Incoterms Explained

Incoterms (International Commercial Terms) are a set of 11 standardised three-letter trade terms published by the International Chamber of Commerce (ICC). They define exactly who, buyer or seller, is responsible for costs, risk, insurance, customs and delivery at each stage of an international shipment. The current version is Incoterms 2020.

Cost transfer is the point where the seller stops paying and the buyer starts. Risk transfer is the point where responsibility for loss or damage passes to the buyer. For most terms they line up, but for the "C" terms (CFR, CIF, CPT, CIP) they do not: the seller pays freight to destination, yet risk passes to the buyer back at origin. That gap is the single most misunderstood part of Incoterms.

For containerised cargo, FCA, CPT or CIP are recommended over the sea-only terms FOB, CFR and CIF. FOB and its relatives assume the goods cross the ship's rail, which does not fit container terminals where you hand cargo to the carrier well before loading. Using FCA correctly avoids a gap in insurance cover and liability.

The 2020 revision replaced DAT (Delivered at Terminal) with DPU (Delivered at Place Unloaded), raised the required insurance level under CIP to all-risks cover, and added clearer guidance on security-related obligations and on-board bills of lading under FCA. The number of terms stayed at 11.

Only CIF and CIP legally require the seller to buy insurance for the buyer's benefit. Under all other terms, insurance is optional and arranged by whichever party bears the risk during transit. For D-terms (DAP, DPU, DDP) the seller carries the risk to destination, so the seller typically insures even though it is not mandatory.

Incoterms 2020 renamed DAT to DPU (Delivered at Place Unloaded) so the term is no longer tied to a terminal, and it raised the mandatory insurance level under CIP from the basic Clause C cover used in 2010 to the wider all-risks Clause A cover. It also added FCA provisions for on-board bills of lading, recognised the use of a buyer or seller's own transport, and built security-related obligations and cost allocation directly into each rule.

Under DAP (Delivered at Place) the seller delivers the goods ready for unloading at the destination but the buyer handles import customs clearance, duties and taxes. Under DDP (Delivered Duty Paid) the seller goes further and clears the goods for import and pays all duties and taxes, giving the buyer a fully landed price. DDP is the maximum obligation for the seller, while DAP leaves the import formalities with the buyer.

Under FOB (Free On Board) risk transfers from seller to buyer once the goods are placed on board the vessel nominated by the buyer at the port of shipment. Before that moment, loss or damage is the seller's responsibility; afterwards it is the buyer's. Because FOB hinges on loading onto the ship, it suits conventional break-bulk cargo rather than containers, where FCA is the better fit.

CFR (Cost and Freight) and CIF (Cost, Insurance and Freight) are identical except for insurance. Under both, the seller pays ocean freight to the destination port while risk passes to the buyer once the goods are on board at origin. CIF adds a requirement that the seller buy marine insurance for the buyer's benefit at the minimum cover level, whereas under CFR insurance is the buyer's responsibility.