What Is Carriage and Insurance Paid to (CIP)?
Carriage and insurance paid to (CIP) is a global trade term under which a seller pays freight and insurance costs to deliver goods from its factory to a buyer-appointed party at an agreed-upon location. The risk of damage or loss to the goods being transported transfers fromthe seller tothe buyer as soon as the goods are delivered to the buyer's carrier or appointee.
CIP is comparable to but different from cost, insurance, and freight (CIF), an agreement that is used in maritime trade and commodity trading. Under CIP, theseller isobligatedto insure goods in transit for 110% of the contract value. If the buyer desires additional insurance, they must arrange for it on their own.
CIPand CIF are two Incoterms,a set ofglobally accepted commercialtrade termspublished by the International Chamber of Commerce (ICC).
Key Takeaways
- The term “carriage and insurance paid to (CIP)” signifies that the seller will pay freight and insurance when sending goods to a buyer's representative at a mutually agreeable location.
- Theseller must insure the goods being sent for 110% of their contract value.
- If the buyer wants the seller to purchase more insurance, the buyer must typically pay for any extra coverage.
- CIP covers transit of goods from the seller's factory or warehouse to the buyer's home country (but not to the products' final destination).
How CIP Works
CIP, one of several long-standing uses of insurance for international trade, provides for the seller to pay costs to deliver products to a named destination. For example, CIP New York means that the seller pays freight and insurance charges to New York.As is the case with carriage paid to (CPT), carriage or freight charges with CIP refer to transportation charges for any accepted mode of transport,such as road, rail, sea, inland waterway, air, or multimodal transport involving a combination of methods.
For example, say that LGin South Koreawants to shipa container of tablet computers to Best Buyin the United States. Under CIP, LGis responsible for all freight costs and minimum insurance coverageto deliver the tablet computers tothe carrier or appointed person for Best Buy atan agreed-upon destination in the United States. Once the shipment is delivered toBest Buy's carrier or appointee, LG’sobligation is complete, and Best Buy assumes full risk and responsibility for the shipment.
If buyers want better insurance coverage than 110% of the contract value, they must pay for it themselves.
Additional Coverage Under CIP
As the seller isonly obligated to purchasethe minimum amount of insurance coverage to transportthe shipment to the destination, the buyer should consider arranging additional coverage that protects the shipment from all risks. Otherwise, the buyer may have to bear huge losses if the shipment is damaged or lost through some adverse event that is not covered by the minimal insurance provided by the seller.
CIP only covers losses from the seller's factory or warehouse to the first destination specified by the buyer. The buyer takes responsibility for the remaining journey to their facilities.
The buyer may alsoask the seller to provide extra insurance coverage and—depending on the relative bargaining positions of the buyer and seller—negotiate for the seller to bear part or all of the cost of such additional insurance.
What Does Carriage and Insurance Paid to (CIP) Cover?
CIP is a globally accepted Incoterm devised by the International Chamber of Commerce which define common contract terms covering the cost of shipping items in a business sale. CIP requires the seller to pay for both freight and insurance costs in sending goods to a buyer chosen by the seller at a mutually agreed-upon location. As soon as the goods are delivered, the risk of damage or loss becomes the buyer’s.
How Does CIP DIffer From CIF?
CIP and CIF Cost, Insurance & Freight) are similar terms that apply to transportng cargo which assign the transportation costs and risks to the seller. The main diffence is that CIP calls for the seller to purchase cargo insurance covering the contract value of the goods in transit, while CIF does not. CIP relieves the buyer at risk until delivery, but CIF means higher product costs because the seller must obtain insurance.
How Much Insurance Does CIP Require?
The seller must take out 110% of the contract value in insurance. If the buyer wishes to have more insurance, arranging and paying for it is their responsibility.
What Kind of Transport Is Eligible for CIP?
Any form of recognized transport can be used, including road, rail, sea, inland waterway, air, freight forwarding, and any combination of those methods. If the agreement covers multi-modal transportation, CIP only covers the first carrier at the place of shipment.
What Are Incoterms?
Incoterms are commonly-accepted rules that apply to the transportation industry. When included in sale contracts, Incoterms create legal obligation for all parties involved, so sellers and buyers should be sure they understand the terms and their impact.
The Bottom Line
The term "carriage and insurance paid to (CIP)" means the seller will pay freight and insurance when sending goods to the buyer or their representative at a location agreed upon by both parties. Theseller must insure the goods for 110% of their contract value. CIPis anIncoterm, a global trade term devised by the International Chamber of Commerce (ICC) and accepted worldwide.
