It is a common practice in the commercial world to insure goods in transit. Briefly, the following reasons compel traders to contract transport insurance:
Protection against financial losses resulting from damage, pilferage, theft and non-receipt of entire or part of a consignment; and
Protection against financial claims that can be made against the owner of goods on board a vessel in case of a “declared general average” (the goods themselves being undamaged). (1)
According to the Incoterms rules, if the parties agreed on CIF or CIP trade terms, the exporter must provide an insurance policy or an insurance certificate to the importer at his own expense.
Consequently, if letter of credit has been chosen as a payment method with an underlining sales contract that had been established either with CIF or CIP incoterms, then the issuing bank adds an insurance document to the required documents list.
On this page you can find most common letter of credit discrepancies related to insurance documents, such as insurance policies or insurance certificates.
Insurance Policy does not Include the Risks Specified by the L/C
Insurance Policy is not Endorsed
Insurance Policy Shows Date of Issue to a Later Date than Date of Shipment
Insurance Policy Show Different Currency than the Commercial Invoice
Correction/Alteration on the Insurance Policy is not Authenticated Properly
Insurance Certificate Shows that Insurance Cover Subject to a Franchise or an Excess
Important Definitions Regarding the Insurance Documents under Latest Letter of Credit Rules:
An insurance policy, insurance certificate or declaration under an open cover will be examined by banks as per UCP 600 article 28.
An insurance policy, an insurance certificate or a declaration under an open cover, must appear to be issued by an insurance company, an underwriter or their agents or their proxies.
An insurance policy, an insurance certificate or a declaration under an open cover, must appear to be signed by an insurance company, an underwriter or their agents or their proxies.
Presentation of cover notes will not be accepted instead of presentation of insurance policies, insurance certificates or declarations under an open cover.
An insurance policy is acceptable in lieu of an insurance certificate or a declaration under an open cover.
The date of the insurance document must be no later than the date of shipment, unless it appears from the insurance document that the cover is effective from a date not later than the date of shipment.
The insurance document must indicate the amount of insurance coverage and be in the same currency as the credit.
The insurance document must indicate that risks are covered at least between the place of taking in charge or shipment and the place of discharge or final destination as stated in the credit.
References:
Shipping and Incoterms, Practice Guide, UNDP Practice Series, Page:18
Marine insurance, contract whereby, for a consideration stipulated to be paid by one interested in a ship or cargo that is subject to the risks of marine navigation, another undertakes to indemnify him against some or all of those risks during a certain period or voyage.(1)
In a letter of credit transaction where an insurance policy or certificate is required, the amount of coverage must be determined in accordance with the letter of credit conditions and current L/C rules.
There are two possibilities exist for the insurance coverage amount under letters of credit:
First possibility is that when the credit indicates a fix amount to be insured. In this case the insurance policy coverage must match the indicated amount in the credit.
Second possibility is that when the credit is silent about the insurance coverage amount or percentage. In that case the insurance document is to be issued in the currency of and, as a minimum, for the amount indicated under UCP 600 sub‐article 28 (f) (ii). (The letter of credit rules define minimum insurance coverage amount as at least 110% of the CIF or CIP value of the goods.)
It is worth mentioning that there is no maximum percentage of insurance coverage identified under the letter of credit rules.
But, insufficient insurance coverage will cause problems.
If the issuing bank finds out that the insurance coverage is less than what is required under the letter of credit, then the issuing bank raises a discrepancy, which is known as insurance coverage is insufficient.
Discrepancy Example: Insurance Coverage is Insufficient:
A letter of credit has been issued in SWIFT format, subject to UCP latest version, with the following details:
Field 45A: Description of Goods and or Services: 100 pcs of 200mm Concrete Drainage Pipes. Delivery Terms: CIF Port of Apapa, Lagos Incoterms 2010.
Field 46A: Documents Required:
A signed invoice in duplicate indicating the details of the descriptions of goods as per the L/C.
Certificate of Origin issued and certified by any Chamber of Commerce in India indicating that goods are of Indian origin.
Insurance policy/certificate endorsed in blank for covering Institute Cargo Clause (A), Institute Strikes Clause (cargo), Institute War Clauses (Cargo) with claims payable in Nigeria.
Full set of clean on board bill(s) of lading issued or endorsed to the order of issuing bank, notify applicant showing “freight prepaid” and showing full name and address of the shipping company agent or his representative in Nigeria.
The beneficiary presented an insurance policy as shown on the below picture.
Insurance Policy
Discrepancy: The insurance policy indicates the amount of coverage is 150.000 USD which corresponds to 100% commercial invoice value. Letter of credit rules requires that minimum insurance cover must be at least 110% of the invoice value. Insurance cover should have been at least 165.000 USD.
Reason for Discrepancy: If there is no indication in the credit of the insurance coverage required, the amount of insurance coverage must be at least 110% of the CIF or CIP value of the goods.
Marine insurance is a type of commercial liability insurance that provides coverage (financial backing) against perils and losses associated with the transportation of goods.
