Inspection Certificate

Which is the Best Cargo Insurance Type That Should be Selected Against Non-Delivery Risks?

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Incoterms, Inspection Certificate, Insurance Policy, Letter of Credit Basics, Letter of Credit Documents, Logistics , , ,
Which is the best insurance type that should be selected against non-delivery risks?

Institute Cargo Clause A (All risks), Institute Cargo Clause B and Institute Cargo Clause C are the main types of cargo insurance types used in international trade

But which cargo clause is the most suitable one for letter of credit transactions?

How to eliminate non-delivery risks, war and strike risks in international trade?

Question Comes from Lus Miguel, Porto, Portugal:

Dear sirs,

First of all, congratulations for your website, it has been a great help. I’d like to ask you some questions regarding insurance versus letters of credit.

Knowing that if the credit is under the UCP 600 the insurance terms is agreed between exporter and importer (INCOTERMS) the banks sometimes ask for a Clause A plus extra coverage.

I think (and this is my doubt) that the banks at the bottom line can ask a minimum clause insurance (110%) if they trust their client financial capability to support a cargo loss/accident.

It is always a commercial decision.

Am I right at my conclusion?

The reason for my question is that nowadays we usually approve with clause A but if the commercials ask we lower the type of coverage to B or C.

I was looking for case studies, but I believe the risk when the cargo does not arrive to destiny is always on the side of importers/exporters (INCOTERMS chosen) and the bank is always defended since if the documents are good we have to pay them to the exporter.

Do you have knowledge of other situations that banks got “burned” regarding insurance problems when docs were okay?

Sincerely,

Here is the Answer:

Thanks for your question.

Analyses:

Insurance Coverage Under the Incoterms: According to the Incoterms 2010, seller has to make the insurance agreement with an insurance company and has to supply an insurance policy or certificate by paying the insurance premium under two trade terms:

Both CIF and CIP incoterms outlines a minimum insurance coverage, which is Institute Marine Cargo Clauses, C.

Exporters and importers are free to determine a more detailed insurance coverage such as Institute Marine Cargo Clauses, A (all risks).

Furthermore they can choose to include additional clauses to an all risk policy such as

  • WSRCC (War, strikes, riots and civil commotion) Clause,
  • Theft, Pilferage and Non-Delivery clause etc.

All of these extra insurance coverage must be paid by the buyer, unless otherwise determined on the sales contract.

Delivery Place Under CIF incoterms: Most of the international trader think that under CIF incoterms, the seller delivers the goods to the buyer at the port of discharge but this is not correct.

The seller delivers the goods to the buyer at the port of loading once the goods are shipped on board a named vessel under the CIF incoterms.

As a result, non delivery risks of the goods is not different between FOB and CIF incoterms from the point of the issuing bank under a letter of credit transaction.

The exporter delivers the good under both incoterms at the port of loading, and if the issuing bank receives a complying presentation, then it has to honor whether or not the goods arrive to the port of discharge. (Fraudulent shipments are the exemptions)

Insurance Coverage Under the Letter of Credit rules: The letter of credit rules, UCP 600, does not give directions either banks or their customers that what type of insurance cover must be selected.

Just on the contrary, the letter of credit rules tell that a credit should state the type of insurance required and, if any, the additional risks to be covered.

Conclusion:

Non-delivery Risk of Goods: As an issuing bank, the non-delivery risks remains unchanged under certain incoterms such as FOB and CIF.

The issuing bank has to honor complying presentations whether or not goods arrive port of discharge.

In practice, in most of the cases, the issuing banks have to decide accepting or rejecting the presentations while goods are still in transit, long before they have completed their journey.

Establishing Internal Standards: Each bank should establish an internal standards against non-delivery of goods risks.

This can be done by requesting all risks insurance policy covering additional clauses such as war, strikes, riots and civil commotion and theft, pilferage and non-delivery under CIF and CIP incoterms.

For the remaining incoterms you may indicate on the letter of credit application form that your bank will be arranging an insurance policy on behalf of your customer in order to secure delivery of goods.

Alternatively you can indemnify yourself against such risks by holding your customer fully responsible against non-delivery of goods under complying presentations.

Implementation: In order to establish a well-structured internal guidelines, an issuing bank could get in touch with local ICC Banking committee.

In our case it is ICC Portugal.

ICC Portugal
Rua das Portas de Santo Antão, 89
1169-022 Lisboa
T: +351 21 346 3304
E-mail: [email protected] Web: www.icc-portugal.com

Inspection Certificate

Ozgur Eker (CDCS) Inspection Certificate, Letter of Credit Documents ,
inspection certificate

On this page, I will try to explain “Quality Control Inspections”, “Inspection Certificates” and their applications in letters of credit.

A letter of credit transaction is all about the documents, but not the actual goods or services.

The banks reach to payment or non-payment decisions under the letters of credit only by controlling the documents presented by the beneficiaries.

The banks have no connection with the actual goods or the services.

Above explanation put importers to a serious fraud risk related to quality of goods such as:

  • non-delivery of goods or,
  • goods shipped with inferior quality.

A third party inspection, that is carried out by a reputable independent inspection company, could eliminate or at least limit the fraud risk related to quality of goods considerably.

fraud risks in letters of credit

Depending on the type and value of the goods, the inspection may be commenced when the goods are in process of being manufactured or packed and until they are on board the means of transport concerned. (1)

Place of inspection can be set either in the country of origin (at the time of loading) or in the country of destination (at the time of unloading or at the warehouses where the imported goods are received).

Types of Quality and Shipment Inspections in International Trade:

Third party inspection services can be grouped under two main categories.

