Incoterms 2010: What is Incoterm CIP Carriage and Insurance Paid?

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Incoterms 2010 CIP Carriage and Insurance Paid
Picture by Melissa Walker Horn

Overview

The Incoterms 2010 CIP means Carriage and Insurance Paid to a named port of destination.

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Ask An Expert

Discussion on Incoterms 2010 CIP with renowned global trade expert Murdo Beaton and Abdul Mann, creator of the cloud based export solution EdgeCTP.

Geoff :

Today we’ll be discussing CIP, including how and when to use it. So Murdo, what is CIP?

Murdo:

CIP stands for Carriage and Insurance Paid To. Now this term is identical to the previous term we discussed CPT, with the additional aspect of insurance included. This insurance issue is one that is intended to cover the goods against any physical misadventure while in transit from the seller to the buyer. The seller is responsible under this term to procure insurance to the standard that would be expected in terms of the transaction that he is involved in, and also taking account of any provisions as far as insurance is concerned that the buyer may wish the seller to account for when the seller secures this insurance against physical misadventure.

Now in international trade there are pre determined criteria regarding the insurance cover for such goods and they are identified as Institute Cargo Clauses. Now when the word institute is used we wonder, what does that actually mean? It makes reference to the Institute Cargo Clauses of London. There’s a range of them, there’s A, B, C and an all risk clause or as near an all risk clause as one can actually acquire. All these clauses are derived from the Institute of London Underwriters.

Abdul:

Is it always London that insures it Murdo?

Murdo:

Invariably it is.

Abdul:

Are we talking Lloyds of London?

Murdo:

You’re talking Lloyd’s of London in principal yes.

Abdul:

OK, so can you give me a quick recap then on CPT? CPT was where we were taking goods and effectively the international leg was one where you dropped the goods off at a location in the international port and that would therefore be the transfer of goods as such?

Murdo:

Yes, CPT would determine that the seller was responsible for paying for all carriage up to the point where upon the goods have arrived at an entry point in the country of destination. The CIP element is just simply the same except that it incorporates the issue of insurance. With CPT one might say, well CPT doesn’t include insurance. It doesn’t include insurance because it leaves it open for the insurance to be covered by the seller or the buyer. It would be recommended that one or other of them does cover it for insurance but that is a matter for them both to discuss. So they have the option of CPT to either suggest, OK we will keep the term at CPT but we will agree the seller will cover the goods for insurance. That then would be the seller’s responsibility to take out the necessary insurance cover for the goods.

Abdul:

Or it could be that the buyer covers…

Murdo:

Or it could be that the buyer covers the insurance, in which case that then releases the seller from any obligation as far as insurance is concerned. But in international trade, insurance against physical misadventure is always something that should be considered, absolutely. In general terms as we mentioned a while ago, we were talking about the Institute of London Underwriters clauses. There are a ranges of these clauses as we said and it’s up to the parties concerned to actually choose which category of clause they wish to adopt. Commonly the buyer would always look for as near an all risk clause as they could actually acquire and probably one would say that clause A is the one that is likely to achieve that the closest. Then there is clause B and there is clause C and each of these has exemptions built into them so certain aspects will be excluded from the insurance cover.

Abdul:

Does A cover all of the risks then?

Murdo:

A is as near all risk as you can get. What we need to understand with insurance is that despite the good will of underwriters, they will not cover you for actions that you have brought about by your own negligence, particularly negligence which could be construed as bordering on the intentional.

Abdul:

What about acts of God, are they covered?

Murdo:

Yes, acts of God are usually covered, but then again one would have to look at the cover that you’re getting and make sure all these issues are being taken into account.

Abdul:

So who pays the insurance on CIP? Is it the buyer or the seller?

Murdo:

The seller attends to the provision of insurance but having a cost attached to it (because there is an insurance premium to be paid) then of course it would be concluded that the seller would take account of that in his costing. The seller may choose in actual fact to say look, the initial transaction is based on a CPT arrangement as far as costs are concerned. You now would like me to insure it so yes, I’ll insure it for you but I will show the insurance premium as separate in my costing so you can see exactly what the insurance charge is so that I the seller am not really making any financial gain in taking out the insurance. I am more or less providing to you as a concession as it were but the buyer is paying for it.

Abdul:

So if you went with CPT and you as a seller decided that you’re going to insure it, in that example would the seller then say let’s move the Incoterms to CIP?