Marine insurance is possibly the oldest type of commercial insurance in the world, dating as far back as the thirteenth or fourteenth century.(1)
According the current letter of credit rules, when the insurance document indicates that it has been issued in more than one original, all originals must be presented.
For example, if the insurance policy states on its face that ‘this policy has been issued in two originals to the same effect’, then both originals must be presented.
If the issuing bank finds out that all original insurance documents have not been presented, then the issuing bank will raise a discrepancy, which is known as all originals of insurance policies have not been presented.
Discrepancy Example: All Originals of Insurance Policies Have Not Been Presented:
A letter of credit has been issued in SWIFT format, subject to UCP latest version, with the following details:
Letter of Credit Conditions
Field 45A: Description of Goods and or Services: 100mtons of Iron Ore. Delivery Terms: CIF Port of Rotterdam, Netherlands Incoterms 2010.
Field 46A: Documents Required:
A signed invoice in duplicate indicating the details of the descriptions of goods as per the L/C
Certificate of Origin issued and certified by the Chamber of Commerce in Beneficiary’s country indicating South African origin of the goods.
Insurance certificate or policy in assignable form and endorsed in blank for 110% CIF commercial invoice value covering all risks showing claims payable in Netherlands in commercial invoice currency.
A full set (3/3) original bills of lading issued to the order of the issuing bank marked “freight prepaid”‘ and to notify the issuing bank and the applicant.
The beneficiary presented an insurance policy as shown on the below picture.
Insurance Policy
Insurance Policy Discrepancy: The insurance policy indicates that it is issued in two originals. All of the original insurance policies should have been presented but only one original insurance policy presented.
Reason for Discrepancy: When a credit requires the insurance document to be issued in more than one original, or when the insurance document indicates that it has been issued in more than one original, all originals are to be presented and are to appear to have been signed.
References:
Keenan, Marie. 2016. “Marine insurance.” Salem Press Encyclopedia Research Starters, EBSCO host (accessed February 24, 2018).
Cargo insurance, also referred to as a marine cargo insurance, in general, means the insurance on goods being shipped in international trade by vessel, aircraft or overland conveyance. (1)
An insurance policy, an insurance certificate or a declaration under an open cover will be regarded as an insurance document under current letter of credit rules. (UCP 600 at article 28)
An insurance document must appear to be issued and signed by an insurance company, an underwriter or its agents or proxies, and that any signature by an agent or proxy must indicate whether the agent or proxy has signed for or on behalf of the insurance company or underwriter.
If the issuing bank finds out that an insurance document has not been signed as per UCP 600 article 28, then the issuing bank will raise a discrepancy, which is known as insurance policy not issued by an insurance company or its agent discrepancy.
Discrepancy Example: Insurance Policy Not Issued and Signed by an Insurance Company or Its Agent:
A letter of credit has been issued in SWIFT format, subject to UCP latest version, with the following details:
Letter of Credit Conditions
Field 45A: Description of Goods and or Services: 20 mtons of %100 Pure Tunisian Dates. Delivery Terms: CIF Port of Barcelona, Spain Incoterms 2010.
Field 46A: Documents Required:
Beneficiary’s hand-signed and dated commercial invoice in 3 originals bearing full description of goods and its quantity, net and gross weight, unit and total price.
Certificate of Origin issued and certified by the Chamber of Commerce in Beneficiary’s country indicating Tunisian origin of the goods.
Insurance policy in assignable form and endorsed in blank for 110% invoice value (CIF value) covering all risks showing claim payable in Spain in invoice currency.
Full set original clean on board, marine bills of lading marked freight prepaid and made out to order and blank endorsed, marked notify applicant stating the name, telephone and fax numbers of carrier’s agent in port of discharge. Bill of lading should evidence shipment in 20′ closed containers.
The beneficiary presented an insurance policy as shown on the below picture.
Insurance Policy
Insurance Policy Discrepancy: Although insurance policy indicates the name of the insurance company, insurer, it is not signed by the insurance broker on behalf of the insurance company.
Reason for Discrepancy: An insurance document, such as an insurance policy, an insurance certificate or a declaration under an open cover, must appear to be issued and signed by an insurance company, an underwriter or their agents or their proxies.
Any signature by an agent or proxy must indicate whether the agent or proxy has signed for or on behalf of the insurance company or underwriter.
The issuing bank or the confirming bank must pay the credit amount to the beneficiary, when they determine that the presentation is complying.
The complying presentation means is that the presentation with zero discrepancies.
If, the issuing bank or the confirming finds at least one discrepancy, then the presentation becomes discrepant.
Under a discrepant presentation, the beneficiary can get the payment, only if the applicant accepts the discrepant documents.
On this post, I am going to explain discrepancies in letters of credit.
Firstly, I will make the definition. Secondly, I will disclose links for discrepancies for each document type. At later stages of the post, I will discuss how to deal with the letter of credit, in order to make discrepancy free presentations.
Definition: Discrepancy can be defined as an error or defect, according to the issuing bank, in the presented documents compared with the documentary credit, the UCP 600 rules or other documents that have been presented under the same letter of credit.
Perhaps, discrepancy is one of the most complicated and “blurred” field in all letters of credit terminology.
