CIF vs FOB: Which Incoterm Should You Use?

CIF (Cost, Insurance, Freight) and FOB (Free On Board) are the two most-quoted Incoterms in the world - and two of the four rules ICC restricts to sea and inland waterway transport. They are frequently misused for container cargo, and the choice between them has direct consequences for who insures, who pays freight, how customs value the goods, and how discrepancies play out under a letter of credit.

Where risk passes

Under both CIF and FOB (Incoterms® 2020), risk passes when the goods are on board the vessel at the named port of loading. That's identical. Everything before then - inland haulage, terminal handling, export clearance - is the seller's risk. Everything after, including main carriage, is the buyer's.

This is exactly why the ICC warns against using either for containers. The seller typically hands over at the container yard days before the vessel sails, but risk under CIF/FOB does not pass until on-board. That gap is uninsured and legally ambiguous. FCA (with an FCR / on-board B/L addendum) and CIP are the ICC-recommended alternatives for containers.

Where cost sits

The two rules diverge on who arranges and pays for what:

• FOB - the seller loads on board; the buyer arranges and pays ocean freight and marine insurance.
• CIF - the seller arranges ocean freight and minimum-cover marine insurance (Institute Cargo Clauses "C", at least 110% of CIF value in the invoice currency); risk still passes on board at origin.

Note the asymmetry: under CIF the seller pays for insurance but the buyer bears the risk. If cargo is damaged on the water, the buyer claims on the policy the seller took out. That's why the buyer usually wants to see the policy or certificate - and why LC Field 46A almost always requires it as a document.

What appears on the invoice

Price stack:

• FOB = EXW + inland freight + export clearance + terminal + on-board loading
• CFR = FOB + ocean freight
• CIF = CFR + marine insurance (on 110% of CIF)

Because insurance is charged on 110% of CIF itself, the CIF formula is self-referential:

CIF = (FOB + freight) / (1 − insurance_rate × 1.1)

Use the CIF ↔ FOB Converter - it solves this exactly and lets you enter your carrier's freight and your insurer's rate.

How customs treat the two

Customs valuation methodology is set by the WTO Valuation Agreement, but member states differ on the freight/insurance treatment:

• EU, UK, GCC, India - CIF is the customs value (freight and insurance included).
• USA - FOB / transaction value is the customs value; freight and insurance are added afterwards to reach landed cost.
• Canada, Australia - FOB-based, similar to USA.

This matters when you're quoting duty-inclusive prices - a CIF origin invoice into the US still attracts duty only on FOB, but into the EU it attracts duty on the full CIF.

Under a letter of credit

Under UCP 600, an LC calling for CIF requires the seller to present a marine insurance document as one of the documents (Article 28). An LC calling for FOB does not. The most common CIF discrepancies are:

• Insurance amount below 110% of CIF invoice value
• Insurance currency different from LC currency (Art. 28(f)(i))
• Cover starting after the on-board date
• Institute Cargo Clauses "C" quoted when LC required "A"

The LC Application Checklist flags all of these before issuance. And if you're negotiating whether to price CIF or FOB into an LC, the trade-off is administrative burden (CIF = more documents to prepare) versus buyer control over freight/insurance choice (FOB = buyer picks their forwarder and insurer).

Which should you use?

For containerised cargo, neither - use FCA (buyer's freight) or CIP (seller's freight and all-risk insurance). For bulk and breakbulk over the ship's rail, use CIF when the seller has stronger insurance rates or the buyer wants a delivered-cost quote for budgeting, and FOB when the buyer already has a preferred forwarder and insurer.

Run your specific case through the Incoterms Selector Wizard - it asks eight questions and returns the ICC-recommended rule for your mode, LC status and control preference.