Full-Form of CIP (Carriage and Insurance Paid)
Full form of CIP means Carriage and Insurance paid up to a certain place. CIP is part of “INCOTERMS” which stands for International Commercial Terms. There are 11 “INCOTERMS” in total out of which CIP is a part. International Chambers of Commerce defines the INCOTERMS. INCOTERMS helps to standardize the export and Import process.
- All costs related to the delivery of goods say transportation, carriage, freight is paid by the seller to a certain point.
- This can be used in any mode of transportation, say you are sending goods by AIR, SEA or Land, it can be used
- The most important feature of carriage and insurance paid is that it is still a certain place. So when you are mentioning carriage and insurance paid, you need to mention the place.
- There is one rule of CIP for SEA transfer. It is only applicable for goods that are transported in sealed cargos. If there is any kind of good that is not stored in a container and sent, like Coal or Crude, this is not applicable
- If say CIP is mentioned till a place says New York port, then sellers responsibility ends till the port, now whether the seller will pay for the unloading or not depends on the terms already decided.
- When the Goods reach the decided carriage and insurance paid point, from there the buyer takes the responsibility and all other costs are paid by the buyer from there.
How does it Work?
Let’s understand this concept Step wise.
Say a seller in Srilanka wants to export 5 tonnes of coconut extracts to New York. He has mentioned that carriage and insurance paid New York Port, USA.
- Step 1: Srilankan seller will have to pay loading charge, transportation charge of the goods from factory to Srilankan Port and any freight charges that are charged for land transportation
- Step 2: When the goods reach the PORT, then it needs to be stored in a warehouse that charges will also be paid by the seller. Unloading charge at the port shall also be borne by the seller
- Step 3: Now the goods will have to be loaded in the vessel for transportation. This cost is also borne by the seller.
- Step 4: Seller will pay the SEA Freight charges for the transport.
- Step 5: Any goods when sent needs to be insured. So the seller will have to ensure 110% of the contract value. Any additional insurance will have to be borne by the buyer
- Step 6: Once the Goods reach New York port, then whether the unloading cost will be paid by the Seller or Buyer should be predefined as this may cause confusion.
- Step 7: Custom clearing charges will be borne by the buyer as the goods have reached the point where the carriage and insurance paid was agreed to. If carriage and insurance paid was agreed till the office in New York, then the custom charges will be paid by the seller
Difference Between CIP and CIF
- The main difference between CIF and CIP INCOTERMS is that CIP covers all modes of transportation and CIF covers only transportation via SEA. So this is a huge difference. The stretch of CIP is vast than CIF.
- Under CIF the responsibility of the seller is to board the goods in the vessel at the loading point. Say it is decided that goods will be transferred from port A to Port B, so CIF will help the buyer to get goods delivered safely by seller till the loading point of the port A. In carriage and insurance paid all the responsibility remains with the seller until the goods reach a pre-determined place. So all the charges and Insurance of the journey will be paid by the seller until the buyer gets the goods
- It is part of INCOTERMS, so this is a standardized agreement that helps to make trade between countries easier. Without proper guidance and stipulated terms it would have been really difficult to set terms regarding who will pay for the transportation charge, freights and other charges that are required to transport goods from one place to another
- It gives confidence to buyers as they are confident that there are trade rules that the seller can’t break. So this ultimately improves the frequency of purchase and sale of commodities between countries.
- It is also helpful to sellers as they now know an agreed place where their responsibility ends. Earlier it was difficult for the seller to know where exactly their responsibility is over and the buyer used to sue the seller whenever there used to be an obstacle in the transit.
- It helps the seller to know the exact charges they will have to pay, so it helps them to add the costs in the selling price.
- This is very helpful for businesses that are engaged in the Export and Import of goods. The export of goods involves lots of custom clearings and charges. So it is extremely important to know who exactly will pay the charges. This standardization is required for the expansion of international trade.
- In the growing economy, the world is coming closer. So the Export/Import has increased tremendously. It is also necessary to import goods if you are getting it at a lower cost than producing it In-House. So for this, we need to standardized trade between countries. It is a form of standardization.
This has been a guide to the Full Form of CIP i.e (Carriage and Insurance Paid). Here we discuss the features of CIP and how it works along with benefits and differences between CIP and CIF. You may refer to the following articles to learn more about finance –