide the buyer with relevant documents including proof of insurance and inform the buyer of any necessary information.
③ Commencement of transportation
The seller ships the goods using the specified mode of transportation. At this point, the risk passes from the seller to the buyer when the goods are delivered to the carrier. However, the seller is still responsible for transportation costs and insurance.
This protects the buyer from the risk of damage to the goods during transportation, while the seller remains responsible for ensuring the goods’ safety during transportation.
④ Pickup and Delivery at Destination
The buyer picks up the goods at the designated destination. Once the goods are received, the transaction is complete. The buyer can receive the goods with peace of mind as any damage that occurs during transportation is covered by pre-arranged insurance. If an insurance claim is required, the seller will assist in contacting the insurance company to facilitate the process.
⑤ After-sales support
Even after the transaction is completed, the seller will provide support as needed to resolve any shipping or insurance issues. In particular, the seller will respond promptly and assist the buyer in obtaining appropriate compensation for any issues that arise during transportation or with insurance claims. This will help maintain trust after the transaction and ensure future business opportunities.
