Table of Contents
Having clarity on the terms of a contract is key when it comes to international trade.
To ensure that both parties understand the terms of an agreement, the International Chamber of Commerce has laid out a set of rules called Incoterms.
One of the rules that define the responsibilities of exporters and importers is CIP (Carriage and Insurance Paid To).
This blog post provides an all-encompassing look into the CIP shipping term, outlining both parties' responsibilities, a real-life example, as well as the advantages and disadvantages. We cover every inch of this phrase in order to give you a comprehensive understanding of how it works and its repercussions.
What Is Carriage Paid and Insurance Paid To (CIP)?
The CIP Incoterm defines that the seller is responsible for arranging and paying for carriage, including loading costs and transportation to the agreed upon destination port. The seller also agrees to take out an insurance policy on behalf of the buyer in order to cover any loss or damage that may occur during transit.
Once the goods have arrived at the destination port, responsibility shifts to the buyer, and it's the exporter's responsibility to pay for unloading costs and any customs fees or taxes associated with the shipment.
CIP Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges +insurance + profit share
Obligations Under the CIP Incoterm
- Export customs formalities and documentation
- Packaging and labeling
- Pre-shipment inspection for export clearance (if applicable)
- All-risk insurance coverage
- Arranging and paying for freight, including loading costs
- Pay for unloading costs at the destination port
- Cost of delivery to the named place of destination
- Import customs formalities and documentation
- Cost of delivery to the final destination
- Pre-shipment inspection for import clearance (if applicable)
- Unloading and loading costs at the destination port
CIP Point of Risk Transfer
The CIP Incoterm can be slightly confusing since the seller pays for insurance and freight, but the transfer of risk happens at the destination port. The Incoterms 2020 rules state that the seller bears responsibility for the goods till the delivery is addressed.
However, under the CIP shipping term, the delivery is addressed at the carrier, and therefore the risk of loss or damage to the goods transfers from seller to buyer at that point.
The South African buyer placed an order with an Italian supplier for 10 tons of fruit. The Italian company agreed to use the CIP Incoterm and offered a good price for the delivery of the product.
The supplier then arranged shipping with a carrier that included insurance coverage and paid all related fees. Once the goods arrived at the destination port in South Africa, it was then up to the buyer to pay for unloading costs and import customs fees and duties.
Benefits and Drawbacks of CIP
The main benefit of the CIP Incoterm for exporters is that the seller is only responsible until the delivery address. This in turn also minimizes the risk of non-payment. As the exporter, you don’t need to worry about import customs clearance as the buyer will handle this.
On the flip side, sellers may end up paying high freight and insurance costs if they're inexperienced or unaware of the market.
The main benefit of CIP for importers is that they only need to pay for unloading costs and import customs fees, making it a cost-effective option.
On the downside, buyers may incur losses if goods are damaged or lost in transit, as they haven't booked insurance themselves. Additionally, the buyer might need to book additional insurance if the seller opts for a less comprehensive option.
Is CIP the Right Choice for Your Business?
Carriage and Insurance Paid To (CIP) is a popular shipping term choice for many businesses due to its convenience and cost-effectiveness.
However, some risks must be taken into consideration when selecting this delivery term, as it may not always be the most suitable option depending on the type of goods being shipped. High-value products may require more comprehensive insurance, while buyers of commodities can opt for CIP if the seller is willing to pay for adequate insurance.
Overall, CIP terms can be beneficial for both exporters and importers if they understand the risks and obligations associated with this shipping term. Our team of experts can help you evaluate your options and pick the ideal shipping contract for your needs. Get in touch with us to get started.
What is the difference between CIP and DAP?
The difference between Carriage and Insurance Paid To (CIP) and Delivered At Place (DAP) is that with CIP the seller pays for both the freight and insurance costs from their facility to the destination port, while with DAP they only pay freight charges. In both cases, the responsibility for unloading at the destination is on the buyer.
What is the difference between CIP and DDP?
The difference between Carriage and Insurance Paid To (CIP) and Delivered Duty Paid (DDP) is that with CIP the seller pays for both the freight and insurance costs from their facility to the destination port, while with DDP they are also responsible for other charges such as duties, taxes, and other fees related to customs clearance.
What is the difference between CIP and CIF?
The main difference between Carriage and Insurance Paid To (CIP) and Cost, Insurance, and Freight (CIF) is who pays for what. Under a CIP agreement, the seller is responsible for most of the costs, whereas under the CIF agreement, the buyer has to cover expenses such as freight payments, cargo insurance, and customs clearance.
What is the difference between CIP and CPT?
The difference between Carriage and Insurance Paid To (CIP) and Carriage Paid To (CPT) is that with CIP the seller pays for both the freight and insurance costs from their facility to the destination port. In contrast, with CPT the insurance is not included.