What it means
Incoterms are standard three-letter trade terms published by the International Chamber of Commerce that set out who does what in a shipment. Carriage and Insurance Paid, shortened to CIP, allocates cost one way and risk another, which is the single most misunderstood feature of the rule.
The seller must contract and pay for carriage to the agreed destination, clear the goods for export, and buy cargo insurance in the buyer's favour. Risk, however, passes at the first handover, so goods damaged halfway through the journey are the buyer's loss even though the seller paid the freight.
Insurance under this rule is set at a high level of cover, broadly all risks, for at least 110% of the contract value and in the contract currency. The extra 10% is intended to cover the buyer's expected profit and incidental costs as well as the invoice price of the goods.
The rule works for road, rail, air and multimodal movements as well as sea, which is the main difference from the older sea-only term with a similar name. A seller shipping by air, or by container through several carriers, should prefer this rule over a term written around loading onto a vessel.
Pricing a quote on these terms means building the freight and the premium into the selling price. The quote is comparable with the buyer's own arrangement only if the buyer knows what the freight and insurance inside it actually cost, which is why procurement teams often ask for an ex-works price alongside it.
The common nuance is the naming of the destination. The named place sets where the seller's cost responsibility ends, so a vague destination leaves unloading, inland haulage and terminal charges open to argument, and the term should always be written with a specific place.
In practice
Real-world examples.
Example
A German machine tool maker sells to a buyer in Brazil on CIP terms to the buyer's nearest airport. The seller books the air freight and an all-risks cargo policy for 110% of the invoice value, while the buyer handles import clearance, duty and the final road leg.
Example
A textile exporter shipping by sea container quotes CIP to a named inland city rather than to the port, so the price includes rail haulage from the port. Its finance team adds the inland leg and the terminal handling charge to the quote, because both fall on the seller under the named place agreed.
Example
A buyer of laboratory equipment suffers water damage to a crate in transit on a CIP shipment. Because risk passed when the goods were handed to the first carrier, the buyer claims on the policy the seller took out in the buyer's favour rather than asking the seller to replace the goods.
Formula
Calculation
CIP price = cost of the goods + export packing and clearance + carriage to the named destination + insurance premium on 110% of the contract value
A supplier sells machinery with a contract value of $200,000. Export packing and clearance cost $4,000 and carriage to the named destination costs $9,000. Insurance must be bought for 110% of $200,000, which is $220,000, and at a rate of 0.35% the premium is 220,000 x 0.0035 = $770. The CIP price is therefore 200,000 + 4,000 + 9,000 + 770 = $213,770, quoted as one figure to the named destination.Case study
Seen in the real world.
Halvard Instruments is an illustrative, fictional maker of calibration equipment that began exporting on CIP terms to win orders from buyers who disliked arranging their own freight.
The sales team quoted to named airports and the margin looked healthy, but the first year produced three disputes. In each case goods arrived damaged, the buyer asked Halvard to replace them, and Halvard explained that risk had passed at the first carrier and pointed to the insurance it had bought. The buyers had never been told how to claim, and two of the three relationships suffered.
Halvard changed its process rather than its Incoterm. Each shipment now travels with the policy certificate, the insurer's claims contact and a one page note explaining that the cover is in the buyer's name, with the insured value of 110% stated on the invoice. In this illustrative case the term was always correct; what was missing was explaining the risk split before the first claim arrived.
Watch out
Common mistakes.
- Assuming that because the seller pays the freight and the insurance, the seller also carries the risk of damage in transit.
- Insuring only the invoice value, when the rule calls for cover of at least 110% of the contract value.
- Writing the term without a specific named place, which leaves inland haulage, terminal charges and unloading open to dispute.
Questions
People also ask.
Where does risk pass under this rule?
When the goods are handed to the first carrier contracted by the seller, not when they reach the named destination.
How does it differ from the sea-only term with a similar name?
This rule works for any mode of transport and requires a higher level of insurance cover, while the sea-only version applies to vessel movements and requires only minimum cover.
Who claims on the insurance if goods are damaged?
The buyer, because the seller must arrange the policy for the buyer's benefit and should pass over the certificate and claims details with the shipping documents.
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