4.1 Incoterms 2020 Risk, Cost & Insurance

What Incoterms 2020 actually decide

Incoterms 2020 are the International Chamber of Commerce (ICC) rules for allocating key obligations in a B2B contract for the sale of goods. The current edition entered into force on 1 January 2020. This independent OpenExamPrep section is study material for NIBAF Foreign Trade Certificate candidates working in Pakistani Authorized Dealer (AD) trade units. It is not an ICC publication and does not claim official ICC, SBP, or NIBAF approval.

ICC’s Incoterms 2020 overview and ICC Academy commentaries on CIP/CIF and C versus D rules make the same core point: each of the eleven three-letter rules tells the parties (1) the place of delivery and when risk of loss or damage passes, (2) who contracts and pays carriage, including transport-related security costs now gathered in articles A4/A7 and the consolidated costs article A9/B9, (3) who handles export and import formalities, and (4) packing, marking, and usual certificates. Only CIP and CIF impose a seller duty to buy cargo insurance for the buyer. Incoterms do not replace the contract of carriage, the insurance policy, the letter of credit, or Pakistan’s foreign-exchange instructions.

The eleven rules, grouped by transport mode

ICC presents two families. Any mode or multimodal: EXW, FCA, CPT, CIP, DAP, DPU, DDP. Sea and inland waterway only: FAS, FOB, CFR, CIF. Using FOB or CIF for a container delivered to a terminal (instead of loaded on board) is a classic operational error: risk can pass before the goods are on the vessel, while the bill of lading language still talks about “on board.”

DPU is not a twelfth rule. ICC renamed Delivered at Terminal (DAT) to DPU so the named place can be any site, not only a terminal, and so the only difference from DAP is unmistakable: DPU requires the seller to unload; DAP does not.

Risk transfer is not cost transfer

This is the C-versus-D trap that shows up in LC files and insurance disputes.

Under CPT, CIP, CFR, and CIF, the named place after the three letters is the destination to which the seller must pay freight (and, for CIP/CIF, buy insurance). Delivery and risk happen earlier, at origin: handover to the first carrier (CPT/CIP) or loading on board at the port of shipment (CFR/CIF). If a Karachi importer buys CFR Port Qasim, Incoterms 2020 from a bulk-cargo seller in Brazil, the seller pays ocean freight to Port Qasim, but if the cargo is damaged after loading at Santos, that is already the buyer’s risk. The buyer should therefore arrange (or verify) insurance from the shipment port, even though the seller paid freight.

Under DAP, DPU, and DDP, delivery, destination, and risk transfer coincide. If the goods do not arrive, or arrive damaged, the seller has not delivered. ICC Academy’s C/D commentary is explicit: C rules are shipment terms; D rules are arrival terms.

F terms (FCA, FAS, FOB) leave main carriage unpaid by the seller. E (EXW) is the minimum seller obligation: the buyer even faces export clearance, which is why many banks and exporters refuse EXW for cross-border sales.

CIP Clauses (A) versus CIF Clauses (C)

ICC’s Incoterms 2020 key-changes page states the insurance split in so many words. CIF, reserved for maritime trade and often used in commodity trading, keeps Institute Cargo Clauses (C) as the default—named major casualties such as fire, explosion, stranding, and collision, not “all risks.” Parties may agree a higher CIF cover, but silence means Clauses (C). CIP now requires cover complying with Institute Cargo Clauses (A) or similar—the broader “all risks” form, still subject to the usual exclusions (delay, inherent vice, insufficient packing, and so on). CIP is the multimodal/container companion; CIF is the bulk port-to-port companion.

Do not confuse Incoterms quality of cover with UCP 600 Article 28 practice on amount. When an LC requires an insurance document, banks commonly look for cover of at least 110 percent of CIF/CIP value in the same currency. That 110 percent figure is a documentary-credit amount convention taught with UCP. It is not an SBP-unique Incoterm percentage, and it does not upgrade Clauses (C) into Clauses (A).

Incoterms 2020 also lets the parties agree, under FCA, that the buyer will instruct the carrier to issue an on-board bill of lading to the seller after loading, so the seller can tender it through the banks. That change exists because container FCA sales still needed an on-board BL for many LCs.

Pakistani AD scenarios: who insures, who pays freight

ADs do not “choose Incoterms” for the customer. They check that the term on the sales contract, Financial Instrument (FI) / LC, insurance certificate, and transport document can actually be performed under SBP Foreign Exchange Manual instructions.

Chapter 13 paragraph 5 — standing import terms

Current Chapter 13 (Imports), paragraph 5 (Terms of Imports), states that, subject to that chapter, imports may be made on FOB, FCA, FAS, CFR, and CPT. EXW may be allowed only if (i) remittance is made against presentation of shipping documents at the applicant’s bank counter and (ii) insurance from the supplier’s warehouse is arranged by the applicant. For Incoterms other than those listed in that paragraph, prior permission of the Foreign Exchange Operations Department (FEOD), SBP-BSC is required.

