Incoterms and Cargo Insurance: Who Should Buy Cover Under Each Term

Incoterms are best known for settling one specific question: at what point does risk of loss or damage pass from seller to buyer. Less well known, and easy to assume incorrectly, is that only two of the eleven Incoterms 2020 rules — CIF and CIP — actually build an insurance obligation into that answer. Every other term is silent on insurance entirely, leaving each side to decide for itself whether, and how, to cover the risk it's carrying.

That gap causes real problems when it's misunderstood. A buyer who assumes "the seller handles insurance" under a term like FOB or CFR, where the seller may be paying for freight but not for insurance, can find themselves with an uninsured shipment the moment something goes wrong mid-transit. Getting this right starts with separating two ideas that Incoterms deliberately keep distinct: where risk transfers, and who is required to insure against it.

Why Risk Transfer and Insurance Obligation Are Different Questions

Every Incoterm answers the risk-transfer question, because that's the core function of the entire rule set: define, unambiguously, at what point in a shipment's journey responsibility for loss or damage shifts from one party to the other. That point might be at the seller's own warehouse door (EXW), when goods are handed to a carrier at a named place (FCA), when goods are loaded on board a vessel (FOB, CIF), or only once goods arrive at the buyer's location (DAP, DPU, DDP).

Insurance is a separate mechanism entirely — a financial arrangement that compensates a party if the risk they're carrying actually materializes as a loss. Nothing about Incoterms requires the party carrying risk to insure against it; a buyer who takes on risk at the seller's factory gate under EXW is free to leave that risk uninsured, at their own commercial peril. What CIF and CIP do, uniquely among the eleven terms, is convert that general freedom into a specific obligation for one particular leg of the journey — requiring the seller to buy insurance that protects the buyer even though the buyer already carries the risk from an early point.

Seen this way, CIF and CIP aren't really about protecting the seller. The seller has already handed off risk by the time their insurance obligation kicks in. The insurance they're required to buy exists specifically for the buyer's benefit, covering a period during which the buyer bears risk but has comparatively little practical ability to arrange cover itself before the goods even leave origin.

Insurance Under EXW, FCA, and FOB: The Buyer's Responsibility

Under EXW, FCA, and FOB, risk transfers to the buyer relatively early in the journey — at the seller's premises, at a named place of delivery to the carrier, or once goods are loaded on board the vessel, depending on the specific term. None of these three terms creates any insurance obligation for either party.

In practice, this means the buyer is the one exposed to loss for the vast majority of the journey — the main international carriage, and often the pre-carriage leg too — and is therefore the one with the clearest reason to arrange cargo insurance. Because the buyer usually isn't the party actually booking the international transport under these terms, arranging insurance requires the buyer to either purchase an open cargo policy that automatically covers shipments as they occur, or coordinate with the seller or forwarder on a shipment-by-shipment basis, which introduces timing risk if it isn't set up before the goods actually move.

Sellers operating under these terms sometimes carry their own insurance too — covering their interest up to the transfer point, or protecting against contractual disputes about when exactly risk passed — but that's a separate, self-interested decision, not something FOB, FCA, or EXW requires them to do for the buyer's benefit.

The CFR and CPT Trap: Seller Pays Freight, Not Insurance

CFR and CPT create the most common source of confusion in this whole topic, because the seller is visibly paying for the main transport — which makes it easy for a buyer to assume insurance is bundled into that arrangement the same way it is under CIF or CIP. It isn't. Under CFR and CPT, the seller's obligation covers freight only; risk still transfers to the buyer at essentially the same early point as it would under FOB or FCA, and no insurance obligation attaches to either party.

The practical result is a shipment where the seller is managing and paying for the transport booking, while the buyer — who may have little visibility into the shipment's actual movement — carries the uninsured risk for that same transport. This is precisely the gap that catches buyers off guard: they see the seller handling logistics and assume protection is included, when in fact the C in CFR and CPT stands only for "cost" (freight), never for insurance.

Buyers working under CFR or CPT terms should treat arranging their own cargo insurance as a standard, non-optional step in the transaction — coordinated with the seller if useful for practical reasons (since the seller has better visibility into loading and departure details), but contractually and financially the buyer's own responsibility.

CIF and CIP: The Two Terms Where Insurance Is Mandatory

CIF (Cost, Insurance, Freight) and CIP (Carriage and Insurance Paid To) are the only two Incoterms that explicitly obligate the seller to buy cargo insurance. Both share the same basic structure: risk transfers to the buyer early, exactly as it would under FOB or FCA respectively, but the seller must additionally pay for an insurance policy that protects the buyer's interest during the onward journey.