Murdo:

Not necessarily, you can still retain CPT and if the buyer then suggests to the seller that maybe it was more appropriate for the seller to insure them but on behalf of the buyer, then the seller can insure on behalf of the buyer and charge the insurance premium as would be appropriate. But the core transaction would still be identified as a CPT transaction. Just because the seller in the instance has covered for insurance, the seller has done so at the behest of the actual buyer and the seller will take account then of, “Well I will insure them for you but my contract is CPT so since you have asked me to insure them for you I will do this, but you tell me what are the conditions of insurance that you would like me to take out.”

Abdul:

So in CIP I the seller would have to insure the goods. I the seller would have to talk to the buyer and say I want to go for clause A, B or C etc.…

Murdo:

The seller need not do that, the seller just has to make sure that he has provided a cover which is adequate for the transaction in question.

Abdul:

OK so I could just say I’m going for CIP that means I’m paying, I’m the seller and I’m going for Clause A, which is as near as everything, and I’m going to pay a premium for that. Then once I’ve done that I needn’t show it as a separate entity on my invoice as an example. I could just roll it up as a cost of the sale.

Murdo:

You could do that then we have to consider the issue of customs clearance at the point of destination and here customs authorities at the point of destination, they do like to have a break between the basic costs of the product, the carriage costs of the product and the insurance costs of the product. They tally these up to what they then call a CIP cost and calculate the duty on that. If the seller quotes one basic figure then there may be a need for the customs figure to ask the clearing agent to break that cost down so that it indentifies the carriage cost and the insurance cost separately.

Abdul:

Why would I choose CIP because I’m just adding more costs to the actual products that I’m selling overseas?

Murdo:

Well you probably wouldn’t as a seller choose CIP, but the buyer may suggest that you are in a better position to cover the goods for insurance than the buyer is and the buyer may therefore suggest to you, the delivery term that I would like the contract attached to is CIP.

Abdul:

So how would I go about it? Say I found myself a buyer and this buyer says to me I want CIP, I’m now thinking hang on, I’ve never used this before. So how do I go about insurance? Do I just pick up the phone, thumb through the yellow pages, go on the internet, Google for international trade insurance? What do I do?

Murdo:

We really are getting back to basics here again in that you have determined to move into the international trade arena or the international supply chain in one form or another. In doing that there are, and we’ve discussed this many times Abdul, there are basic understandings that you must have on what you are actually beginning to get involved in.

Certainly you have to understand and will understand that the goods will not move from A to B without some third party intervention i.e. carriage and once they are in that mode you will also understand that they do have exposure to physical risk so you would have, prior to sitting down and talking to a buyer one would think, you would have taken recognition of that fact and actually already pre determined if asked to consider the issue of insurance or asked to consider the issue of carriage, “How do I go about finding out about these things? Should I find out about them before talking to my buyer because if I talk to my buyer without knowing about them and my buyer in conversation is illustrating that they have quite a strong grasp of these disciplines it’s going to make me look rather silly? Who are these people that we’re dealing with; these people don’t know what they’re doing.”

So yes, of course I would always promote that before you speak to your buyer please understand all the issues that are likely o be involved in concluding your supply with that particular buyer.

Abdul:

And then where do we go?

Murdo:

In answer to your question where do you go, well most companies do have insurance brokers at a domestic level and that’s a good start. That insurance broker should be provisioned enough to be able to direct you towards a broker that covers goods at an international level and it’s also quite possible that the underwriter your insurance broker is using for your domestic activity may very well be an underwriter that has an international arm as well and would be able to cover goods as far as insurance is concerned.

Abdul:

So I’m not picking up the phone to Lloyd’s of London?

Murdo:

No, it is unlikely that as an individual exporter you would want to have access to these underwriters in any event, and it’s normally done through brokers. Most of the underwriters actually operate through brokers; they very rarely expose themselves directly to the market. They normally use brokers, at this level anyway. They may be quite willing to have market exposure at a higher level but at this level they probably prefer to deal through brokers.

Abdul:

Should I shop around from broker to broker? Is there going to be a lot of difference?

Murdo:

Absolutely, absolutely. Always shop around as you might be able to get better terms in some quarters but in doing that please do not sacrifice the obligation that you have to ensure that whatever cover you secure at whatever rate, it has to be as compatible with what would be expected of you as a diligent exporter.

Abdul:

So the example we were using earlier was I have a buyer in Rio De Janeiro and I’m trying to get the goods over to them. What I’d end up doing in the CIP situation is the buyer would say “I’d like you to pay for insurance and I’d like you to use CIP because I want to have a worry free arrival of the goods and we’re both protected in some case with insurance. I’ll want my money back if the goods don’t arrive in the quality or quantity of the way I’m meant to receive them.”

