Introduction
If you’re wondering what is Incoterms?, these are standardized three-letter trade rules published by the International Chamber of Commerce (ICC). They help buyers and sellers understand who is responsible for transportation, costs, customs procedures, and the risk involved in moving goods. The current official edition is Incoterms® 2020, which includes 11 rules for different types of transport and delivery arrangements.
Incoterms clarify important responsibilities throughout the shipping process. Some rules, including CIP and CIF, also require the seller to arrange cargo insurance. However, Incoterms themselves are not insurance policies and do not provide cargo insurance coverage.
For example, under CIP, a seller may arrange transportation and insurance for an $80,000 shipment from Singapore to India. The buyer, however, takes on the transit risk once the goods are delivered to the carrier.
This guide covers all 11 Incoterms, explains buyer and seller responsibilities, identifies when risk transfers, and shows how these rules can affect cargo insurance decisions.
What Is the Latest Version of Incoterms?
The latest official edition is Incoterms® 2020, published by the International Chamber of Commerce (ICC). There is no separate official “Incoterms 2026” edition. The 2020 rules remain the applicable version in 2026.
Incoterms® 2020 includes 11 trade rules that define key buyer and seller responsibilities, including:
- Transportation and delivery obligations
- Export and import clearance
- Freight and other delivery costs
- Transfer of risk
- Insurance requirements under specific rules
The rules apply to different transport situations. Seven Incoterms rules can be used for any mode of transport, while four are specifically designed for sea and inland waterway transport.
When using an Incoterm in a sales contract, it is important to state the rule, named place, and edition clearly. For example: CIP Singapore Airport, Incoterms® 2020.
How Many Incoterms Are There?
There are 11 Incoterms® 2020 rules. They are divided into two groups based on the type of transportation they can be used for:
7 Incoterms for Any Mode of Transport
These seven Incoterms can be used for shipments involving road, rail, air, sea, or multiple modes of transportation:
- EXW — Ex Works
- FCA — Free Carrier
- CPT — Carriage Paid To
- CIP — Carriage and Insurance Paid To
- DAP — Delivered at Place
- DPU — Delivered at Place Unloaded
- DDP — Delivered Duty Paid
4 Incoterms for Sea and Inland Waterway Transport
These rules are intended specifically for shipments transported by sea or inland waterways:
- FAS — Free Alongside Ship
- FOB — Free On Board
- CFR — Cost and Freight
- CIF — Cost Insurance and Freight
The main difference between these groups is the type of delivery point and transport arrangement covered by each rule. Selecting an appropriate Incoterm clarifies the party responsible for costs, transportation arrangements, and the point at which transit risk shifts.
Check Your Coverage Needs
Your Incoterm can affect who carries the risk during transit. Enter your shipment value, transport mode, and cargo type to estimate your cargo insurance premium.
The 11 Incoterms at a Glance
Different obligations for the buyer and seller are outlined in each Incoterm. The table below provides a quick overview of transport, main carriage, risk transfer, and insurance requirements.
Incoterm | Transport | Main Carriage Paid By | Risk Transfers | Seller Insurance Required? |
EXW | Any mode | Buyer | At the seller’s named place | No |
FCA | Any mode | Buyer | At the agreed delivery point | No |
CPT | Any mode | Seller | When goods are handed to the carrier | No |
CIP | Any mode | Seller | When goods are handed to the carrier | Yes |
DAP | Any mode | Seller | At the named destination, ready for unloading | No |
DPU | Any mode | Seller | After unloading at the named destination | No |
DDP | Any mode | Seller | At the named destination, ready for unloading | No |
FAS | Sea/inland waterway | Buyer | When goods are placed alongside the vessel | No |
FOB | Sea/inland waterway | Buyer | When goods are on board the vessel | No |
CFR | Sea/inland waterway | Seller | When goods are on board the vessel | No |
CIF | Sea/inland waterway | Seller | When goods are on board the vessel | Yes |
Important: Paying for the main carriage does not always mean the same party bears the transit risk. For example, CPT and CIP, the seller covers the transportation cost, while the buyer assumes the transit risk once the shipment is delivered to the carrier.
Insurance requirements also differ. CIP and CIF require the seller to arrange insurance under the Incoterms® 2020 rules, but the required level of cover is different.