The two terms differ in scope and, since Incoterms 2020, in the required minimum insurance level. CIF applies only to sea and inland waterway transport, and its minimum requirement remains the narrower Institute Cargo Clauses C, covering a limited set of named perils. CIP can be used for any mode of transport, including multimodal shipments, and Incoterms 2020 raised its minimum requirement to the broader Institute Cargo Clauses A, covering loss or damage from a wider range of causes unless specifically excluded.

That difference between the two minimums matters commercially. A buyer receiving CIF-based insurance only receives the narrower minimum unless the sales contract specifically negotiates a higher level; a buyer receiving CIP-based insurance under Incoterms 2020 starts from a broader baseline by default. Either way, both terms allow the parties to negotiate a higher level of cover than the stated minimum — the minimum is a floor, not a ceiling.

Why CIF's Insurance Minimum Stayed Narrow While CIP's Widened

The gap between CIF and CIP's minimum insurance levels traces back to how each term is typically used. CIF has deep roots in bulk commodity and sea trade, where the narrower Clause C minimum has long been an accepted market convention, and buyers in those trades are generally well-equipped to negotiate additional cover contractually when the cargo or route warrants it.

CIP, by contrast, covers a broader range of goods and transport modes — including higher-value manufactured goods moving by multimodal or containerized transport, where a narrower minimum was seen as a weaker default protection for buyers who might have less negotiating leverage or familiarity with cargo insurance markets than commodity traders. Incoterms 2020's drafting committee widened CIP's default specifically to give those buyers a stronger baseline without requiring them to negotiate for it.

For a business choosing between CIF and CIP for a given trade, this history is a practical reminder rather than just a technical footnote: don't assume the two terms offer equivalent insurance protection just because both include an "I" for insurance. The underlying minimum cover is genuinely different, and it's worth checking rather than assuming.

DAP, DPU, and DDP: Why Sellers Usually Insure Even Without a Requirement

Under the D-terms — DAP, DPU, and DDP — risk stays with the seller for almost the entire journey, transferring to the buyer only at or after arrival at the named destination. None of the three formally requires insurance any more than EXW or FOB do. But in practice, sellers operating under D-terms very commonly insure the shipment anyway, for a simple reason: they're the one holding the risk for the full transit, so an uninsured loss falls entirely on them, not on the buyer.

This is a useful illustration of the broader point running through this whole topic: the decision to insure tracks who holds the risk, far more reliably than it tracks what any specific Incoterm formally requires. A seller under DDP who skips insurance isn't violating any Incoterms rule, but is accepting full exposure to any transit loss with no requirement forcing anyone else to share it.

Buyers receiving goods under D-terms don't need to worry about arranging transit insurance themselves, since they don't carry that risk — their insurable interest, if any, only begins once risk transfers to them at or near destination.

How a Freight Forwarder Fits Into the Insurance Decision

A freight forwarder can typically arrange cargo insurance as a service, whether or not the underlying Incoterm formally requires it — coordinating the policy, matching the coverage period to the shipment's actual transit, and handling the paperwork alongside the rest of the shipping documents. That's genuinely useful, but it's worth being clear about what a forwarder does and doesn't decide.

A forwarder can advise on practical coverage options and help a shipper understand what a given policy actually protects against, but doesn't determine whether an Incoterm legally obligates one party or the other to buy insurance — that's fixed by the Incoterms rules themselves and by the sales contract that references them. Whichever party ends up arranging cover — buyer or seller, required or voluntary — a forwarder is generally well positioned to execute that arrangement once the underlying obligation, or the commercial decision to insure anyway, has been settled between the trading parties.

Getting the sales contract's Incoterm and its insurance implications right before shipping is still squarely the responsibility of the buyer and seller negotiating the deal — a forwarder supports the logistics of insurance, not the legal analysis of who's obligated to hold it.

Example

A Thai manufacturer sells a shipment of electronics components to a buyer in Europe under CIP terms, using a combination of ocean freight and inland trucking to reach the buyer's warehouse. Under CIP, risk transfers to the buyer once the goods are handed to the first carrier in Thailand — well before the goods leave the country — but the seller is required to buy insurance covering the buyer's risk for the entire multimodal journey, at a minimum of Institute Cargo Clauses A cover under Incoterms 2020.

Midway through the ocean leg, a container is damaged during a rough transfer at a transshipment port. Because risk had already passed to the buyer under CIP, the buyer is the party with standing to claim against the cargo insurance policy — but because the seller was required to buy that policy at a broad Clause A level, the buyer's claim is more straightforward than it would have been under a narrower policy, since Clause A cover doesn't require the buyer to prove the damage falls under a specific named peril. The buyer files the claim directly with the insurer named on the policy the seller purchased, using the transport documents and a damage survey to support it.