In short: under FOB the buyer takes on freight and insurance from loading onwards. Under CIF the seller pays freight and minimum insurance to the port of destination, but risk likewise passes to the buyer at loading. This point is often overlooked in contracts and later leads to disputes about costs and liability.
In brief:
Under FOB the seller's liability ends with loading on board; from that point the buyer bears freight, insurance and formalities.
CIF includes the organisation and payment of sea freight as well as a minimum insurance by the seller, but risk passes to the buyer already at loading.
Unclear contract wording on port, insurance clauses or freight details often causes disputes in international trade.
For more certainty, an explicit written fixing of port names, insurance clauses and freight allocation in the contract is advisable.
Where the buyer has its own logistics and planning, FOB contracts are usually cheaper and more controllable, while CIF is more suited to inexperienced importers.
FOB (Free On Board): duties, costs and risks
FOB stands for „Free On Board“ and marks the point of delivery as the moment the goods are loaded on board the ship at the named port of shipment. The exact port name is not a detail but the heart of the contract: „FOB Shanghai“ sets where the seller's duties end, while an imprecise „FOB“ leads to disputes over interpretation later.
Up to this point the seller takes care of export clearance, transport to the port and loading on board. From loading onwards, freight, insurance and all import formalities pass to the buyer; this is also how the ICC Incoterms® set it out, with risk under FOB and CIF passing uniformly on loading on board.
In practice this means:
- The seller bears cost and risk only up to loading; after that both lie with the buyer.
- The buyer must conclude its own freight contract and chooses the shipping line.
- Insurance from loading onwards is organised exclusively by the buyer; otherwise a coverage gap arises automatically.
- For container transport, FOB is often unsuitable, as the goods are handed over at the terminal rather than on board. Here the Incoterm FCA (Free Carrier) usually fits the actual handover better.
On an invoice the FOB price should be shown separately from freight, insurance and destination-port charges. Only then can one trace later which party actually had to bear which cost block, and disputes over supposedly included services can be avoided.
CIF (Cost, Insurance and Freight): seller's duties and scope of insurance
Under CIF the seller organises and pays for sea freight plus a minimum insurance up to the named port of destination. UK government guidance describes exactly this split: the seller arranges freight and basic insurance, while from unloading onwards the buyer remains responsible for import formalities and any fees.
The decisive, often misunderstood point: CIF is a cost rule, not a risk rule. Risk, despite the seller's payment obligation, passes to the buyer already on loading on board, as the ICC Incoterms® also set out. The seller here only pays the invoice; it does not bear the transport risk.
The prescribed minimum insurance typically follows the Institute Cargo Clauses (C), a very narrow cover. According to iContainers, Clause C covers only a few clearly named causes of damage; many practical risks such as theft, water damage or rough handling fall outside.
- Minimum cover is often enough for cheap, robust goods, but not for sensitive or high-value cargo.
- Under Clause C, buyers should actively request a top-up cover or their own policy with Clause A cover.
- CIF suits importers without their own logistics structure, but comes with less control over the shipping line and insurer.
Pro tip: have the seller confirm in writing which Institute Clause exactly applies before you sign the contract.
FOB vs CIF: comparison by cost, risk and insurance claim
The cost split between FOB and CIF can be pinned to four items: sea freight, insurance, destination-port costs and import handling. Under FOB the buyer pays all four itself. Under CIF the seller takes on sea freight and minimum insurance, while destination-port fees and import handling remain with the buyer.
Even where damage occurs during transport, the roles remain clear: since risk passes on loading in both cases, the buyer is the one who reports damage and acts as beneficiary of the insurance policy, even where the seller took out the policy under CIF.
Before signing, a short checklist pays off:
- Is the port of shipment or destination named precisely and unambiguously?
- Under CIF, is the exact Institute Cargo Clause named in the contract, not merely „insurance included“?
- Is there proof of the actual freight contract showing the services included in the CIF price?
- Is the total CIF price broken down into its components of goods value, freight and insurance?
For cost review, a simple rule applies: ask the seller for a freight-breakdown schedule and compare the CIF price with the sum of the FOB price plus your own freight and insurance costs. A practical comparison often shows that CIF offers contain a seller's mark-up that falls away if logistics are organised in-house.
- Where the port name is missing, it is unclear later where exactly the delivery duty ends.
- Where the Clause name is missing, it is unclear which damage is actually covered.