Incoterms for Any Mode of Transport
Seven Incoterms® 2020 rules are designed for transactions using road, rail, air, sea, or a combination of transport modes.
1. EXW — Ex Works
With EXW, the seller’s responsibility is generally limited to making the goods available at the agreed location, such as a factory, warehouse, or other premises. The buyer takes care of collection, transportation, customs procedures, and most related expenses.
Risk transfers: Once the seller has made the goods available for the buyer to collect at the specified location.
Seller: Prepares the shipment and makes it available for collection.
Buyer: Organizes pickup, freight, customs procedures, and cargo insurance when needed.
Example: If machinery worth $30,000 is purchased from a Singapore supplier under EXW Singapore, the buyer would generally arrange collection from the supplier’s premises, export procedures, international transportation, and final delivery in India.
2. FCA — Free Carrier
Under FCA, the seller delivers the shipment to a carrier or another party selected by the buyer at the agreed delivery location. Where applicable, the seller handles the necessary export customs formalities.
The buyer normally takes responsibility for the main international transportation.
Risk transfers: When the goods are delivered to the nominated carrier at the agreed point.
Seller: Prepares the goods and completes the applicable export formalities.
Buyer: Organizes the main carriage, import clearance, and subsequent delivery.
FCA is often suitable for containerized cargo because the goods may be transferred to a carrier or terminal before they are loaded onto the vessel.
3. CPT — Carriage Paid To
With CPT, the seller contracts and pays for transportation to the specified destination. The transfer of risk, however, takes place before the shipment reaches that destination.
Risk transfers: When the goods are delivered to the carrier.
Seller: Arranges the required transportation and covers the freight charges up to the agreed destination.
Buyer: Assumes transit risk after delivery to the carrier and takes care of import-related requirements.
This rule demonstrates why transport costs and transit risk should be considered separately. The seller may be responsible for the freight expense, while the buyer bears the risk of loss or damage once risk has transferred.
4. CIP — Carriage and Insurance Paid To
CIP follows the same basic risk structure as CPT, but it also places an insurance obligation on the seller under the Incoterms® 2020 rules.
Risk transfers: When the goods are delivered to the carrier.
Seller: Arranges the carriage and obtains the required cargo insurance.
Buyer: Takes on the transit risk from the point of delivery to the carrier and manages import formalities.
The insurance requirement under CIP is generally broader than the default requirement under CIF in Incoterms® 2020.
Example: Consider an $80,000 machinery shipment moving from Singapore to India under CIP. The seller arranges the transportation and required insurance, while the buyer assumes the transit risk once the goods have been delivered to the carrier.
5. DAP — Delivered at Place
Under DAP, the seller organizes transportation and brings the goods to the agreed destination. The shipment is considered delivered when it is placed at the buyer’s disposal ready for unloading.
Risk transfers: At the named destination, before unloading takes place.
Seller: Takes care of unloading the shipment and completes the required import procedures, including applicable duties and taxes.
Buyer: Handles unloading and is responsible for import clearance, duties, and applicable taxes.
6. DPU — Delivered at Place Unloaded
DPU places an additional delivery responsibility on the seller: the goods must be delivered and unloaded at the specified destination.
Risk transfers: Once unloading has been completed at the named destination.
Seller: Arranges transportation, completes delivery, and handles unloading while bearing the risk until that process is complete.
Buyer: Takes care of import clearance, duties, and taxes.
The DPU rule does not require the seller to arrange cargo insurance.
7. DDP — Delivered Duty Paid
DDP assigns extensive delivery responsibilities to the seller. These generally include arranging transportation, completing export and import formalities, and paying applicable duties and taxes.
Risk transfers: Once the goods reach the agreed destination and are available for unloading.
Seller: Manages transportation, customs requirements, duties, taxes, and delivery to the specified location.
Buyer: Receives the shipment and generally takes responsibility for unloading.
Although the seller carries substantial responsibilities under DDP, the rule itself does not make cargo insurance mandatory. The seller can nevertheless obtain insurance if it chooses to protect its financial interest.
Incoterms for Sea and Inland Waterway Transport
Four Incoterms® 2020 rules are specifically intended for sea and inland waterway shipments: FAS, FOB, CFR, and CIF. Each one sets a different point for delivery, cost responsibility, and transfer of risk.
