CIF is one of the most frequently used incoterms in foreign trade transactions, but it is widely misunderstood and misused by the practitioners.
For example CIF term is commonly used with land or air shipments, whereas CIF can only be used with sea shipments according to ICC Incoterms 2010 rules.
Additionally, under CIF trade term risk passes from exporter to importer when the goods are shipped on board a vessel at the port of loading.
But many exporters believe that their risk will not be over until goods are being discharged at the port of destination.
Above I have defined two major misunderstandings regarding the mode of transport usage and delivery responsibility of the CIF incoterms.
Now I would like to focus on the insurance coverage of the CIF incoterms.
Important Note: Although I will explain how to calculate minimum insurance cover under CIF Incoterm 2010, you can use the same calculation method for CIP Incoterms 2010 as well.
According to CIF Incoterms 2010 rule, the exporter must obtain, at its own expense, marine cargo insurance complying at least with the minimum cover provided by Marine Cargo Clauses (C) of the Institute Cargo Clauses (LMA "Lloyd's Market Association" / IUA "International Underwriting Association") or any similar clauses.
- Exporter has to buy the insurance policy from a reputable insurance company, in which the importer, or any other person having an insurable interest in the goods, could claim the compensation of the loss directly.
- The exporter should increase the insurance cover, Marine Cargo Clauses (A) or (B) of the Institute Cargo Clauses (LMA/IUA) or any similar clauses, only if the additional cover cost will be paid by the importer.
- The exporter should add additional insurance clauses, such as Institute War Clauses and/or Institute Strikes Clauses (LMA/IUA) or any similar clauses, only if the additional cover cost will be paid by the importer.
- The insurance shall cover, at a minimum, the price provided in the contract plus 10% (i.e., 110%) and shall be in the currency of the contract.
- The insurance shall cover the goods from the point of delivery set out in A4 and A5 to at least the named port of destination.
- The seller must provide the buyer with the insurance policy or other evidence of insurance cover.
- Moreover, the seller must provide the buyer, at the buyer’s request, risk, and expense (if any), with information that the buyer needs to procure any additional insurance.
I have described above that the minimum type of cargo insurance, which must be provided by the exporter is Institute Cargo Clauses (C) under CIF deliveries.
Additionally, minimum insurance coverage should be at least 110% of the invoice amount of the goods.
Now I would like to give you an example to further clarify the subject.
Example 1:Please feel free to let us know your thoughts through your comments.
An exporter from South Korea, who produces ceramic kitchen ware, signed a sales contract with an importer from Sweden. The goods will be shipped from Busan Port to Gothenburg Port with the transit time around 42 days. Goods will be loaded on 24 pcs of euro pallets in a 40ft container.
FOB value of the goods are 96.000USD and the freight cost between Busan Port to Gothenburg Port is 3.820USD and insurance premium is 180USD. Delivery term is CIF Gothenburg Port, Incoterms 2010.
The question is what is the minimum insurance coverage should be according to information given above.
Answer: According to Incoterms 2010 rules, minimum insurance cover should be at least the price provided in the sales contract plus 10% (i.e., 110%) and shall be in the currency of the contract.
In order to calculate the minimum insurance cover, first of all we have to find the CIF value of the goods.
- CIF Value of Goods : 96.000USD, Freight:3.820USD and Insurance:180USD: total CIF value is 100.000USD.
- Minimum Insurance Cover: 100.000USDx110=110.000USD