The subtle differences between INCOTERM CIF and CIP seem minuscule at first until you closely inspect and compare the two in several aspects. After rigorous mouse clicks and research about both the INCOTERM Rules, we surmise that the two look rather different.
Before that, we have to point out that the best description of all 12 INCOTERMs can only be accurately described by the people responsible in drafting the Rules, the International Chambers of Commerce (ICC) came up with the INCOTERM in order to eliminate any ambiguity in trading between the buyer and the seller.
Here are the aspects we will look into to decipher the difference between CIF and CIP
|CIF 2020||CIP 2020|
|Description||Cost, Insurance and Freight||Carriage and Insurance Paid To|
|Mode of Transportation||Sea Transport Only||All Mode of Transport|
|Transfer of Transportation Responsibility||Once the cargo has arrived at Sea Port of Discharge||Once the cargo has arrived at an agreed destination at the Country of Discharge|
|Insurance Coverage||Coverage up to the Sea Port of Discharge||Coverage up to the agreed destination at the Country of Discharge|
|Transfer of Risk||At the Sea Port of Discharge||Once Cargo is transferred to First Carrier|
Mode of Transportation
This is the easy part; CIF 2020 is classified for sea transportation only.
Whereas CIP 2020 is used for all modes of transportation, whether it is the sea, air, railway, or road.
Transfer of Transport Responsibility
With CIF 2020, the seller takes the responsibility for transporting the cargo from the seller’s factory to the seaport of discharge.
Once the cargo is staged at the port’s container yard, effectively the responsibility of transporting the cargo from the destination’s port yard to the final destination lies on the buyer.
With the CIP 2020, the seller takes the responsibility for transporting the cargo to a named destination of the buyer’s choice. Since CIP includes all modes of transportation, it could be an airport terminal, a railway terminal, a container depot yard, or a warehouse of the transporter’s choice.
Insurance Coverage of CIP and CIF
Both CIF and CIP INCOTERMS requires the seller to purchase the insurance on behalf of the buyer.
It is clearer with CIF, as the seller agrees to purchase marine insurance to cover the journey up to the seaport of destination.
On the other hand, although CIP generally sets upfront that the seller is required to purchase insurance, there are no hard rules on how much coverage minimum is required.
This is important as the risk of ownership of the goods transported is different between CIF and CIP, which we will explore further below.
Marine Cargo Insurance has 3 forms of coverage, Institute Class (A), Institute Class (B), and Institute Class (C).
Class A is the most extensive coverage therefore the most expensive whereas Class C is less extensive and demands lower insurance premiums.
A seller can get a Class (C) coverage and still fulfill the requirements set in the INCOTERM Rule unless the buyer explicitly requires other forms of insurance coverage.
Transfer of Risk of CIP and CIF
The transfer of risk does not mean the same thing as the transfer of transport responsibility. You might realize we specifically avoid using the term “Transfer of ownership” to describe the transfer of risk too. All the three from of “transfers”, we argue are separate and we don’t want to confuse our readers of the three.
Transfer of ownership is where the possession of goods is transferred from one party to another, usually a documentary transfer with a Bill of Lading Form.
On the other hand, the Transfer of transport responsibility is where the responsibility of moving the cargo has been transferred from one party to another.
the Transfer of Risk is where the risk of moving cargoes is transferred from one party to another, as dictated by the INCOTERM rule arranged.
Ideally, the transfer of transport responsibility, transfer of risk and transfer of ownership happens at the exact same point to avoid any ambiguity. But the transfer of ownership and the transfer of risk sometimes happen at different points of the transportation journey.
The key distinction between CIF and CIP is that although in a CIP term the seller arranges the carriage of goods to a named destination, plus insurance, the seller’s risk of transportation is transferred to the carrier once the first carrier has picked up the cargo.
To reiterate, yes the seller pays for the transportation, but at the risk of the buyer.
Case Example for Transfer of Risk
For example, in a Free on Board or (FOB) shipment, the seller is responsible for transferring the cargo to the port, clearing customs for export and stage the container onto the booked vessel.
Once the container is “shipped on board”, detailed in the Bill of Lading, the seller then arranges the Original Bill of Lading to be couriered to the buyer once he receives the payment.
In this scenario, the shipment term is FOB, the buyer arranges the freight booking with their own contracted agent.
At this specific point, before the Original Bill of Lading reaches the hand of the buyer, the ownership of the goods is not yet transferred to the buyer, however, the risk of transportation has been transferred to the buyer as determined by the INCOTERM.
If there is cargo damage on board of the vessel, and the damage is proved to be damaged by the carrier, the buyer cannot argue that he/she hasn’t had ownership of the goods yet if the Bill of Lading hasn’t reached him. He can only lay the damage claim to the ocean carrier he was responsible to arrange.
Graphic contribution: incotermsexplained.com