CIF and CFR under Incoterms 2020: difference, insurance and pitfalls

CIF stands for Cost, Insurance and Freight. CFR stands for Cost and Freight. Both rules belong to the sea Incoterms family, alongside FAS and FOB, and only apply to sea or inland waterway transport, with a port of loading and a port of destination agreed between the parties.

Under both rules, the seller arranges and pays for main carriage to the agreed port of destination. The difference concerns only insurance: under CIF, the seller must take out cover for the buyer's benefit; under CFR, no insurance is owed by either party, and the buyer alone remains responsible for insuring if it wishes to.

France's customs directorate points out that these four sea rules are designed for bulk and conventional cargo: containerised shipments in principle fall under the multimodal Incoterms, CPT and CIP in particular. In practice, CIF and FOB nonetheless remain widely used for containerised shipments, including from China.

The point at which risk passes from seller to buyer is the same under CIF and CFR: the moment the goods are loaded on board the named vessel, at the agreed port of loading. From that moment, damage or loss occurring during sea transport is borne by the buyer, even though the seller continues to pay freight to the port of destination.

This separation between the transfer of risk and the transfer of costs is the hallmark of the Incoterms C rules, CFR, CIF, CPT and CIP. It is this point that a first-time buyer often gets wrong, wrongly believing that a seller paying freight to destination remains responsible for the goods until they arrive.

Under CIF, the seller must take out an insurance policy covering, at minimum, the price of the goods plus 10%, in the currency of the contract, for the buyer's benefit. Unless otherwise agreed, the cover required by the Incoterms 2020 rule corresponds to the Institute Cargo Clauses (C), or comparable cover: this is the minimum level provided for by the rule, not all-risks cover.

This minimum cover protects against a limited list of major events, fire, explosion, stranding, capsizing, sinking or general average contribution, but excludes ordinary particular average and partial theft. A buyer who needs broader cover must either negotiate a higher clause with the seller or take out supplementary ad valorem insurance itself.

The Incoterms 2020 revision specifically split the fate of CIF and its multimodal equivalent CIP: CIP now requires all-risks cover, Institute Cargo Clauses (A), while CIF stayed at the minimum level of clauses (C). Two rules that once seemed interchangeable have, since 2020, covered two very different levels of insurance.

Under CFR, the seller has no insurance obligation, either for its own account or the buyer's. If the buyer wants to be covered during sea transport, it must arrange its own policy before loading.

The cost paid by the seller under CIF and CFR stops, in principle, when the vessel arrives at the agreed port of destination, unloading not included. Unloading costs and the related handling charges fall to the buyer, unless the transport contract concluded by the seller provides otherwise.

This limit explains much of the dispute seen on shipments from China: a CIF or CFR quote shown at an attractive price can hide freight negotiated at a discount by the seller's agent, a discount then recovered on the destination side as port handling charges, file fees or demurrage billed by the local correspondent.

A simple safeguard limits this risk: ask in writing, before loading, for the list of charges included in the CIF or CFR price up to the port of destination, and refuse to pay a second time for a service already included in that price.

Article 71 of the Union Customs Code provides that transport and insurance costs up to the place of introduction into the Union's customs territory form part of the elements to be added to the customs value, when not already included in the invoiced price. In practice, a price invoiced CIF or CFR to a Union port already includes these costs: nothing to add, in most cases, for the portion of the journey up to that port.

The nuance comes from the place agreed under the incoterm: if the invoiced price covers onward intra-Union carriage beyond the point of introduction, the corresponding portion must be identified and removed from the calculation basis, which requires a detailed transport contract.

On this point, CIF and CFR appear to simplify the declaration compared with an FOB-type incoterm, where the buyer itself must reconstruct and add the freight cost up to the point of introduction. This simplicity comes at a cost: it depends entirely on the reliability of the price quoted by the seller, hard to verify once the goods have been loaded.

Under FOB, as under CIF and CFR, risk passes to the buyer on loading on board the vessel. The difference lies in who arranges and pays for main carriage: under FOB, it is the buyer who contracts directly with its freight forwarder or shipping line, not the seller.

This arrangement changes things on three points: the buyer chooses its own freight forwarder and negotiates its own rates, it knows the actual freight cost instead of a CIF or CFR price with an undetailed margin, and it keeps control over tracking its cargo, which limits the risk of additional charges imposed by an agent who alone controls the information.

FOB requires more organisation on the buyer's side in return, with a trusted freight forwarder to manage directly. This is why some buyers choose CIF or CFR for small one-off volumes, then switch to FOB as their volumes and experience grow.

Sorva reviews factory quotes before they are signed and checks the incoterm proposed, the detail of the quoted freight and the charges that do, or do not, remain the buyer's responsibility at the port of destination. Our Chinese-speaking team in Guangzhou negotiates directly with the factory and its freight forwarder, in the local language, to clarify what is actually included in a CIF or CFR price before loading.

In most cases you pay no fees: you open a file, we negotiate the goods for you and we take a commission on their ex-works value. For an order that runs from production through to delivery, our Produce and Deliver plan arranges freight and customs clearance on your behalf, with a clear rundown of destination charges before the vessel departs.