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Incoterm CIP: Definition, challenges and alternatives

The Incoterm CIP (Carriage and Insurance Paid To) is a trade term used in international trade that specifies the responsibilities of the seller and the buyer in regards to the transportation of goods. It is one of the most commonly used Incoterms, along with FOB (Free On Board), FCA (Free Carrier), and EXW (Ex Works).

 

Definition and scope of CIP

CIP stands for Carriage and Insurance Paid To, which means that the seller is responsible for arranging and paying for the carriage of the goods to the named place of destination. The seller is also responsible for purchasing insurance coverage for the goods until they are delivered to the buyer or the designated location.

The scope of CIP includes the cost of transport and insurance, as well as any applicable taxes and duties. The seller is responsible for the export customs clearance, and the buyer is responsible for the import customs clearance.

What Is Carriage and Insurance Paid To (CIP)?

CIP is when a seller pays freight and insurance to deliver goods to a seller-appointed party at an agreed-upon location.

The buyer is responsible for any damage or loss to the goods being shipped as soon as the goods are given to the carrier or other person in charge.

It is similar to the cost, insurance, and freight (CIF) agreement, but it is not the same. The CIF agreement is used in maritime trade and commodity trading.

Under CIP, the seller must insure products for 110% of the contract value. The buyer must arrange for supplementary insurance.

CIP is one of 11 Incoterms published by the International Chamber of Commerce (ICC) in 2020.

Key points: The phrase “carriage and insurance paid to” (CIP) means that the seller will pay for shipping and insurance to send the goods to a person or place chosen by the seller.

The goods being sent must be insured for 110% of their agreed-upon value by the seller.

CIP is one of 11 Incoterms made by the International Chamber of Commerce (ICC) and used all over the world.

 

CIP

 

How CIP basically works

CIP is frequently used along with a destination.

CIP California, for instance, denotes that the seller is responsible for California’s freight and insurance costs.

Carriage or freight costs with CIP refer to any accepted means of transport, such as road, rail, sea, inland canal, air, or multimodal transport.

For example, let’s say LG in South Korea wants to send a container of tablet computers to Best Buy in the United States. Under
CIP, LG pays for all shipping costs and a minimum amount of insurance coverage to get the tablet computers to the carrier or Best Buy’s designated person at an agreed-upon location.

Once the shipment is given to the carrier or person Best Buy has chosen to receive it, LG’s job is done and Best Buy is fully responsible for the shipment.

 

Risks and responsibilities under CIP

Under the CIP Incoterm, the seller bears the risk of loss or damage to the goods until they are delivered to the designated location. This means that if the goods are lost or damaged during transportation, the seller is responsible for covering the costs.

The buyer is responsible for accepting the goods upon delivery and paying the agreed upon price. If the buyer refuses to accept the goods or fails to pay the price, the seller has the right to claim damages from the buyer.

 

Choosing CIP in international trade

CIP is often used in international trade when the buyer and seller are located in different countries and the goods are shipped by air, sea, or land. It is a useful Incoterm for the seller as it allows them to control the transportation and insurance of the goods, while also transferring the risk of loss or damage to the buyer upon delivery.

CIP is also a suitable Incoterm for the buyer as it allows them to be involved in the transportation process and gives them the opportunity to negotiate the terms of delivery with the seller.

 

Key considerations when using CIP

There are several key considerations to keep in mind when using the CIP Incoterm:

  • The seller must ensure that the goods are properly packed and labeled for transportation.
  • The seller must purchase the appropriate insurance coverage for the goods based on the mode of transportation and the value of the goods.
  • The seller must provide the buyer with all necessary documents, including the bill of lading, commercial invoice, and insurance policy, to facilitate the import customs clearance process.
  • The buyer must be prepared to accept the goods upon delivery and pay the agreed upon price.
  • The buyer must be aware of any applicable taxes and duties that may be incurred upon import and budget accordingly.

 

CIP’s Additional Coverage

Since the seller only has to buy the minimum amount of insurance to get the shipment to its final destination, the buyer should think about getting extra insurance to protect the shipment from all risks.

If the shipment is damaged or lost due to an unfortunate event that is not covered by the limited insurance offered by the vendor, the buyer may be forced to face significant damages.

The buyer may also ask the seller to provide supplementary insurance coverage and arrange for the seller to pay part or all of the cost.

 

What Is Covered by Carriage and Insurance Paid To (CIP)?