1. FAS — Free Alongside Ship
With FAS, the seller completes delivery when the goods are placed alongside the vessel at the agreed port.
Risk transfer: Risk moves to the buyer once the goods are positioned alongside the vessel.
Seller’s responsibility: The seller delivers the cargo alongside the nominated vessel and completes the required export procedures.
Buyer’s responsibility: The buyer arranges vessel loading, main transportation, import clearance, and cargo insurance if needed.
2. FOB — Free On Board
Under FOB, the seller delivers the goods once they have been loaded onto the vessel selected by the buyer at the agreed port.
Risk transfer: The buyer takes on the risk when the goods are loaded on board the vessel.
Seller’s responsibility: The seller gets the goods onto the vessel and handles the applicable export formalities.
Buyer’s responsibility: The buyer arranges the main sea transportation, import procedures, and cargo insurance when additional protection is required.
Important: FOB is intended for sea and inland waterway transport. It may not be the best fit for containerized cargo that is handed over to a carrier or terminal before it reaches the vessel. In such cases, FCA Incoterms may better reflect the actual delivery point.
3. CFR — Cost and Freight
CFR means the seller arranges and pays for freight to the named destination port. However, paying the freight does not mean the seller remains responsible for the cargo throughout the journey.
Risk transfer: Risk passes to the buyer when the goods are loaded onto the vessel at the shipment port.
Seller’s responsibility: The seller books the transportation and pays the agreed freight charges to the destination port
Buyer’s responsibility: The buyer assumes transit risk after loading and can arrange cargo insurance when protection is required.
4. CIF — Cost, Insurance and Freight
CIF is similar to CFR because the seller arranges and pays for freight to the destination port. The key difference is that CIF also requires the seller to arrange cargo insurance under Incoterms® 2020.
Risk transfer: Risk moves to the buyer once the goods are loaded onto the vessel at the port of shipment.
Seller’s responsibility: The seller arranges the agreed sea freight and obtains the insurance required under the CIF rule.
Buyer’s responsibility: The buyer takes on the transit risk after loading and handles the applicable import requirements.
CIF applies only to sea and inland waterway transport. Its default insurance requirement under Incoterms® 2020 generally provides a narrower level of cover than the default requirement under CIP.
Who Pays for Shipping and Who Bears the Risk?
The person who pays the freight is not necessarily the person who carries the transportation risk. This is one of the most important points to understand when using Incoterms® 2020.
For example:
- CPT and CIP: The seller pays for the main carriage, but risk transfers when the goods are handed to the carrier.
- CFR and CIF: The seller pays freight to the destination port, but risk transfers when the cargo is loaded onto the vessel.
- DAP, DPU, and DDP: The seller generally carries the risk until the goods reach the specified delivery point.
This difference matters when arranging cargo insurance. Before deciding who should insure a shipment, identify the exact point at which the risk moves from the seller to the buyer.
Which Incoterms Require the Seller to Arrange Insurance?
Under Incoterms® 2020, only CIP and CIF place an insurance-arranging obligation on the seller.
Incoterm | Seller Arranges Insurance? | Applicable Transport |
CIP | Yes — generally broader cover is required | Any mode of transport |
CIF | Yes — minimum cover is generally required | Sea/inland waterway |
Other Incoterms | No mandatory seller insurance requirement | Depends on the rule |
The insurance requirements for CIP and CIF are not identical. CIP generally calls for broader insurance protection, while CIF uses the minimum level required by the rule.
For the other Incoterms, the buyer or seller may arrange cargo insurance depending on the sales agreement, risk exposure, cargo value, and coverage requirements.
How Do Incoterms Affect Cargo Insurance?
Incoterms do not replace a cargo insurance policy. Instead, they help establish when the financial risk of loss or damage moves between the seller and buyer.
Before arranging coverage, check these points:
- When does risk transfer? Identify the exact delivery point where the buyer becomes responsible for transit risk.
- Who has an insurance obligation? Check whether the selected Incoterm requires the seller to arrange insurance.
- What is the cargo worth? Make sure the potential financial exposure is properly considered.
- How is the shipment moving? Sea, air, road, rail, and multimodal shipments can have different risk considerations.
- What does the policy cover? Review limits, exclusions, deductibles, and claim conditions.
Example: A buyer purchasing goods under FOB generally takes on the transit risk after the cargo has been loaded onto the vessel. The buyer may therefore choose to arrange cargo insurance for covered losses or damage during the remaining journey.
