CIP (freight and insurance prepaid) is a delivery method in international trade terms. The CIP clause balances the responsibilities of the buyer and seller, making it an ideal choice for multimodal transport and high-value goods trade. It can be flexibly used according to the specific characteristics of the transported goods, simplifying the international trade process.

Learn more in the following articles: The 11 common international trade logistics terms

Advantages and Disadvantages of CIP Clauses

CIP Advantages

• Simplified process: The seller controls transportation and insurance, covers the entire transportation process, and simplifies the transaction process.
• Clear responsibilities: The division of responsibilities between the buyer and the seller is clarified, reducing transaction risks.
• Improved efficiency: Applicable to multiple modes of transportation, applicable to complex transportation chains, and improved transaction efficiency.

CIP Disadvantages

• Insurance costs: The seller needs to bear the insurance costs, which may increase costs.
• Risk transfer: Risk transfer is early, and the buyer needs to rely on insurance claims after the goods are damaged
• Insurance coverage: The buyer may be dissatisfied with the insurance coverage (such as not covering theft)

Overview of CIP

CIP terms apply to all modes of transportation, including land, sea, and air. Unlike other international trade terms, CIP establishes a clearer division of responsibilities for buyers and sellers in terms of transportation and insurance.

 

 

Responsible party	Seller’s obligations	Buyer’s obligations
Transportation	Arrange full transportation and pay freight	Take risks during transportation (from cargo to carrier)
Insurance	Purchase the lowest insurance (such as ICC clause)	Additional insurance can be requested (additional negotiation required)
Customs clearance	Handle export customs clearance	Handle import customs clearance
Delivery	Deliver the goods to the first carrier	Receive the goods at the destination

 

Differences between CIP and other Insurance Clauses

CIP is significantly different from other insurance clauses in international trade terms, especially in terms of insurance coverage, insurance liability and applicable scenarios:

• CIF (Cost, Insurance and Freight): CIF stipulates that the seller’s insurance amount is usually 110% of the goods, while CIP only requires minimum insurance liability.
• DDP (Delivered Duty Paid): Under the DDP terms, the seller is not required to insure, so compared with CIP, the buyer needs to bear the insurance liability of the goods.

Insurance Requirements in CIP

CIP requires the seller to insure the goods, and the insurance content should cover possible loss or damage during transportation. Specific insurance requirements include:

• Insurance amount: CIP requires the seller to purchase at least an insurance amount equal to the value of the goods, but the seller can choose to purchase a higher insurance amount.
• Insurance coverage: It is usually required to purchase “minimum liability insurance”, that is, to cover common risks during transportation, and the two parties can negotiate to purchase more extensive insurance.
• Insurance beneficiary: The beneficiary of the insurance is usually the seller, but during transportation, the beneficiary can be the buyer or other third party.
• Minimum insurance standard: According to Incoterms 2020, the seller must purchase Class C insurance in accordance with the Institute Cargo Clauses (ICC) (covering major accidents such as fire, explosion, ship stranding, etc.), which does not include general risks (such as theft, rain).

How to Use CIP Clauses

In international trade contracts, CIP clauses should clearly stipulate the following:

Place and method of delivery

The parties should clearly stipulate the specific place and method of delivery.

Insurance requirements and scope

Clarify the type and amount of insurance that the seller needs to purchase, and whether the buyer needs to purchase additional insurance.

Cost division

Clarify the scope of expenses to be borne by the seller and the buyer respectively.

Risk transfer time point

Clarify the specific time point when the risk is transferred from the seller to the buyer.

Challenges of CIP Clauses

In practice, CIP clauses may face the following challenges:

Risks assumed

Although the seller is responsible for transportation and insurance, once the goods are handed over to the carrier, all risks are transferred to the buyer

Applicability of different modes of transport

Since CIP applies to all modes of transport, in practice, cross-border transport may require coordination of multiple modes of transport, which is complicated.

Issues with transport documents

The transport documents provided under different modes of transport may be different, and the accuracy and compliance of the documents must be ensured.

Allocation of tariffs and fees

CIP clauses require the buyer to pay import tariffs and related fees, which may cause the buyer to face additional cost pressure when clearing customs.

Complex customs clearance procedures

The buyer needs to bear the customs clearance procedures and related fees, and may face complex import regulations and tax policies

CIP has a wide range of application value in international trade. By clarifying the responsibilities and obligations of both parties, it can effectively reduce transaction costs, improve transaction efficiency, and provide more reliable security.