Cost, Insurance and Freight (CIF) Meaning
Cost, Insurance and Freight (CIF) are the expenditures that are borne by the seller in order to cover not just the regular costs but also the charges pertaining to 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 that is 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 during the time 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.
How does It Work?
- Cost, insurance, and freight are confined to commodities that are transported by the inland waterway or sea. In this, a seller will need to arrange and pay for expenses pertaining to the transportation of goods to the export port that is mentioned in the contract pertaining to sales. The contract seller will deliver the goods that are mentioned in the sales contract. The risk of the goods will remain with the seller until the goods are not received by the buyer from the export port.
- Once the buyer receives the goods the risk passes on to the buyer of the goods. This means that the moment the goods are received by the buyer, the responsibility of the seller will end and the responsibility of the buyer will begin. The seller of the goods is totally responsible for all the related costs and liabilities (if any) until the buyer does not receive the goods. The contract seller will not be responsible for the loss, damage, or theft of goods once they are loaded onboard for being transported to the export port provided in the sales contract.
CIF vs FOB
- 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 totally 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 opposite since it is the buyer who is responsible for bearing the costs and liabilities pertaining to goods transported and not the contract seller.
- Cost, insurance and freight option get relatively more expensive for the buyers in comparison to the free onboard option. It still puts a burden on the seller regarding the goods that are shipped whereas free on board in a way relieves the stress of the seller once the goods are loaded on board.
The rules are as follows:
- General Obligations- The seller will need to abide by the rules of CIF and must necessarily provide a commercial invoice to the buyer of the goods.
- Delivery- The delivery of the goods will start from the time the goods are loaded on the board and not when the goods reach the export port mentioned in the sales contract.
- Transfer of Risk- The seller will have to bear all the risks pertaining to the loss, theft, or damage of goods until and unless the same is not received by the buyer.
- Carriage- The seller will be responsible for the carriage of the contracted goods from his place to the export port.
- Insurance- The seller is also responsible for the insurance of goods and he will need to get it all done at his own expenses.
- Delivery or Transport Document- The seller is also responsible for providing the buyer of the goods with the documents pertaining to transport or delivery.
- Export or Import Clearance- The seller will have to take care of all the formalities pertaining to export at his own risks and expenses.
- Checking or Packaging or Marking- The seller will have to pay the costs pertaining to checking the quality, packaging or marking of the goods.
- 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 pertaining to freight and insurance.
- Notices- The contract seller must issue a notice to the buyer confirming the delivery of the goods.
- 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 sort of risk during the time the goods are in transit.
- The seller has full rights to retain the transportation of goods until and unless the payment is not made by the buyer of the goods.
- The buyer will not need to stress about the transportation of the goods.
- This can be an expensive option for the buyer of the goods. This is because of the fact that the seller might charge the buyer of the goods more for earning more profits from the transaction.
- The buyer and seller of a contract might also face communication issues.
- The buyer might also have to bear extra costs at the export port pertaining to custom fees and dock fees prior to the clearance of the goods.
The full form of CIF is cost, insurance and freight and in this option, the contract seller will take the responsibility of the goods and will 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 pertaining to the costs, insurance, and freight of the goods and as soon as the goods are received by the buyer, the responsibility of the same will pass on the buyer and the seller will be relieved from this responsibility.
This has been a guide to What is Cost Insurance & Freight and its Meaning. Here we discuss how do CIF works, its rules along with advantages and disadvantages. You can learn more about from the following articles –