CIP is a widely used Incoterm that the International Chamber of Commerce (ICC) developed to control the cost of transporting goods in commercial transactions.

It requires the seller to cover the costs of freight and insurance when sending products to a buyer they choose at a place that is mutually agreed upon.

The risk of loss or damage passes to the buyer as soon as the items are delivered.

 

How much insurance is required by CIP?

The seller is required to insure for 110 percent of the contract’s total value.

It is the buyer’s duty to arrange and pay for any additional insurance they desire.

 

What Sort of Transportation Qualifies for CIP?

Any accepted mode of transportation, including road, rail, sea, inland canal, air, and any combination of these, may be employed.

 

Who Does Carriage and Insurance Paid To (CIP) Apply To?

Insurance is a time-honored business practice, and transportation and insurance paid to (CIP) occurs when a seller pays freight and insurance to deliver goods to a party designated by the seller at a predetermined place. The buyer assumes the risk of loss or damage to the transported goods as soon as the seller delivers them to the carrier or designated person.

 

Extra Protection Under CIP

As the seller is only required to obtain the minimal level of insurance coverage to carry the product to its final destination, the buyer should consider purchasing supplementary coverage that protects the shipment against all hazards. Otherwise, if the shipment is damaged or lost due to a calamity that is not covered by the modest insurance offered by the vendor, the buyer may be liable for astronomical damages. The buyer may also request additional insurance coverage from the seller and, depending on the relative negotiating positions of the buyer and seller, may negotiate for the seller to pay a portion or the entire cost of such additional insurance.

 

Alternatives to CIP

There are several Incoterms that may be used as alternatives to CIP depending on the specific needs and requirements of the buyer and seller. Some possible alternatives include:

  • FOB (Free On Board): This Incoterm specifies that the seller is responsible for the cost of transporting the goods to the port of shipment, and the buyer is responsible for the cost of transporting the goods from the port of shipment to their final destination.
  • FCA (Free Carrier): This Incoterm specifies that the seller is responsible for delivering the goods to the carrier at the agreed upon location, and the buyer is responsible for the cost of transporting the goods from there to their final destination.
  • EXW (Ex Works): This Incoterm specifies that the seller is only responsible for making the goods available at their place of business, and the buyer is responsible for arranging.

 

Conclusion

In conclusion, the Incoterm CIP is a commonly used trade term in international trade that specifies the responsibilities of the seller and the buyer in regards to the transportation of goods. Under CIP, the seller is responsible for arranging and paying for the carriage of the goods to the named place of destination, as well as purchasing insurance coverage for the goods until they are delivered. The buyer is responsible for accepting the goods upon delivery and paying the agreed upon price. CIP is often used when the buyer and seller are located in different countries and the goods are shipped by air, sea, or land. It is important for both the seller and the buyer to be aware of their responsibilities and to consider any applicable taxes and duties when using CIP. Alternative Incoterms that may be used in place of CIP include FOB, FCA, and EXW.

 

Frequently Asked Questions About The CIP Incoterms

What does CIP stand for?

CIP stands for Carriage and Insurance Paid To, which refers to a trade term used in international trade that outlines the responsibilities of the seller and buyer in regards to the transportation of goods.

What is included in the scope of CIP?

The scope of CIP includes the cost of transport and insurance, as well as any applicable taxes and duties. The seller is responsible for exporting customs clearance, and the buyer is responsible for importing customs clearance.

How does CIP differ from CIF?

CIP is similar to the cost, insurance, and freight (CIF) agreement, but it is not the same. CIF is used in maritime trade and commodity trading, while CIP is used for all modes of transport. Under CIP, the seller must insure the goods for 110% of the contract value, while the buyer must arrange for supplementary insurance.

Who bears the risk of loss or damage under CIP?

Under CIP, the seller bears the risk of loss or damage to the goods until they are delivered to the designated location. This means that if the goods are lost or damaged during transportation, the seller is responsible for covering the costs.

When is CIP commonly used in international trade?

CIP is commonly used in international trade when the buyer and seller are located in different countries and the goods are shipped by air, sea, or land. It allows the seller to control the transportation and insurance of the goods while transferring the risk of loss or damage to the buyer upon delivery.

What are some key considerations when using CIP?

Some key considerations when using CIP include ensuring that the goods are properly insured for 110% of their value, clearly communicating the terms of delivery with the buyer, and being aware of any applicable taxes and duties. It is also important to carefully consider the mode of transport and the designated place of delivery.

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