Murdo:

If I could interject there, with insurance the buyer would have the right to expect the goods to arrive safely. Certainly in terms of breakages, damages, things like this. When one talks about quality, this is a different exercise. Provision of insurance against physical misadventure does not in actual fact reflect anything to do with the quality of these goods.

Abdul:

Got it.

Murdo:

So quality is not something that would be generally found as included within insurance cover, but certainly anything that occurred because of some misadventure in transit is what you’re looking for in insurance.

Abdul:

So when things go wrong and you’ve gone for CIP, the buyer invariably gets in contact with the seller and says “Where’s my stuff or it’s not what I expected, or there’s something missing or it’s broken” etc. The seller i.e. me would have to go through an exercise of investigating what’s wrong, and trying to remediate it before an insurance claim was actioned.

Murdo:

What actually happens is if the seller is the party which has agreed or obliged to take insurance cover for the widgets in question, the seller will from the underwriters secure an insurance policy or insurance certificate, just again to evidence that the goods in question have been covered at that appropriate cargo clause. The seller will then endorse that insurance document over to the buyer and will send that document to the buyer.

Abdul:

The insurance certificate?

Murdo:

The insurance certificate and the policy.

Abdul:

So part of the sale process is the generation of an insurance certificate to show I’ve used CIP. “Here’s the insurance certificate and there you go, you’ve got it.”

Murdo:

Yes and the insurance certificate should also identify the underwriter’s agent in the geographic area where the buyer is actually located. So if the subject goods arrived to the buyer’s awareness in a damaged condition or whatever, then the buyer will contact the underwriter’s agent as named on the certificate and the underwriter’s agent will then begin the process of putting a claim in place. So the seller is unlikely to be involved at all because the seller has, as we’ve just said, endorsed the certificate.

In other words the seller has surrendered all the rights that he has in that insurance document by the endorsement over to the buyer. The buyer now has the full rights under that insurance document and will execute his requirements under it, whether it’s a claim or whatever materialises from it. Where the seller might have an exposure is if it is discovered that the seller did not secure an insurance cover that was considered appropriate for this transaction. That is where the seller must be very careful that they don’t under insure the goods or don’t insure them for something that they obviously should insure them for given the nature of the transaction and the nature of the carriage.

Abdul:

OK so if I was a seller and I had twelve widgets that I needed to put in the consignment and I sent it across. The buyer has then received it, we’ve gone with CIP as the Incoterm and when he opens the consignment he discovers that there’s not twelve, there’s ten so there’s two missing! Does he go to his insurance broker?

Murdo:

Obviously the packages or the cases in question, if there is something missing it may be evidence of some interference or tampering. Now if there is no evidence of interference or tampering of any description and if the straps on the cases or cartons are absolutely intact then it is questionable whether these items could have dropped out of the package to use a phrase. So the accusation then might be that the seller actually did not load them into the package so the claim could revert back to the seller.

Abdul:

OK but the buyer in this case isn’t getting on the phone first to the seller and saying “Hey, you only gave me ten.” he’s going straight to the insurance company.

Murdo:

He may choose to. If the seller has actually been given access to the cases or the crates he may be able to see if there has been any interference and this again is why it’s so important that if you receive a package you actually don’t just rush to open it an unwrap it. Take a look at it carefully and determine if there is any evidence of interference. If there is I want to note it before I open the package so that if when I open it there is something missing I can at least be able to say the package bore evidence of interference as per my carefully noted description.

Abdul:

I see because usually a buyer would be almost rushing like a Christmas to open the widget.

Murdo:

And then when you open it up you discover there are two missing. Well did it appear that it was interfered with while it was in transit? Oh, I don’t know. I didn’t look. There is a weakness.

Abdul:

Right, so it’s important when you receive goods to be able to check the packaging to make sure it hasn’t been tampered with.

Murdo:

Absolutely, and a lot of people say this is nuts but really at the end of the day it’s eminently sensible because if you receive packages and you choose not to identify their condition in terms of potential interference and you wish to claim somebody did not put the correct number of widgets in a package, well….

Abdul:

I mean mistakes do happen so a seller may have forgotten or their processes may not be as tight as they should be.

Murdo:

Yes it’s possible but the more evidence that is available to actually identify, where the oversight occurred in the first place that is important. So if the package bears no evidence of interference at all then the likely finger would point at the seller. A lot of these packages now in the international supply chain have these secure wire wrappings on them. Now you need a machine to put these wrapping on so if they are interfered with in transit it is very questionable whether one of these packaging machines would be available at the point of interference to replace them. This is also of course why it is important when the seller is actually describing the packaging, that if there are any secure wrappings like this on it like this wire band aid wrapping, that they say this so that people can say I can expect to receive it like this with the wire band aid wrapping.

