Compensation of Damage Claim in a CIF Shipment
Shipping doesn’t always go as planned. In fact, it’s quite common for accidents or damage to occur during the supply chain movement of commodities. The potential of damage is enhanced when you are importing products from international destinations. For this purpose, many shippers who are importing products will either purchases Free On Board (FOB) from the named port of the shipment or sell Cost Insurance and Freight (CIF) to a named port of destination.
To be completely honest, there are more questions than answers with how a damaged claim in a CIF shipment is handled. Moreover, it can be downright confusing as to who is compensated – and how this process works. To provide a little clarification in this misunderstood insurance program, let’s outline the basics of a CIF shipment, how they can protect a shipper, and some items that shippers need to know about a CIF shipment, so they can make an informed decision.
What is Cost Insurance and Freight (CIF)?
The official definition of CIF shipping terms is, “ The seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.” So – what does this mean? In simple language, it means that the price invoiced or quoted by the seller will include insurance and charges to the shipment’s port of destination. Once the shipment reaches the port, it’s the responsibility of the buyer to protect their products under their own insurance policy – as the CIF is terminated upon port arrival.
Why do Shippers Purchase CIF?
Those who are importing products will typically purchase CIF if they have small amounts of cargo or if they are new to the international trade process. Many shippers will rely on CIF if they want a hands-off approach to importing goods. The drawback is that they are likely paying a premium for the convenience. However, if you’re a new shipper or simply don’t have the bandwidth to process every detail involved in the importing process, then a CIF makes sense.
What Happens if Freight is Damaged with CIF?
Earlier we made it quite clear that the CIF terms ONLY cover freight until it reaches the port of destination – not its final arrival. For example, if you’re shipping in “widgets” from China to the USA, and your factory is located in Chicago, the port of destination is likely going to be Long Beach or another major coastal port. If your freight is damaged while in transit, then the shipper will be covered under the CIF. If the freight is damaged from the port to your location – additional insurance is required.
If a damaged claim is filed with a CIF, the individual at risk may be reimbursed for any loss. However, this is where the confusion occurs. A CIF is essentially settled by the insurance company covering the shipment. Therefore, it’s not always a smooth process. In most cases, the insurance company will complete an investigation, which may take quite some time complete. Plus, it’s not 100% guaranteed that the amount allocated to the shipper covers all loss.
There are some other facts about CIF terms that are not commonly articulated – especially by those who offer the service including:
• You’re not in control of the coverage. A CIF is sold to a shipper by a supplier. However, what is not commonly known is that it’s more than likely that the supplier will purchase the cheapest possible option for coverage. This limits your coverage options – and also may restrict the direct root of shipment.
• You’re not always the direct beneficiary. Quite often, the CIF policy will list the supplier as the beneficiary – not you the customer. If this is the situation, the supplier will be compensated for the loss, then have to reimburse the shipper. This causes a delay in the processing of the payments.
• The CIF is “open to interpretation”: Since the CIF will only cover damages up to the point they arrive at the port of destination, the question often asked is how is “arrival at the port of destination” actually defined. For some policies, this means as soon as the boat (or plane or truck) actually arrives at the port. In some instances, it means until freight is offloaded from the carrier.
As you can see – there are several unanswered questions about CIF claims simply due to the diverse possible terms. This is why it’s so important to gather the facts about CIF terms before committing. An experienced 3PL can help a shipper understand the pros and cons.