Why CIF (Cost, Insurance and Freight) shipping terms can be a risky proposition for importers

Why CIF (Cost, Insurance and Freight) shipping terms can be a risky proposition for importers

Cost, Insurance and Freight (CIF) is among the most widely used Incoterms® in international trade. At face value, CIF offers buyers comfort: the seller is responsible for arranging carriage to the named port of destination and for procuring cargo insurance on the buyer’s behalf. However, beneath this apparent convenience lies a set of nuanced risks that buyers often overlook. These risks relate primarily to the adequacy of insurance cover, the scope and duration of that cover, and the valuation basis applied when losses occur.

There are three commonly misunderstood aspects of CIF from the perspective of an importer, which highlight why relying solely on seller-arranged insurance may not always align with the buyer’s actual risk profile.

1. Minimum insurance obligations – is “minimum” enough? 

Under CIF, the seller must procure insurance that at least complies with the cover provided under Institute Cargo Clauses (C), unless the parties agree otherwise. The “minimum cover” standard creates several challenges for buyers:

• Limited coverage scope: Institute Cargo Clauses (C) cover only a narrow range of perils such as fire, stranding, sinking, or collision. They do not respond to losses arising from theft, rough handling, improper stowage, or weather-related damage, which are common in modern supply chains.
• Absence of additional benefits: many Australian importers rely on extensions such as Debris Removal Costs, Airfreight Replacement Costs, and Concealed Damage. There is no obligation under CIF for the seller to secure such extensions, and even if they are included, the sub-limits may be insufficient given the higher cost environment in Australia.
• Buyer’s loss of control: by relying on the seller, the buyer effectively outsources a critical risk management function. The insurance purchased may meet only contractual minimums rather than the buyer’s specific requirements.

Practical consideration:
Importers seeking broader coverage should weigh the benefits of contracting on CFR terms (Cost and Freight) and arranging their own cargo insurance. This allows the buyer to control both scope and adequacy of cover, tailoring it to their own exposures.

2. Duration of insurance cover – where does it really end?

CIF requires the seller to arrange insurance “against the buyer’s risk of loss or damage to the goods from the port of shipment to at least the port of destination.” The wording “at least” is critical but often misunderstood.

• Misconception of termination at port of destination: many importers believe cover ceases upon arrival at the named port of destination. This is not correct. Incoterms® regulate obligations between Buyer and seller, not the scope of the insurance contract itself.
• Institute Cargo Clauses “warehouse to warehouse”: where cover is arranged under Institute Cargo Clauses (A), (B) or (C), insurance typically operates on a “warehouse to warehouse” basis, extending beyond the port to the final delivery point (subject to termination provisions and the buyer holding insurable interest).
• Practical risks in split coverage: where Buyers assume that seller arranged insurance ends at the port and take out a separate local cover thereafter, claim complications can arise. If damage is discovered after arrival, it can be difficult to prove whether the loss occurred pre- or post- discharge.

Why banks insist on clarity:
Financial institutions issuing letters of credit frequently require that seller-arranged insurance explicitly notes “warehouse to warehouse” coverage on the certificate. This reduces disputes and aligns with standard cargo insurance practices.

Practical consideration:
Unless expressly agreed otherwise, the scope and duration of the seller’s insurance is determined by the insurance contract itself, not by the CIF rule. buyers should seek evidence of the actual insurance wording before shipment.

3. CIF + 10% – the misunderstood valuation basis

Under CIF, the seller must arrange insurance to cover the contract value of the goods plus 10%. This CIF+10% requirement is often misinterpreted:

• Not a profit element: the additional 10% is not intended to compensate for the buyer’s loss of profit. Rather, it acknowledges that at the time insurance is placed, the seller cannot know the final costs the buyer will incur upon importation, such as duties, inspection fees, and inland transportation.
• Risk of underinsurance: for Australian importers, actual landed costs can exceed CIF+10%, particularly where duties, and inland logistics costs are significant. In such cases, the buyer may not be fully indemnified following a loss.

Practical consideration:
buyers arranging their own insurance can stipulate a valuation clause that reflects the full delivered cost of the goods, ensuring they are appropriately insured.

Conclusion: CIF – convenience or compromise?

CIF offers the veneer of convenience by placing responsibility for freight and insurance with the seller. Yet, for importers, this convenience can conceal material risks:

• Insurance may meet only minimum requirements and lack key extensions.
• Confusion often arises as to where cover terminates, creating disputes.
• The CIF+10% valuation basis may not match the buyer’s actual exposure.

For Australian importers, where regulatory costs, duties, and inland logistics are significant, these nuances take on particular importance. Importers are best advised to carefully review the adequacy of seller-arranged insurance, request full details of the cover, and strongly consider using CFR terms while procuring their own bespoke cargo insurance program.