The advising bank checks the documents and finds the presentation complying, then dispatches the documents to the issuing bank.
This time, the issuing bank checks the same documents and comes back with a swift message, mentioning couple of discrepancies.
How Could This Have Been Possible?
How could one bank finds multiple discrepancies in a set of documents, while the same documents are found to be complying by another bank.
Alleged Discrepancies and ICC Opinions:
Almost all of the ICC opinions issued so far are related to complaints about “alleged discrepancies”.
What we can see from the results of the ICC opinions is that ICC Banking Committee does not agree with banks in most cases.
Definition or Lack of Definition:
It is strange, but there is no definition of a discrepancy in the letter of credit rules.
Is it too simple to be forgotten? Or too complicated to define? What is the definition of a discrepancy according the UCP 600 rules?
Inconsistency in Application:
Discrepancies varies from country to country, bank to bank, even more; document checker to document checker.
Let me give you a real life example here.
Couple of years ago, I have presented documents to a confirming bank. The presentation has been made under a set of letters of credit, which contain 10-15 pcs of independent letters of credit.
All of these small amount independent letters of credit have the same text and having the same conditions.
Description of goods, port of loading, port of discharge, additional conditions all were the same.
Just, the latest date of shipment and expiry date were changing form one lc to another.
First 3 presentations were found to be complying by the confirming bank. But on the 4th presentation, we received a swift message “MT 734 Advice of a Refusal” indicating a discrepancy on the certificate of origin.
Lessons learned.
Discrepancies can be changed from country to country, bank to bank, document checker to document checker and presentation to presentation.
and here are the results:
According to ICC Trade Finance Surveys, on average, %70 of letter of credit presentations are found to be discrepant on first presentation.
This is a very frustrating outcome, and has a huge negative impact on everyone in letter of credit business.
Why Banks Find too much Discrepancies on the Documents:
Letter of credit rules are often find to be very complicated and hard to understand by exporters and importers.
Most of the small and medium scale export and import companies do not have enough resources to hire a letter of credit specialist in their organizations.
Exporters and importers do not give enough respect to letter of credit rules and standard banking practices. Exporters and importers think that, they can handle letters of credit with ease on their way. However, the fact is different. Letters of credit have very strict rules to follow.
Exporters do not allocate enough time to understand the letter of credit text, before starting to production and shipment.
Some banks open overdetailed letters of credit. Sometimes we see that banks demand almost impossible conditions from the beneficiaries on their letters of credit texts.
Some banks issue foggy (not clear) letters of credit.
Some banks examine documents not as per UCP 600 and ISBP 745.
What can be Done to Prevent Discrepant Presentations:
Pre – Document Preparation Stage:
Keep Your Relationship with Your Customer Close: Please keep in mind that, whatever preventive steps you may take, it is highly likely that you will be facing a discrepancy on one of the documents, that you have submitted. So, it would be very wise for you to keep your relations close with your customer.
Learn the Rules: Before entering a letter of credit transaction, you need to learn the letter of credit rules very well. You should buy one original copy of current letter of credit rules book, UCP 600. Please follow this link to buy a UCP 600 online.
Learn the International International Standard Banking Practices: Before entering a letter of credit transaction, you also need to be familiarized with the International Standard Banking Practices. In order to do that, you should buy one original copy of current International Standard Banking Practices book. Please follow this link to learn more about International Standard Banking Practices.
Check the Credit: You must check the letter of credit as early as you can, before starting to the production. As one of the letter of credit expert indicated “you can not solve lc problems at the presentation stage.” The earlier you are starting to work on the letter of credit text, the better it would be.
Demand a Draft Letter of Credit: Demanding a letter of credit draft from your customer, before having the original letter of credit issued, would be a wise move. This will save you from additional letter of credit fees; such as amendment fees and amendment advising fees.Work on this letter of credit draft carefully.
Check Field 46-A: Check required documents field one by one. Make sure that, you can supply all the required documents, that has been requested under this field.
Check Field 47-A: Check additional conditions field one by one. Make sure that, conditions stated in this field are doable, and are not going to create any problems for you on the presentation stage.
Demand Amendment: If you find a condition or clause that you can not comply with, get in touch with your buyer to amend the letter of credit.
Demand Clarification: If you can not understand a condition or sentence on the letter of credit text, then you should get in touch with the issuing bank for clarification.
Document Preparation Stage:
Complete the documents as requested by the credit. Make sure that, you also take into account the letter of credit rules and international standard banking practices when preparing the documents.
Make sure that, signatures, authentication are made by requested persons or institutions.
Make sure that, you will be presented all required documents without any absence.
Make sure that, you presented correct number of originals and copies as requested by the credit.
Make sure that, the dates on the documents are in accordance with the dates mentioned on the credit. For example, you would not be making either a late shipment or a late presentation.
Make sure that, you will collect all requested documents by the credit as soon as you make the shipment. Once you collect all the documents, you need to make the presentation without losing any time.
After Presentation Stage :
Follow the situation of the documents day by day with the advising bank. Give necessary information to your buyer. And stay in alert mode, until you receive your payment.
