When your company operates beyond national borders, it’s important to understand the trade terms related to transportation, risk, and insurance to avoid misunderstandings. Incoterms are a set of standard delivery terms you can use for this purpose. Read more about Incoterms here.

What are the Incoterms?

Incoterms are a set of generally accepted commercial terms—more precisely, terms of delivery—used in international trade agreements between companies. Incoterms were developed to help companies agree on delivery when goods are transported across borders.

Incoterms include a series of commercial conditions that predefine which party in a commercial agreement is responsible for paying freight, assuming the risk of damage or loss of the goods, and recommend which party should pay for insurance covering the goods during transport. These conditions also clearly specify when the obligations transfer from the seller to the buyer, which prevents any future litigation.

Here is an overview of the conditions covered by the Incoterms in their terms:

• When does the responsibility for paying transportation costs pass from the seller to the buyer?
• When does the responsibility for paying for any insurance pass from the seller to the buyer?
• Where must the goods be delivered? Who is responsible for the loading and unloading of the goods?
• When does the risk of damage or loss pass from the seller to the buyer?
• What are the time limits for filing a claim, the limitation period, and the limit of liability?

Delivery Conditions in Incoterms

Business partners can agree on 11 different delivery conditions. The following section briefly explains the details of these conditions to help you find the one that best suits your business.

EXW – Ex Works

Under the EXW terms, the risk of loss or damage to the goods, as well as the cost of transportation, passes from the seller to the buyer once the seller has made the goods available at its warehouse or factory. Consequently, the buyer bears all transportation costs to the place of delivery.

Therefore, under this terms, the seller assumes the least risk. It is recommended that the buyer assume the insurance cost once the seller has made the goods available at the seller’s warehouse or factory for the buyer’s collection.

FCA – Free Carrier

Under the FCA terms, the risk of loss or damage to the goods, as well as the obligation to insure them, passes from the seller to the buyer when the goods are handed over to the carrier designated by the buyer for further transportation.

If the place of delivery is not the seller’s warehouse or factory, the risk passes when the goods are handed over to the buyer’s designated carrier, without unloading.

FAS – Free Alongside Ship

FAS can only be used for sea freight. With FAS, the freight and insurance costs are transferred from the seller to the buyer when the goods are delivered to the quay alongside the ship. The risk of damage or loss is also transferred from the seller to the buyer at this point.

FOB – Free on Board

FOB applies only to sea freight. Under FOB terms, the seller bears the freight and insurance costs and assumes the risk of damage or loss of the goods until they are loaded onto the vessel at the agreed-upon port.

Once the goods are loaded onto the vessel, all costs and risks are transferred to the buyer. Therefore, if the goods are lost during transport, the buyer must bear all resulting costs and losses.

CFR – Cost and Freight

CFR applies only to sea transport. Under CFR terms, the seller is responsible for paying the freight charges until the goods arrive at the agreed-upon destination port.

From that port, the buyer bears the freight charges. However, the risk of damage or loss to the goods, as well as the cost of insurance, passes to the buyer when the goods are loaded onto the vessel at the port of shipment.

CIF – Cost Insurance and Freight

CIF can only be used for sea transport. Under CIF, the seller pays the freight and insurance until the goods arrive at the agreed destination port. However, the risk of damage or loss passes from the seller to the buyer as soon as the goods are loaded onto the vessel at the agreed port of shipment.

CPT – Carriage Paid To

Under the CPT terms, the transport costs are transferred to the buyer upon delivery of the goods to the agreed location.

However, the risk of damage or loss of the goods, as well as the cost of insurance, is transferred from the seller to the buyer as soon as the goods are handed over to the first carrier responsible for transporting them from the seller’s warehouse or factory.

CIP – Carriage and Insurance Paid To

When CIP is used, the seller pays the freight and insurance up to the delivery of the goods to the buyer-specified place of delivery. However, the minimum insurance cover must comply with terms (A) of the Institute Cargo Terms (ICC). The risk of damage or loss, however, passes from the seller to the buyer as soon as the goods are handed over to the first carrier.

DAP – Delivered at Place

Under DAP, the seller pays freight and insurance to the buyer-specified place of delivery, with unloading. The transfer of risk also does not take place until the goods are made available at the place of delivery specified by the buyer, unloaded.

Unloaded means that the seller is not responsible for the unloading of the goods; rather, that responsibility lies with the buyer.

DPU – Delivered at Place Unloaded

Under the DPU terms, the costs of transport and insurance are transferred from the seller to the buyer once the goods have been delivered to the delivery place specified by the buyer.

The risk of damage or loss also passes to the buyer only once the goods have been completely unloaded at the specified location—that is, once the goods have been removed from the delivery vehicle and placed at the delivery location itself.

DDP – Delivered Duty Paid

With DDP, the seller pays the freight and insurance to the delivery location specified by the buyer. In addition, the seller pays all duties and taxes, including customs duties, applied to the goods.

The transfer of risk also occurs only when the goods are made available at the delivery location specified by the buyer, once unloaded.

Why use Incoterms?

Since Incoterms are internationally recognized commercial terms, many businesses are already familiar with them, so you don’t need to waste time drafting new agreements and terms with your business partner.

By using Incoterms, you also reduce the risk of misunderstandings regarding freight, insurance, or risk. The likelihood of legal disputes is therefore significantly lower when you use Incoterms.