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Incoterms CIP | Carriage and Insurance Paid To

Explore the essentials of Incoterms CIP, understanding how ‘Carriage and Insurance Paid To’ benefits global trade, ensuring secure and insured delivery.
Incoterms CIP,Carriage and Insurance Paid To

Table of Contents

One of the 11 globally used Incoterms is CIP (Carriage and Insurance Paid to). It essentially dictates who will pay for the freight and insurance of the goods being traded. Standardized by the International Chamber of Commerce (ICC), CIP is frequently used worldwide to trade all types of goods. 

If you’re new to international trading, you should be fully familiar with this term. Keep reading this guide to learn everything you need to know!

Understanding Incoterms CIP

To understand CIP, let’s look at its definition and responsibilities for sellers and buyers.

Incoterms General Table,DDP, FOB, DAP, EXW, CIF, FCA, FAS,CFR, CTP, CIP, DAT

Definition of CIP

According to the latest Incoterms standard published by the ICC, CIP means the seller delivers the goods to a carrier or person chosen by the seller at a location (agreed between the parties) and that the seller must arrange and pay for the costs of carriage to bring the goods to the named place.

In CIP, the seller pays for the freight and insurance for delivering the goods to an agreed-upon location/carrier appointed by the seller and agreed upon by the buyer.

During transit to this location or carrier, the seller assumes the risk. However, the risk transfers to the buyer once the goods reach the agreed-upon person, carrier, or location. The location may not necessarily be the final destination of the cargo. 

Key Features of CIP

  • Used with a destination agreed upon by the buyer and seller
  • May involve any mode of transport (road, rail, air, or water) or multimodal transport
  • Seller bears all the risk and pays for insurance up to the named destination
  • Insurance must be 110 percent of the contract value (any insurance above that must be arranged by the buyer)
  • Seller prepares the invoice and ensures the proper packaging and labeling
  • Seller pays the export duties and taxes as well as loading and freight charges
  • Seller must also provide proof of delivery
  • Buyer pays any terminal handling charges at the destination
  • Buyer pays for the offloading charges and import duty
  • Buyer bears the cost and risk after delivery at the named destination

Benefits of Using CIP in International Trade

The benefits of using CIP vary whether you’re the exporter or the importer. As such, there are advantages for both parties as well as drawbacks. 

For buyers or importers, the risk is minimized, as the seller assumes all the risk and pays for the insurance.

Should the goods get damaged during transport, the seller will bear any losses. And the minimum requirement for insurance, as per the latest Incoterms® 2020 standard from the ICC, is 110 percent.

This insurance is determined using the total contractual value. As a result, the goods are fully insured and paid for by the seller. However, the seller may consider that in the goods’ pricing. 

Also, the buyer doesn’t have to take care of any export taxes or all the paperwork that comes with them. This can benefit buyers who may not have a presence in the country they’re importing from. So, this form of trade agreement saves the buyer the hassle of arranging transportation and insurance for the goods. 

The benefit of CIP for sellers is that they’re only responsible for delivery until the named destination, which may not necessarily be the final destination of the goods. This simplifies things for the exporter, who doesn’t have to worry about paying for freight or insurance beyond that point. They also don’t have to worry about paying import duties at the port. 

Comparative Analysis: CIP vs. Other Incoterms

There are other Incoterms that are somewhat similar to CIP. Among the most commonly used alternatives to CIP are Cost, Insurance, and Freight (CIF) and Delivered at Place (DAP). Let’s see the differences:

CIP vs. CIF

CIF, like CIP, defines the responsibilities of the seller and buyer in international trade. CIF is similar to CIP, except it applies to goods transported through waterways (inland and sea). The seller and buyer agree on the destination port where the seller must deliver the goods.

In CIF, the seller is responsible for arranging and paying for shipping and insurance for the goods up to the destination port. In comparison, CIP may involve an inland destination. 

Another thing to note is that under CIF, the risk is transferred to the buyer once the goods are loaded onto the vessel. The freight cost and cargo insurance are still the seller’s responsibility. The seller must also pay the export duties and handle all the paperwork, including any special documentation at the export port.  

On the other hand, the buyer is responsible for receiving the goods, unloading them, and transporting them beyond the port, for example, on trucks. Similarly, they’re also responsible for paying import duties and handling the customs duties at the port. 

CIP vs. DAP

DAP is similar to CIP in that the seller is responsible for moving goods to a particular location and bearing losses due to damage or loss of cargo. However, unlike CIP, they’re not required to insure the goods during transit. 

In this type of agreement, the seller takes on a big risk, as any damage during transit will be their responsibility. The location of delivery can be any place, such as a port, facility, or warehouse. The seller must also provide proof of delivery. The buyer assumes all the risk once the shipment arrives at this destination. 

In international trade, a DAP agreement requires the seller to pay the export duties and taxes, whereas the buyer pays the import duties. 

Compared to CIP, DAP is a cheaper option for sellers as they’re not required to pay for insurance. However, it’s relatively riskier for sellers as they may bear the loss in case of damage or non-delivery. 

Conclusion

CIP is a popular Incoterm in international trade, particularly for importers, as it’s convenient and cost-effective for them. It’s a suitable choice for high-value goods, so they can be protected with mandatory insurance. 

On paper, CIP may seem like a beneficial deal for importers, but exporters may also benefit from it by ensuring the goods are insured, even if that’s an additional cost.

The cost-effectiveness of CIP also depends on where the cargo is going, as the costs for exporters may not be high if they deliver goods within the same region. 

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