Incoterms don’t just decide who pays for freight, they also determine who’s responsible for arranging marine insurance, and when. Getting this wrong can leave a shipment technically uninsured during the exact window something goes wrong. This guide breaks down how each major Incoterm treats insurance responsibility.
Table of Contents
- Risk Transfer vs Cost Responsibility
- How Each Incoterm Treats Insurance
- Why CIF and CIP Only Require Minimum Coverage
- The Insurance Gap Risk
- Frequently Asked Questions
Risk Transfer vs Cost Responsibility
Every Incoterm defines a specific point where risk transfers from seller to buyer, the moment the buyer becomes responsible for loss or damage, even if the seller is still paying for freight or insurance beyond that point. This distinction matters because insurance needs to be in place before risk transfers, not after, or there’s a gap where damage isn’t covered by anyone’s policy.
How Each Incoterm Treats Insurance
| Incoterm | Who Arranges Insurance | Insurance Obligation |
|---|---|---|
| EXW | Buyer | None required from seller |
| FOB | Buyer | None required from seller |
| CFR | Buyer | None required from seller (seller pays freight only) |
| CIF | Seller | Minimum coverage required (Institute Cargo Clauses C) |
| CIP | Seller | Higher minimum coverage required (Institute Cargo Clauses A, under Incoterms 2020) |
| DDP | Seller (in practice) | Not formally mandated, but seller bears risk until delivery |
Only CIF and CIP explicitly require the seller to arrange insurance as part of the trade term itself. Under every other common term, insurance is left entirely to whichever party bears the risk at that stage, and if neither party arranges it, the shipment simply travels uninsured.
Why CIF and CIP Only Require Minimum Coverage
Under CIF, sellers are only obligated to purchase minimum coverage under Institute Cargo Clauses (C), the narrowest tier of standard marine cargo insurance, covering a limited list of named perils rather than broader “all risks” protection. This minimum is often lower than what buyers actually want, especially for higher-value or fragile cargo.
Incoterms 2020 changed CIP’s minimum requirement to the broader Institute Cargo Clauses (A), effectively all-risks coverage, recognizing that CIP is more commonly used in higher-value trade. CIF’s minimum remained at the lower Clauses (C) level, reflecting its more frequent use in bulk commodity trade where buyers often prefer to arrange their own additional coverage regardless.
The Insurance Gap Risk
The most common mistake is assuming insurance is automatically included when it isn’t. Under FOB or CFR, for example, many buyers wrongly assume the seller has insured the goods since the seller is handling export logistics, when in fact the buyer needs to arrange their own policy before risk transfers at the port of loading. If nobody arranges insurance and cargo is damaged in transit, the loss falls entirely on whichever party held the risk at that point, with no policy to claim against.
Frequently Asked Questions
Does FOB include insurance?
No. Under FOB, the seller’s obligation ends once goods are loaded on the vessel, and insurance is not part of that term. The buyer needs to arrange their own coverage before that point.
Is CIF insurance enough to fully protect my cargo?
Not necessarily. CIF only requires minimum coverage under Institute Cargo Clauses (C), a limited named-perils policy. Buyers with higher-value or more fragile cargo often arrange supplementary coverage on top of the seller’s minimum policy.
What’s the difference between CIF and CIP insurance requirements?
Under Incoterms 2020, CIP requires the broader Institute Cargo Clauses (A), essentially all-risks coverage, while CIF still only requires the narrower Clauses (C) minimum.
Who is responsible for insurance under DDP?
DDP doesn’t formally mandate insurance the way CIF and CIP do, but since the seller bears risk all the way to final delivery, it’s standard practice for the seller to insure the shipment throughout that period.
Not sure who should be arranging insurance on your next shipment? Contact Paramount Express Agencies for guidance based on your Incoterm and cargo type.