That list is why a Karachi AD should not quietly issue an LC on CIF, CIP, DAP, DPU, or DDP as if those were default import terms. CIF/CIP put the foreign seller in charge of insurance; DDP puts the foreign seller in charge of Pakistan import clearance—often legally and operationally unworkable.

EPD Circular Letter No. 04 of 2026 (11 March 2026) expressly points ADs back to Chapter 13 paragraph 5 and then allows import of crude oil / petroleum products on CIF for sixty (60) days from issuance. EPD Circular Letter No. 10 of 2026 (7 May 2026, archive text) extended that CIF relaxation to 10 July 2026. After that date, whether a later circular renewed CIF for crude is a circular-check; this section does not invent a standing CIF permission.

Chapter 15 — marine insurance still written into the Manual

The current Chapter 15 (Insurance Business) PDF on sbp.org.pk still contains the domestic marine-insurance mandate. Paragraph 13 (Marine Policies – Imports) says imports into Pakistan are required compulsorily to be insured in Pakistan with companies operating in Pakistan; imports can thus be made only on C & F or F.O.B. basis; it is not permissible to issue marine policies covering imports in currencies other than rupees, subject to narrow NICL / aid-loan and historic U.S. AID exceptions. Paragraph 12 (Marine Policies – Exports) says exporters may insure only if goods are shipped on C.I.F. basis; on F.O.B. or C & F, insurance is arranged by the overseas buyer; Pakistani exporters take policies only from companies operating in Pakistan, which may be in rupees or foreign currency.

Read Chapter 13 paragraph 5 and Chapter 15 together. Chapter 13 is the operational Incoterm list (FOB/FCA/FAS/CFR/CPT, plus conditioned EXW). Chapter 15 is why import cargo insurance is a Pakistani, rupee, local-company product on the standing rules. Manual “C & F” is the older label for what Incoterms 2020 calls CFR. Do not invent an SBP rule that “CIF must be 110 percent of FOB” or any other homemade Incoterm percentage.

Worked AD files

Import, FOB Shanghai, cotton yarn, LC through a Lahore AD. The Chinese seller delivers when the yarn is on board at Shanghai and completes Chinese export formalities. The Pakistani buyer (through the AD’s LC) pays ocean freight and, under Chapter 15 paragraph 13, must place rupee marine cover with a company operating in Pakistan. If the LC instead demanded a foreign seller’s CIF policy as the only insurance, the file would fight both Incoterms (buyer already bears risk from Shanghai) and the Manual’s local-insurance instruction—unless FEOD had given a transaction-specific permission or a live circular exception applied.

Import, CFR Port Qasim, fertilizer, documentary collection. Seller pays ocean freight to Port Qasim; risk passed at loading. The Pakistani importer still needs local marine insurance from loading (or warehouse-to-warehouse if the policy so extends). Chapter 13 paragraph 5 lists CFR as a permitted import term; Chapter 15 still expects the import policy to be a Pakistani rupee marine policy.

Export, FCA Faisalabad dry port, knitwear, LC requiring an on-board BL. FCA is a multimodal rule. Risk passes when goods are handed to the carrier at Faisalabad, not when the feeder vessel later sails from Karachi. Incoterms 2020’s FCA on-board BL mechanism exists so the seller can still obtain an on-board original for the LC. Export marine insurance, if the contract is not CIF, is for the foreign buyer (Chapter 15 paragraph 12).

Export, CIF Rotterdam, basmati rice, bulk. CIF is sea-only. The Pakistani exporter pays freight and must supply insurance. Under Incoterms the default cover is Clauses (C) unless the contract upgrades it. Under Chapter 15 paragraph 12 the policy is taken from a company operating in Pakistan. If the LC demands Institute Cargo Clauses (A) and 110 percent, that is a documentary upgrade, not a silent Incoterms default.

EXW Lahore factory, spare parts import. Chapter 13 paragraph 5 allows EXW only if the importer’s AD pays against shipping documents at its counter and the importer has arranged insurance from the supplier’s warehouse. An EXW LC that pays on a proforma invoice with no transport document fails both the Manual condition and ordinary documentary control.

Traps for trade officers

• Treating CFR/CIF as if the seller still bears ocean risk all the way to Karachi
• Using FOB/CIF for a container handed to a carrier at an inland terminal
• Assuming CIP and CIF require the same Institute clause
• Opening a CIF or CIP import LC because “that is how the supplier quoted,” without FEOD permission or a live circular exception
• Treating UCP 600’s 110 percent insurance amount as if it were an SBP Incoterm percentage
• Ignoring Chapter 15’s local, rupee import-marine rule because Chapter 13 now also lists FCA, FAS, and CPT