A206: The Incoterms Rule DAP (Delivered At Place) puts the seller at risk of loss of or damage to the goods until ‘delivery’. Delivery in this Rule is the arrival of the goods at the placed named in the Rule or sales contract.

Although neither party (the seller nor the buyer) is obligated under the Rule to arrange insurance cover, as the seller has the insurable interest (in this case to an inland place in a foreign country) it is common practice for the seller to ensure that they are adequately covered.

However, if the buyer (for example) is a resident of a country that does not allow foreign suppliers to arrange cover, then the seller may find themselves in the situation described in the question. The seller has the need for insurance cover, but the buyer has the legal obligation to arrange it.

This type of State interference with free market principles is common to many ‘developing’ countries where it often mutates into a form of indirect taxation on cross-border activity.
The worse-case is when the buyer must arrange cover, but the cover only attaches at the point of export – so the seller is uninsured from the point of supply to the origin port or airport.

Added to this, the seller’s preferred insurers cannot insure through to an inland place in the destination country – thus, even if the seller arranges for a second insurance policy locally, this additional cover terminates on first arrival at the destination country, and they have no indemnification for the final inland leg.

Given this extreme, the best course of action is for the seller to renegotiate the terms to describe the named place of delivery as being the first point of arrival. By this I mean that the ‘named place’ needs to be a destination port, airport or border point, and not an inland location.

If this cannot be achieved, the seller may negotiate a private agreement with their insurers who might offer cover to the inland place, with the seller building this premium into their price as an undisclosed cost (this is to say the fact that cover has been arranged is not disclosed in the sales agreement or commercial selling price.)

If this cannot be negotiated (as it is often impossible for the insurer to accommodate the request), the seller might request a copy of the buyer’s insurance arrangements (the policy/contract terms) and, with the assistance of their local insurer, assess whether the cover is acceptable against their risk.

A point of caution here is that one reason why the buyer’s country imposes the initial restriction on insurance might be to limit the outflow of foreign exchange. If the seller arranges cover, then the price to be paid is higher than if the buyer arranges cover locally and settle this in local currency.

If this was the case, it might well be that, should the seller accept the buyer’s cover and thereafter experience a claim, the seller might not be able to repatriate the funds paid on settlement i.e., the claim is paid out but the money cannot leave the banking system of the destination country.

Part of the seller’s ‘homework’ during the negotiation on a D-prefix sale is to understand the insurance conditions (and exchange controls) in the destination country. If the information is not accessible or if it is as restrictive as the examples given above, the seller is best advised to take out undisclosed cover, and to sell only to the point or port of arrival, and to avoid being drawn into an ‘inland place’ obligation.

If this isn’t possible, and if an inland leg is involved, the seller is advised to discuss the matter with their underwriter or broker – before they sign the sales contract. Be guided by the insurer.

Of course, all business is risk. If, having looked at all the options, the seller finds that they are exposed and that this exposure cannot be managed, the seller may still decide to undertake the transaction, if they have the risk appetite to do so.

Being risk averse is one thing, but it is not the Big Thing. The Big Thing is being Risk Aware. Do your homework, seek the support of the experts around you and make an informed decision.

Regardless of the cause of the situation, in DAP it is the seller that needs to take action to avert exposure. If you do take the buyer’s cover, be aware that the origin landside might not be covered; that a claim might not be repatriated and that the buyer may have no choice in the matter either.

The next and LAST course on Incoterms Rules for 2024 is on the 3rd and 4th of December, mail me: [email protected]