Why CIF Insurance Is 110%

Not 100 percent, not 120. There is a reason for the figure. And there is a trap that matters more than the number itself.

Where 110 percent comes from

Under CIF, the seller must insure for a minimum of 110 percent of the value of the goods. Incoterms 2020 and UCP 600 Article 28 both apply the same standard.

The reason it is not 100 percent is straightforward. When goods are lost in full, what the buyer loses is more than the price of the goods.

The buyer intended to sell those goods at a profit. They may have arranged customs clearance, inland transport, warehousing. When the goods disappear, those costs and the expected margin disappear with them.

What 110 percent covers

100 percent for the goods, plus 10 percent for incidental costs and expected profit. A standard settled by international trade practice.

The 10 percent figure itself comes from convention. Actual incidental costs may run higher or lower. But it has become the accepted international minimum, and in letter of credit transactions it becomes an examination item.

110 percent is a floor, not a target

What matters is that 110 percent is a minimum. Insuring above it creates no problem. If the buyer wants higher coverage, they specify it in the sales contract or the letter of credit.

A common letter of credit (LC) discrepancy arises right here. Rounding during the CIF value calculation leaves the insured amount fractionally below 110 percent. The bank treats that as a discrepancy. Exceeding is fine. Falling short is not.

The real trap is coverage scope

More often than the amount, the issue is what the policy actually covers.

Under Incoterms 2020, the default coverage level for CIF is Institute Cargo Clauses (C) or similar. This is not comprehensive coverage. It is minimum coverage.

Institute Cargo Clauses (C) covers major casualty events: stranding, sinking, fire, collision. It does not cover theft, breakage, water damage, or most partial loss scenarios. Which are precisely the events that occur most often in practice.

This is how a buyer who felt secure because "the shipment is insured under CIF" opens a container, finds partial damage, files a claim, and learns the loss falls outside the policy scope.

Free resource

CIF and FOB Practical Guide (PDF)

A checklist covering insured amount, currency, effective date, and issuer eligibility for letter of credit insurance document examination, with the applicable UCP 600 articles cited for each item. Also includes seller and buyer obligations under FOB and CIF and a comparison table of all eleven Incoterms.

Download free → https://guild.tflowx.com/ko/post/96

If you want comprehensive coverage

A buyer wanting broad protection must specify Institute Cargo Clauses (A) or equivalent. Clauses (A) covers all risks except the stated exclusions.

Specify it in two places. Put the coverage condition in the sales contract, and in a letter of credit transaction, reflect it in the credit terms as well. When the credit states something like "Insurance Policy covering Institute Cargo Clauses (A)," the seller must insure on those terms and the bank examines against that standard.

Worth noting: the Incoterms 2020 revision raised the default coverage for CIP to Institute Cargo Clauses (A). Only CIF remains at (C). Two terms that both include insurance, at different default coverage levels.

What to check in a letter of credit transaction

The insurance document is examined under UCP 600 Article 28. Beyond the amount, several items need verification.

Currency. Must be issued in the same currency as the credit. A USD credit with an EUR insurance document is a discrepancy.

Issuer. Must be issued and signed by an insurance company, underwriter, or their agent. A broker's cover note is not acceptable unless the credit expressly permits it.

Effective date. Coverage must begin no later than the date of shipment. An insurance document dated after shipment is a discrepancy unless it states that coverage is effective from a date no later than shipment.