  1. Previous Shipment Inspections, which are performed before the goods are shipped from the exporter’s factory and
  2. Post Shipment Inspections, which are performed after the goods are shipped from the exporter’s factory. (2)

types of shipment inspections in international trade

Previous Shipment Inspections are as follows:

  • Pre-Production Inspection (PPI)
  • During Production Inspection (DUPRO)
  • Pre-Shipment Inspection (PSI)
  • Container Loading Inspection (CLI)

Post Shipment Inspections are as follows:

  • Post-Shipment Inspection

The most frequently used inspection type in international trade is the pre-shipment inspection, PSI, is a reliable quality control method for checking goods’ quality.

What is an Inspection Certificate?

An inspection certificate, sometimes called as certificate of inspection or pre-shipment inspection certificate, is a trade document used in international trade transactions, issued generally by an independent inspection company after conducting a related inspection, certifying whether or not the goods are in question are in conformity with the specifications stated on the sales contract. (3)

What are the Types of Inspection Certificates:

The certificates delivered by the inspection companies are basically of two different types:

  1. Clean Report of Findings (CRF): This is a document required by the importing (sometimes, exporting) country, as some developing countries have a large part or all of their imports (exports) inspected prior to shipment in the country of origin, as to quantity, quality and price (Pre-Shipment Inspection – PSI). These PSI schemes, entrusted to international inspection agencies, have been established by the authorities for custom, fiscal or foreign exchange control purposes and are compulsory.
  2. Commercial Certificate of Inspection: Stating the quantity and quality ( any measurable quality parameter requested by the principals). These Certificates are issued by an inspection agency acting as a neutral third party assessing the actual condition of a traded cargo between a seller and a buyer. A commercial certificate of inspection is necessary to build up a long-term relation between buyers and sellers. Bad quality of goods in trade can lead to loss of market share in the long run.

What are the Benefits of Inspection Certificates:

Main objective of the inspection certificate is to satisfy the importer or the government body that the goods are in conformity with the indicated specifications on the sales contract or proforma invoice.

  1. Inspections are important tools to reduce trade risks and avoid fraud.
  2. Shipment of low quality goods prevented.
  3. Non-delivery fraud with fake bill of lading or any other transport document prevented.
  4. Another fraud risk factor is the possibility of replacement inspected goods with the fraudulent ones after the inspection: basically the cargo inspected would not go into the shipment. This can be prevented by adding a numerical link on the inspection certificate to the transport document. For example, inspection certificate that is indicating the container number can prevent such a fraudulent action.

How to Demand an Effective Inspection Certificate in a Letter of Credit Transaction?

  • Add at least one original copy of an inspection certificate to field 46-A Documents Required as one of the necessary documents under the letter of credit.
  • Make sure that inspection certificate is issued by one of the well known inspection companies around the world. The most well known inspection companies are : SGS, Bivac/Bureau Veritas, Cotecna, Intertek.
  • Clearly indicate on the letter of credit text that inspection certificate is complying with the specifications indicated on the sales contract or proforma invoice.
  • Make sure that values indicated on the inspection certificate does not conflict with the values indicated on the letter of credit or other documents.
  • Do not forget to add a numerical link on the inspection certificate to the transport document.

References:

  1. Documentary Credits, Nordea Trade Finance, Page:175
  2. What is a Pre-Production Inspection (PPI)?, www.advancedontrade.com, Retrieved: 05.May.2018
  3. What is an Inspection Certificate or Certificate of Inspection?, www.advancedontrade.com, Retrieved: 05.May.2018

Letter of Credit Documents

Ozgur Eker (CDCS) Air Waybill, Bill of Exchange, Bill of Lading, Certificate of Origin, Charter Party Bill of Lading, Commercial Invoice, Featured, Inspection Certificate, Insurance Policy, Letter of Credit Documents, Packing List, Road Transport Document, Sea Waybill , , , , , ,
letter of credit documents

After reading this post, you should understand why documentation is very important under letters of credit.

Additionally, most frequently used document links have been supplied on later parts of this article.

There are many important points in a typical letter of credit transaction that need to be taken care of professionally.

However, documentation is much more important than any other aspects of the letters of credit transactions, because the documentation forms the backbone of the letters of credit structure.

In order to understand the importance of the documentation, please assume that you are an exporter, whom has just shipped an order.

How can you prove to the issuing bank that you have make the shipment according to the letter of credit terms?

Which means that;

  • you have shipped the goods on time, not late
  • you have shipped the right goods, not wrong ones
  • you have shipped the goods in good condition, no apparent defect on the packing
  • you have delivered the goods to the carrier for transportation from port of loading to the port of discharge indicated in the credit etc.

In order to prove above points to the issuing bank, you have to supply a relevant transport document.

Furthermore, let us also consider that the delivery term was CIF Incoterms 2010, which obligates the exporter, which is you, to arrange and pay the insurance for the shipment.

Once again, you have to supply an insurance policy to fulfill your insurance responsibility.

The examples can be extended, but perhaps the main idea is very clear. Letters of credit transactions are related to the documents only, not actions.

importance of letter of credit documentation

The importance of the documentation is stated in UCP 600 article 5 as follows:

Banks deal with documents and not with goods, services or performance to which the documents may relate.

In addition, every condition stated in the letter of credit must be connected to a document. This point is also clearly indicated in UCP 600 article 14 as below.

If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it.

Documents Most Frequently Used Under Letters of Credit Transactions:

Transport Documents:

Insurance Documents:

Financial Documents:

Commercial Documents:

Official Documents: