Ask for a marine cargo policy and the sum insured will almost certainly be quoted as CIF value plus 10 percent. It is so standard that most shippers never ask where the number comes from, and never ask whether it is right for their cargo.
Where the 10 percent comes from
It is not a rule of insurance. It comes from the sale contract. Under Incoterms 2020, rule CIF (and CIP), the seller must obtain cargo insurance for the buyer's benefit, and the required minimum is expressly 110 percent of the contract price, in the currency of the contract.
The extra 10 percent is meant to cover the buyer's anticipated profit and incidental expenses. The buyer has not just lost the goods and the freight, they have lost the margin they were going to make, plus the cost of dealing with the loss. So the convention spread from CIF sales to every other kind of shipment, because it is a reasonable default.
One change in Incoterms 2020 is worth knowing: CIF still requires only minimum cover, ICC (C), but CIP now requires ICC (A). Under the 2010 rules both required only minimum cover. If you are buying CIF and relying on the seller's policy, you may be relying on the narrowest cover there is. See what ICC A, B and C actually cover.
What CIF value means for the calculation
Cost, insurance and freight: the invoice value of the goods, plus the freight to destination, plus the insurance premium itself. So the sum insured is:
(Goods + Freight + Insurance) x 1.10
Do not insure the invoice value alone. If a container is lost you have paid the freight and received nothing, and freight is rarely refundable. On a low value, high volume shipment, freight can be a large share of the total at risk. Try it with the cargo insurance calculator.
When 110 percent is not enough
The 10 percent uplift is arbitrary, and there are situations where the real exposure is much higher:
- Duty already paid, or payable regardless. If the goods are lost after import clearance you may be out the duty as well, and on a high tariff line that can be 25 percent or more. Insure on a duty-inclusive basis, or take a separate duty extension.
- High margin goods, where lost profit is well above 10 percent of cost.
- Goods sold forward at a fixed price, where replacement at today's cost exceeds the invoice.
- Seasonal cargo, where a loss means missing the season entirely. Note that consequential loss and delay are excluded under the standard clauses, so this cannot simply be insured by raising the sum.
- Long lead time capital equipment, where replacing the item costs far more than its invoice value once expediting and lost production are counted.
Under-insurance and average
Do not solve a premium problem by declaring a lower value. Marine policies commonly apply average: if the sum insured is less than the true value, a partial loss is paid only in the same proportion. Insure for 50 percent of value and a 40 percent damage claim is paid at 50 percent of the assessed amount. You do not just lose cover on the shortfall, you lose it proportionally across everything.
Currency, and the basis of valuation
Insure in the currency of the sale contract. A policy in one currency against an invoice in another leaves you carrying exchange risk between the loss and the settlement, which on a claim settled years later is not trivial.
The basis of valuation clause is what actually decides the payout, and it is worth reading. It should say the insured value is the agreed value, not the market value at the time of loss, so that you are not arguing about depreciation after the event.
A practical method
- Start with commercial invoice value.
- Add freight and any charges you will pay whatever happens.
- Add duty, if it is paid or unavoidable.
- Add the premium.
- Multiply by 1.10 as a floor, and by more if your margin, replacement cost or lead time justifies it.
- State the currency, and check the basis of valuation is agreed value.
General guidance, not insurance advice. The sum insured, the basis of valuation and any average condition are set by your policy wording.
