Incoterms 2020 rules are the latest revision of international terms of trade published by the International Chamber of Commerce (ICC). They are recognized as the authoritative text for determining how costs and risks are allocated to parties conducting international transactions. Incoterms 2020 rules outline whether the seller or the buyer is responsible for, and must assume the cost of, specific standard tasks that are part of the international transport of goods. In addition, they identify when the risk or liability of the goods transfer from the seller to the buyer. So, how exactly Incoterms affects Insurance and Freight Cost. Weesholic has explained Incoterms 11 trade terms available under the Incoterms 2020 rules that range from Ex Works (EXW), which conveys the least amount of responsibility and Freight Cost with risk on the seller, to Delivered Duty Paid (DDP), which places the most responsibility and risk on the seller. The Incoterms 2020 Rules: Chart of Responsibilities and Transfer of Risk summarizes the seller and buyer responsibilities under each of the 11 terms.
For a summary of Incoterms 2020 and a short definition of each of the 11 terms, read An Introduction to Incoterms.
Incoterms affects Insurance and Freight Cost
Under the Incoterms 2020 rules, CIF means the seller is responsible for loading properly packaged goods on board the vessel they’ve nominated, cost of carriage to the named port of destination on the buyer’s side, and insurance to that point. CIF is one of only two Incoterms 2020 rules that identify which of the parties must purchase insurance.
Unlike the Incoterms 2020 change to the term Carriage and Insurance Paid to (CIP), which increases the amount of insurance coverage required on the goods, CIF maintains that the minimum level of coverage identified by Clause C of the Institute Cargo Clauses is enough. That’s because CIF is generally used in shipments of lower-value goods than CIP.
In both cases—CIF and CIP—the insurance should cover, at a minimum, 110% of the value of the goods as provided in the sales contract. The insurance should cover the goods at least to the point of delivery.
The risk or liability for the goods transfers from the seller to the buyer as soon as the goods are loaded upon the vessel before the international carriage takes place.
Weesholic – Incoterms, Insurance and Freight Cost
The ICC has divided the 11 Incoterms into those that can be used for any mode of transportation and those that should only be used for transport by “sea and inland waterway.” That’s because companies were choosing Incoterms where risk and responsibilities transferred at a point that made no sense in a non-ocean journey.
Under Incoterms 2020, CIF should only be used for sea and inland waterway transport.
Using Cost, Insurance and Freight
With all of the C-group terms, including CIF, the seller is responsible for contracting international transportation. The named place where the transfer of responsibility occurs is always on the buyer’s side.
Although buyers and less experienced exporters may prefer an F-group term, C-group terms are preferable to more experienced exporters. These terms allow you to deal directly with the carrier; documentation, bills of lading, and all the information needed for letters of credit originate from a single place. Additionally, using C-group terms gives you more negotiation power, especially if you book a lot of freight.
That being said, like all four of the Incoterms 2020 rules designed for sea and inland waterway transport, CIF is best used in situations where sellers have direct access to the vessel for loading, i.e., bulk cargos or non-containerized goods. For most exports, Carriage Paid To (CPT) might be a better choice.
Buyers should consider CIF if they do not have their own cargo insurance. Risk of loss or damage is greater by ocean freight. The seller can charge for insurance and should provide an insurance certificate. If the buyer wishes to keep the risk with the seller throughout transport, they should instead consider using DAP or DPU.
Learn More about Incoterms 2020 Rules
If you are regularly involved in international trade, you need to understand the risks and responsibilities as defined by Incoterms 2020 rules, not just pick the term you always use. Start by getting a copy of ICC’s Incoterms® 2020 Rules book.
For a more detailed understanding of which term or terms make the most sense for your company, register for an Incoterms® 2020 Rules seminar or webinar offered by International Business Training. If you don’t want to attend a half-day class, you can get the book provided at these seminars and webinars: Incoterms® 2020 for Importers and Exporters.
Read our articles about each of the Incoterms 2020 rules here:
- EXW (Ex Works)
- FCA (Free Carrier)
- FAS (Free Alongside Ship)
- FOB (Free On Board)
- CFR (Cost and Freight)
- CIF (Cost, Insurance and Freight)
- CPT (Carriage Paid To)
- CIP (Carriage and Insurance Paid To)
- DAP (Delivered At Place)
- DPU (Delivered At Place Unloaded)
- DDP (Delivered Duty Paid)
Weesholic believes that the brief understanding of Incoterms will help you in planning for optimized Freight Cost. If history is any indication, the Incoterms 2020 rules will be around for at least a decade. Now seems like the perfect time to make sure you understand each of the terms, so you can make sure you’re speaking the same language as your international trading partner.
