DDP, Insurance Documents, and Unloading Risk: Getting Incoterms® Right in an LC Context

Intro

 One of the recurring sources of confusion in trade finance arises when Incoterms® are mechanically copied into a letter of credit without considering what those rules actually require — or do not require.

 A typical example is an LC issued on DDP terms that nevertheless calls for the presentation of an insurance policy or certificate.

Is that correct?

And if the buyer’s real concern is risk — especially unloading risk — would DAP or DPU be a better choice?

 Let’s take a closer look.

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Question

Dear Mr. Old Man,

I have a question that needs your expert opinion.

An LC is issued with DDP Incoterms, but it requires the presentation of an Insurance Policy/Certificate.

Is that correct?

If not, which Incoterms would be appropriate?

How about DAP? Is DPU or DAP more appropriate for the buyer?

Thank you.

Best regards,

T.V

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Answer

Dear T.V,

Thank you for your questions. They touch on a point that often causes confusion when Incoterms® and letters of credit are mixed together.

DDP (Delivered Duty Paid) means that the seller delivers the goods to the buyer at the named place of destination, cleared for import, with all duties and taxes paid. The seller bears the costs and risks of bringing the goods to that place.

Under Incoterms® 2020, DDP does not require either the seller or the buyer to purchase insurance. Risk passes from seller to buyer when the goods are placed at the buyer’s disposal at the agreed destination, ready for unloading. Unloading itself is the buyer’s responsibility, unless the parties agree otherwise.

For this reason, an LC issued on DDP terms that nevertheless requires presentation of an insurance policy or certificate is not commercially consistent with the Incoterms rule.

That said, in LC practice, the issuing bank is free to require documents that go beyond Incoterms obligations. As a result, a seller may still purchase insurance purely to comply with the LC, even though DDP itself does not oblige the seller to insure the goods.

By contrast, CIF and CIP are the Incoterms that expressly require the seller to arrange insurance. Under these terms, it is commercially logical for an LC to call for an insurance document. It should also be borne in mind that under CIF and CIP, risk transfers earlier (at shipment or dispatch), even though insurance is provided for the buyer’s benefit.

As to your final question on DAP or DPU, the choice depends largely on who should bear the unloading risk.

Under DAP (Delivered at Place), the seller delivers the goods ready for unloading, and risk transfers to the buyer before unloading begins. Any loss or damage occurring during unloading is therefore for the buyer’s account.

For heavy, complex, or sensitive cargo — such as a complete assembly line delivered to a buyer’s plant — DPU (Delivered at Place Unloaded) may be more appropriate. Under DPU, the seller bears the risk and cost of unloading, and risk transfers only after unloading has been completed at the named place. This can significantly reduce the buyer’s exposure at a critical risk point.

Buyers should note, however, that unlike DDP, DPU does not include import customs clearance. Under DDU, the buyer remains responsible for completing import formalities and paying any applicable duties and taxes.

I hope this clarifies the issues.

Best regards,

Mr. Old Man