Abdul:

Taking it to another stage Murdo, is there a situation where customs authorities in the receiving country would expect to see goods insured? Is there an obligation by customs to make sure goods are insured?

Murdo:

As an organisation customs are not concerned. Where the concern would arise would be at the destination market’s own regulatory procedures. Now in some destination markets that are anxious to promote their own insurance industry and are anxious to give their insurance industry the best possible potential of developing, they might have a regulation that stipulates if you buy goods from abroad you will insure them from your own domestic market. In other words you will not seek foreign insurance cover from these while the goods are in transit; you will get the insurance cover in your own market for the transport process.

Abdul:

So I’ve gone for CIP, I’m the seller and I’m in the United Kingdom. I’m sending my goods to Brazil and let’s say the Brazilian authorities say to the Brazilin buyer “Yes you can go for CIP but it must be insured by a Brazilian insurance company.”

Murdo:

Customs would probably say that but the Brazilian Customs are not saying that because it’s a Brazilian Customs dictate, they are saying that because it would be a Brazilian government regulatory position and the Brazilian buyer should actually know that before Brazilian Customs do. So the Brazilian buyer should be wholly aware, “I have to insure the goods here so therefore I have to buy them on CPT.” and the seller would have no obligation to provide insurance whatsoever, I would do that here in Brazil.

Abdul:

OK so in that case you would switch to CPT and the buyer would insure the goods.

Murdo:

Yes, but it would be prudent for the seller at that point to be aware that this is a provision that exists in that particular destination market, that my buyer has under regulatory provisions to insure the goods in his own market. So at least as a seller I know somebody’s going to insure them but just because the buyer is silent on the matter I should not just simply conclude that it’s because the buyer is aware he should insure the goods. I have to evidence this in my negotiation with the buyer.

Abdul:

Is it good then for an exporter to ask their buyer whether they should go for CIP or CPT?

Murdo:

Of course.

Abdul:

So leave the decision up to the buyer?

Murdo:

Indeed. It doesn’t matter what Incoterm the transaction may finally adopt. It is always, always prudent that the seller and the buyer discuss and negotiate between them which one is likely to be more positive for their particular transaction.

Abdul:

For the win, win.

Murdo:

Absolutely. The idea of one party trying to impose an Incoterm on another party, it’s never really conducive to a good business relationship. Now there might be reasons that one party finds certain aspects of another Incoterm to be uncomfortable.   OK, talk to your buyer about it and explain why you’re nervous or uncomfortable about it.

Abdul:

CIP doesn’t cover, because a lot of people confuse Incoterms with payment terms, CIP doesn’t cover the fact that it ensures the seller gets paid.

Murdo:

Incoterms in one way or another have often been suggested as terms that may indicate security of payment. Incoterms do not indicate security of payment. Incoterms may determine when payment should be made or should be due as if it were but they have nothing to offer in terms of payment. That is a matter of contractual law and that is a matter between the buyer and the seller. The Incoterm might suggest as to when payment is due but it is up to both parties to determine when it is actually going to be made.

Abdul:

So very clearly CIP doesn’t cover payment insurance.

Murdo:

In international law there are certain areas where one would say “Does the law determine when money falls due for a particular supply?” Yes depending on the legal system that the parties adopt, that legal system will undoubtedly suggest as to when the payment is due to be made. Does that law then suggest that the parties cannot defer that payment upon their own agreement? Not at all. The law permits that payment to be deferred to whatever time in the future both parties agree. The law has just said if there is no such deferred payment agreement then payment is due at this stage.

If we look at our own legal system the suggestion is that payment is due when the goods in question have been ascertained to the contract i.e. it has been agreed between the two parties that those particular widgets and none other have been identified as the widgets of the contract. In other words that’s them. These are the goods of the contract and no other goods and they cannot be withdrawn from the contract. In other words they are ascertained, they are almost locked to the contract and these widgets then would be concluded and the payment would be due to the supplier for these widgets.

Abdul:

In a nutshell again, CIP is basically the seller insuring the goods up to the buyer, paying for that insurance and covering the goods all the way until the buyer receives them.

Murdo:

And making sure that the correct insurance conditions in terms of risks covered are accounted for.

Geoff :

I hope you enjoyed this audio. If you’d like more information on international trade go to www.edgedocs.com. All material in this audio is copyrighted and all reproduction rights reserved by Morgan Goodwin Ltd, thank you.

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