For businesses that need protection across different transport modes, CargoInsurePro provides cargo insurance options covering areas such as marine cargo, air freight, land transport, and parcel shipments.
What Do Incoterms Not Cover?
Incoterms are designed to clarify delivery obligations, costs, and risk transfer. They are not a complete international sales contract and do not settle every commercial issue between the buyer and seller.
Incoterms generally do not establish:
- Ownership or title: They do not determine when legal ownership of the goods changes hands.
- Price and payment: The purchase price and payment arrangements must be agreed separately.
- Applicable law: They do not establish the governing law or dispute-resolution process.
- Product requirements: Product specifications and quality obligations are handled separately.
- Contract remedies: They do not establish all remedies available when one party breaches the sales contract.
- Cargo insurance coverage: Except for the specific insurance obligations under CIP and CIF, Incoterms do not provide an insurance policy.
For this reason, an Incoterm should be treated as one part of the wider sales and shipping agreement. The contract should clearly identify the selected rule, named location or port, and applicable Incoterms® 2020 edition.
What Are the Most Common Incoterms Mistakes?
A misunderstanding about an Incoterm can lead to unexpected freight costs, insurance gaps, shipment delays, or disagreements between trading partners.
1. Assuming the Freight Payer Bears the Risk
Paying transportation costs does not automatically mean that the same party carries the transit risk.
For example, with CPT, the seller pays for carriage to the agreed destination, but risk transfers when the goods are delivered to the carrier.
2. Using FOB for Every Container Shipment
FOB is specifically intended for sea and inland waterway transport. With some container shipments, the cargo is handed over to a carrier or terminal before it is loaded onto the vessel.
In such arrangements, FCA may better correspond with the actual point where delivery and risk transfer occur.
3. Treating CIF Insurance as Complete Protection
CIF requires the seller to arrange insurance, but that does not necessarily mean the shipment has every type or level of protection the buyer may want.
The buyer should review the actual insurance terms, exclusions, limits, and applicable coverage.
4. Failing to Specify the Named Place
An Incoterm should identify a clear delivery location or port.
For example:
FCA Singapore Airport, Incoterms® 2020
A specific named place helps the parties understand where delivery and risk transfer occur.
5. Assuming DDP Automatically Includes Insurance
DDP gives the seller extensive responsibilities for transportation, customs, duties, taxes, and delivery. However, DDP does not require the seller to arrange cargo insurance under Incoterms® 2020.
Insurance should therefore be considered separately.
6. Not Stating the Incoterms Edition
Always identify the applicable edition in the contract.
For example:
CIF Chennai, Incoterms® 2020
Including the edition reduces uncertainty about which set of rules the parties have agreed to use.
How Should You Choose an Incoterm for Your Shipment?
There is no universal Incoterm for every international shipment. The appropriate rule depends on how the goods will move, where delivery takes place, who controls transportation, and when the parties want risk to transfer.
Before agreeing on an Incoterm, consider:
- Transport mode: Will the shipment move by sea, air, road, rail, or multiple modes?
- Delivery point: Is delivery taking place at a warehouse, terminal, port, airport, or final destination?
- Customs: Which party can manage export and import clearance?
- Freight arrangements: Who will book and control the main transportation?
- Risk transfer: At what stage should the buyer take responsibility for loss or damage?
- Insurance: Which party should arrange the necessary cargo insurance?
- Cargo characteristics: Does the shipment involve high-value, fragile, refrigerated, or otherwise sensitive goods?
The selected Incoterm should reflect the actual logistics arrangement, not just the preferred division of costs. Clearly state the named place or port and the Incoterms® 2020 edition in the contract.
Incoterm Calculator
An Incoterm calculator can help businesses compare the main differences between the 11 Incoterms® 2020 rules.
Instead of looking only at freight costs, compare:
- Who arranges transportation
- Who pays the main carriage
- Where delivery occurs
- When risk transfers
- Who handles customs
- Whether the seller has an insurance obligation
Before finalizing a trade term, both parties should confirm that the selected Incoterm matches the transport mode, delivery location, customs responsibilities, risk-transfer point, and cargo insurance arrangement.
Also Read: Marine Insurance Act in India: A Complete Guide for Businesses
2 Responses