When should your company choose FOB or CIF? Decision rules
FOB fits well where an own logistics structure or a reliable freight forwarder is already in place and you want to decide for yourself which shipping line and which insurer to use. CIF is more suited to companies without import experience that prefer a one-stop solution, even if that usually comes with less control and a price mark-up.
As a rule of thumb: the more regular and predictable the import volume, the more it pays off to negotiate your own freight and insurance contracts, since this usually yields better terms than the seller's flat CIF mark-up.
Under CIF shipments, insurance gaps should always be checked. Where Clause C minimum cover is not enough, a Clause A top-up is usually the more sensible solution than a full change of insurer.
Concrete steps before signing:
- Request a freight-breakdown schedule from the seller.
- Name the port unambiguously and in full in the contract.
- Fix the insurance terms including the Institute Clause in writing.
- For new trading partners, also consider a letter of credit as payment security.
Pro tip: for a first deal with an unknown supplier, the combination of a precise FOB or CIF clause and a letter of credit almost always pays off more than relying on oral assurances.
Contract passages, letter of credit and typical pitfalls: legal practice advice
The contract language often decides the outcome of a dispute. „FOB Rotterdam“ is something different from an unspecified „FOB“; likewise, under CIF the port of destination and the specific Institute Clause should appear in the text, not merely „insurance included“.
A letter of credit, governed by the globally used UCP 600 rules, is particularly suitable for new trading relationships: the importer's bank promises payment against presentation of agreed documents, which according to Commerzbank significantly reduces payment risks in foreign trade. Bank charges are usually borne by each party for its own bank, but the exact split remains a matter of negotiation.
Common points of dispute in our practice:
- Discrepancies between invoice details and the documents required under the letter of credit.
- Unclear or missing port name in the sales contract.
- Missing top-up insurance for high-value CIF shipments.
Contractual inaccuracies such as an unnamed port of shipment are among the recurring causes of dispute in international trade. ICC practice on Incoterms questions also shows this, pointing out that precise wording often avoids delays in payment under a letter of credit.
Perspective: recommendation from law-firm practice
Our clear recommendation is to have every contract with an FOB or CIF clause checked legally before signing, especially where port or insurance clause are only vaguely worded. A missing port name or an unnamed Institute Clause looks like a trifle at first, but decides in a damage case who pays a five-figure bill.
The review costs time and a manageable fee, but it often prevents far more expensive disputes over freight costs, insurance cover or customs formalities. For new trading partners in less familiar jurisdictions, it also pays off to check the letter-of-credit terms before goods or money change hands.
— Bitblade
Offer: contract review, clause drafting and letter-of-credit advice by Sobiera Legal Consulting
We review sales contracts with FOB or CIF clauses for exactly the gaps that become expensive later: unclear port name, missing insurance clause, risky letter-of-credit terms. We handle communication in several languages, which can save time especially in negotiations with partners from different legal areas.
The process is straightforward: an initial conversation to assess your contract situation, then a mandate with a clear brief, then a review report with concrete proposals for clauses, insurance cover and payment security. The initial conversation is available from CHF 150 per hour; for ongoing Eastern trade we also offer a retainer model from CHF 500 per month.
If you would like a specific shipment or a framework contract with an FOB or CIF clause reviewed, you will find our packages and fees or can contact us directly through our services page.
FAQ
Who bears the costs for freight and insurance under CIF?
Under CIF the seller pays sea freight and a minimum insurance up to the named port of destination. From unloading at the destination port, costs for import formalities and other fees pass to the buyer, according to GOV.UK.
What does FOB mean in practice for shipments?
FOB means that the seller delivers the goods on board the ship at the named port of shipment, and from that moment risk and further costs pass to the buyer. A precise port name such as „FOB Shanghai“ is decisive for contract clarity.
Who pays the freight on FOB shipments?
Under FOB the buyer organises and pays sea freight from the port of shipment, since the seller's delivery duty ends with loading on board. The same applies to insurance, which the buyer must take out itself from that point onwards.
What is the difference between FOB and EXW?
Under EXW (Ex Works) the buyer collects the goods already at the seller's premises and thus bears transport, risk and all export formalities from the outset. Under FOB, by contrast, the seller still handles transport to the port and loading on board before risk and costs pass to the buyer.
Is a letter of credit worthwhile in addition to FOB or CIF?
A letter of credit governs payment security and does not replace the Incoterms clause, but complements it sensibly, especially with new trading partners. According to Commerzbank, a letter of credit significantly reduces payment risk, since the importer's bank promises payment against agreed documents.