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Ocean Cargo Methods of Payment

The method of payment agreed upon by the seller and buyer determines the extent of their financial interest and indicates whether or not insurance should be obtained.

The seller should be aware that, due to differences in language, customs and currency, it is generally difficult (if not impossible), as well as expensive, to sue a foreign buyer for nonpayment. In international transactions, unless the seller is paid in full in advance, it would be wise for the seller to purchase his own insurance policy to guarantee payment in the event of physical loss or damage in transit.

The following definitions of payment methods indicate the extent of a seller's financial risk and illustrate the need to protect this risk by purchasing insurance.

Degree of Financial Risk: Buyer and Seller

Method of Payment

Degree of Financial Risk

Principal Risk

Seller Buyer

Cash in Advance

None Maximum

Non-shipment of, or loss or damage to, merchandise

Open Account

Substantial None


Payment by Draft

Substantial Minimal

Non-acceptance or non-payment

L/C Revocable

Maximum Minimal

Default, insolvency loss or damage to merchandise

L/C Irrevocable

Minimal Maximum

Default loss or damage

L/C Confirmed Irrevocable

Minimal Or none Maximum

Bank insolvency, loss or damage to merchandise