Incoterm CIP: Definition, challenges and alternatives

Introduction to CIP Incoterm

The Incoterm CIP (Carriage and Insurance Paid To) defines the obligations of sellers and buyers in international trade. It is among the most widely used Incoterms, alongside FOB (Free On Board), FCA (Free Carrier), and EXW (Ex Works).

Definition and Scope of CIP

CIP stands for Carriage and Insurance Paid To. Under this term, the seller arranges and pays for transporting the goods to the specified destination. The seller is also responsible for purchasing insurance coverage for the goods until delivery to the buyer or a designated location.

This includes transport and insurance costs, as well as applicable taxes and duties. The seller handles export customs clearance, while the buyer is responsible for import customs clearance.

What Is Carriage and Insurance Paid To (CIP)?

CIP means the seller pays freight and insurance to deliver goods to an appointed party at an agreed location. Once the seller hands the goods over to the carrier, the buyer assumes responsibility for any damage or loss during transit.

CIP is similar to the CIF (Cost, Insurance, and Freight) term but differs because CIF applies specifically to maritime trade. Under CIP, the seller must insure the goods for 110% of the contract value, while the buyer should consider additional insurance coverage.

The International Chamber of Commerce (ICC) introduced CIP as one of its 11 Incoterms in 2020.

Key Points:

• The term “Carriage and Insurance Paid To” (CIP) means the seller covers shipping and insurance costs to deliver goods to a designated recipient.
• The seller insures the goods for 110% of their agreed value.
• CIP is a globally recognized Incoterm essential for international trade.

How CIP Basically Works

CIP usually specifies a particular destination. For example, CIP California means the seller is responsible for freight and insurance costs up to California.

CIP applies to all accepted modes of transport, including road, rail, sea, inland waterways, air, and multimodal transport.

Example: If LG in South Korea ships a container of tablets to Best Buy in the United States, LG pays all shipping costs and minimum insurance to deliver the goods to the carrier or location designated by Best Buy. Once LG hands over the shipment to Best Buy’s chosen carrier, LG’s responsibility ends, and Best Buy assumes full responsibility for the shipment.

Risks and Responsibilities Under CIP

Under CIP, the seller bears the risk of loss or damage to the goods until delivery at the agreed location. If damage occurs during transit, the seller must cover the costs.

The buyer must accept the goods upon delivery and pay the agreed price. If the buyer refuses acceptance or payment, the seller may claim damages.

Choosing CIP in International Trade

CIP is often suitable in international trade when buyers and sellers are in different countries. Goods may be transported by air, sea, or land. This term benefits sellers by giving them control over transport and insurance while transferring risk to the buyer upon delivery.

Buyers benefit by negotiating delivery terms with sellers, allowing involvement in the transportation process.

Key Considerations When Using CIP

When using the CIP Incoterm, consider the following:

• The seller must ensure proper packing and labeling of goods for transport.
• The seller must obtain appropriate insurance based on transport type and goods’ value.
• The seller must provide the buyer with all necessary documents, including the bill of lading, commercial invoice, and insurance policy, to facilitate import customs clearance.
• The buyer should be ready to accept goods upon delivery and pay the agreed price.
• The buyer is responsible for any taxes and duties incurred upon import.

CIP’s Additional Coverage

Since the seller is only required to purchase minimal insurance to cover delivery to the final destination, the buyer should consider obtaining additional insurance for full risk protection. If the shipment is damaged or lost due to events not covered by the seller’s limited insurance, the buyer may face significant losses.