Cost, insurance and freight, better referred to as CIF, indicate the responsibilities of sellers in the shipping transaction in the import and export business. From the loading of the goods to providing insurance, sellers have to bear the onus until the goods reach the port of destination. CIF can be best defined as an agreement that establishes the extent to which sellers and buyers are held responsible for merchandise which is shipped across the seas. A CIF also enables sharing the shipping costs once the buyers and sellers familiarise themselves with the details stated therein. It clearly demarcates the responsibilities of sellers and buyers with regard to specific processes in the entire transaction. A CIF is a globally acknowledged official agreement applicable to all transactions made by sea. It is important for all buyers and sellers involved in such transactions to understand the minute details of such agreements. Until the goods reach their port of disembarkment, the seller is responsible for all expenditures pertaining to any unforeseen damage to the goods. The sellers must also bear any losses that occur while the goods are in transit.
Did you know? Cost, insurance and freight terms were established in 1936 by the International Chamber of Commerce (ICC)
What is Cost, Insurance, and Freight (CIF)?
A CIF document includes the details of the buyers, sellers, port of embarkment of the goods by the buyers and details of the final destination of the goods. It includes the various details that are binding on the buyers and sellers. The transportation of any merchandise by sea or other waterways comes with a set of rules and conditions. Cost, Insurance and Freight are expenses binding on the sellers of goods delivered by sea. In addition to the regular costs, sellers are also held responsible for various other costs while the goods are in transit. Some of these are:
- Insurance-related costs
- Theft of goods
- Damage caused to goods
However, sellers hold the right to offer only minimum insurance cover for the said goods. If the buyers in question require more protection by way of insurance, they can discuss the same with the sellers or arrange for the same on a personal level. As soon as the merchandise reaches the address of disembarkment, the risks of the goods and the costs for offloading and delivering the goods are passed on to the buyers.
Understanding Cost, Insurance, and Freight (CIF)
A CIF agreement clearly distinguishes the various liabilities that are obligatory to sellers. It states the official duties of the sellers from when the goods are packed, loaded, and in transit until they reach the said delivery address. The buyers' liabilities start when the merchandise arrives at the point of delivery, and thereafter the risk of all expenses is transferred to the buyers in question.
What Are Seller's Responsibilities?
Every commerce transaction involves a lot of mature responsibilities which are binding on all the individuals involved in the activity. A seller’s responsibilities in a CIF trade agreement in the case of water-way transactions are no exception to the rule. The responsibilities entrusted to sellers are justified and have to be complied with in a professional manner. Some of the key ones are as follows:
- At the onset, sellers must procure the requisite export licenses to ship the merchandise.
- Proper scrutiny of the agreement details avoids any lapses regarding the shipment, insurance, and other vital details. Their expenses begin from bringing the packaging of the merchandise. Sellers have to ensure that different types of packaging apply to different goods. The packaging has to be extremely secure to ensure no damage is done to the goods.
- The correct address has to be worded across every consignment. The receiver’s name, address, contact numbers, as well as other details like registration and license numbers, if any.
- Safe delivery of the goods to the port from where the goods are dispatched.
- An organised and proper count of the total number of goods and seamless uploading of the entire consignment.
- Sellers have to bear all the costs involved in the shipping activity. This includes the packing, delivery, as well as uploading of the goods. In case of a delay in the delivery of goods, or any damage or theft of the goods, sellers are liable to bear the costs.
- Some of the other expenses include custom clearances and payment of taxes wherever levied.
- All insurance expenses until the goods reach their final delivery port are incurred by sellers.
- Sellers can also furnish the buyers with requisite invoices to affirm the expenses they have incurred. This is often done to establish a professional relationship for future consignments.
- Provision of quality and weight certificates to the buyers for every consignment is one of the key responsibilities of buyers.
What Are Buyer's Responsibilities?
The responsibilities of buyers in such shipments are equally demanding. These are as follows:
- Buyers must possess the appropriate authorisations, licences, and permits to import merchandise.
- Buyers have to bear all the custom duty-related expenses of importing the merchandise.
- Once buyers are intimated about the exact date of arrival of the goods, they have to ensure the goods are offloaded properly without any breakages. The entire risk of the safety and timely delivery of the goods becomes the buyers' responsibility.
- They are responsible for the delivery costs of the consignments.
- Any damages, theft or breakages that occur after the buyers receive the goods must be compensated by them.
Also Read: What are the Pros and Cons of Free Trade?
What Does the Transfer of Risk Signify?
The risks or liabilities of the buyers and sellers are clearly denoted in the CIF agreement. The transfer of risk from buyers to sellers takes place at a specific point of time as compared to the transfer of bearing costs. The multiple liabilities of sellers include insurance coverage, freight, shipping, and delivery and uploading of the merchandise. Once the consignment is uploaded, the risk is transferred to the buyer. However, if any part of the entire consignment experiences some form of damage when in transit, buyers have the right to file a claim with the insurance company of the sellers. Once the goods arrive at their final destination, the risks associated with the shipment very naturally are passed on to the buyers. The buyers have to consider the safe delivery of the goods or pay for the damages that take place. They have to bear the cost of transporting the consignments, custom clearance charges as well as all other formalities until they successfully deliver the goods.
A CIF agreement tends to become incongruent with the shipping terms and serves to be unfair, especially to buyers in some situations. There have been incidents where a buyer delivers the consignment to the port from where it must be dispatched. However, the goods are sometimes kept in containers in a godown for a couple of days. This increases the risks of the buyers as goods in containers waiting to be uploaded to the right vessel for delivery don’t have insurance coverage. Under such circumstances, a CIF agreement holds no weightage, and it proves to be inept for such a transaction.
Examples of Cost, Insurance, and Freight (CIF)
Given below are a few examples of cost, insurance and freight
ABC chocolates make a shipment of 10 lakh fruit and nut chocolates from Delhi to New York. During the shipment, the storage facility has a breakdown. This affects the chocolates, which become soft and start to melt. ABC chocolates have agreed to bear the risks involved (as per the CIF document) during the process of transporting the goods. It also bears the shipping expenses and insurance coverage. However, it can file a claim with its insurance company for the consignment of melted chocolates.
A Chinese firm makes transportation of 40,000 mobile phones to a company in South Korea with a CIF agreement. The Chinese firm makes the requisite delivery to the port from where the mobiles are to be shipped to a company in South Korea. After the uploading of the consignment is completed, the risk is transferred to the South Korean company. The Chinese firm has already made an insurance purchase and fulfils all its payment obligations in terms of shipping and freight expenses until the consignment reaches South Korea. During the transportation by sea, a short circuit occurs and damages almost 50% of the phones. Thanks to the CIF trade document, the South Korean firm can file insurance claims for mobile phones that have been damaged.
Cost, insurance and freight (CIF) serve as a purposeful trade contract whereby sellers can claim insurance coverage for goods that are destroyed, stolen or damaged in transit. Once the buyers receive the goods, the risks are transferred to them. A CIF agreement can prove to be an expensive affair for buyers of merchandise as sellers tend to charge more to enjoy optimum profits. Once the risks are transferred to the buyers, the sellers are free of all anxiety. These binding responsibilities are globally applicable to the shipping industry. Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.