Insurance Policy

Amount of Cargo Insurance Coverage Example under an L/C Payment

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Amount of Cargo Insurance Coverage Example under an L/C Payment

The purpose of taking out insurance is to receive compensation in case the goods do not arrive or are damaged.

Therefore, the policy holder must ensure that the sum insured is adequate to replace the goods.

The sum insured should include the price of the goods as well as the cost of transport and a new insurance. (1)

According to the letters of credit rules, UCP 600 and ISBP 745, the insurance document, insurance policy or certificate, must indicate the amount of insurance coverage and be in the same currency as the credit.

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.

Example 1: Marine Insurance Coverage Amount Calculation

Field 32B: Currency Code, Amount

  • 120000USD

Field 46A: Documents Required

  • Insurance Policy / Certificate issued to the order of applicant in duplicate covering all risks for the CIF value of the goods plus 10 pct claims payable in Djibouti and must indicate the agent name and address in Djibouti.

According to our example, total CIF value of the goods is USD 120.000,00. The minimum insurance cover must be %10 higher than total CIF value, so that the minimum insurance coverage indicated in the insurance policy should be USD 132.000,00.

Insurance Coverage Amount

References:

  1. Documentary credits in practice, Reinhard Längerich, Second edition – 2009, Published by: Nordea, Page:165

All Risks Insurance Policy Under L/C Payments

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All Risks Insurance Policy Under L/C Payments

Letter of credit conditions must be clear and precise without leaving any room for ambiguity.

In terms of insurance documents, the letter of credit must clearly states:

  • The amount of insurance coverage
  • The assured party
  • If endorsement is required and its method
  • The insurance coverage as per Institute Cargo Clauses

Following insurance document condition stated in swift message MT 700 under field 46A – Documents Required is a good example:

Letter of Credit Example:

  • 44E: Port of Loading/Airport of Departure
    Any Port in Ecuador
  • 44F: Port of Discharge/Airport of Destination
    Mundra Port, India

46A: Documents Required

  • Full set of original on board ocean bill of lading, issued to order of issuing bank, marked freight prepaid and notify (1) issuing bank (2) applicant.
  • Insurance Policy / Certificate issued in favor of the beneficiary and blank endorsed for full CIF value of the goods plus 10 percent covering Institute Cargo Clauses (A), Institute War Clauses (Cargo) and Institute Strike Clauses (Cargo) covering risks warehouse to warehouse with claims payable in India and showing the name and address of the settling agent in India.

But in some letters of credit, especially the old fashioned ones, carry an insurance document clause not covering above points but simply demanding an All Risks Insurance Policy or Certificate.

Some examples are:

  • Insurance certificate or policy in negotiable form dated not later than the bill of lading date covering all risks for 110 PCT of CIF value and indicating premium paid.
  • Negotiable insurance policy or certificate in duplicate for full invoice value plus ten percent irrespective of percentage covering the Institute Cargo Clauses (All Risks).

The problem with the all risks insurance conditions is that when you contact with an insurance company, they most probably will inform you that they can supply you an insurance policy covering Institute Cargo Clauses (A) instead of All Risks clauses just like below image. 

Insurance Policy Example: Institute Cargo Clauses (A) instead of All Risks ClauseInsurance Policy Example: Institute Cargo Clauses (A) instead of All Risks Clause

The question comes to the mind of the exporter, is it safe to present such an insurance policy according to the letters of credit rules.

In order to answer this question we must look at the latest version of letters of credit rules: UCP 600 and ISBP 745.

UCP 600 : Article 28 – Insurance Document and Coverage

h.When a credit requires insurance against “all risks” and an insurance document is presented containing any “all risks” notation or clause, whether or not bearing the heading “all risks”, the insurance document will be accepted without regard to any risks stated to be excluded.

ISBP 745: Insurance Document And Coverage – Application of UCP 600 article 28

K18) When a credit requires “all risks” coverage, this is satisfied by the presentation of an insurance document evidencing any “all risks” clause or notation, whether or not it bears the heading “all risks”, even when it is indicated that certain risks are excluded. An insurance document indicating that it covers Institute Cargo Clauses (A) or Institute Cargo Clauses (Air), when dispatch is effected by air satisfies a condition in a credit calling for an “all risks” clause or notation.

Conclusion:

If letter of credit does not specify the risks to be covered under the insurance document, but only indicating an All Risks policy, this condition is to be satisfied by presentation of an insurance policy covering Institute Cargo Clauses (A) for sea shipments and Institute Cargo Clauses (Air) for air shipments.

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

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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

Insurance Documents

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insurance documents

Insurance defined by merriam-webster dictionary as “a coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.”

Insurance can cover a wide range of activities including but not limited to agricultural insurance, health insurance, life insurance, vehicle insurance etc…

On this page, the focus is on the cargo insurances.

Cargo insurance can be defined as an insurance policy taken up to protect insurance policy holder/assured against loss of or damage to the goods during the transportation.

Cargo insurance is one of the most important elements of the international trade transactions.

Details of the cargo insurance should be determined under the sales contracts.

Who is Going to Arrange and Pay for the Cargo Insurance:

Under CIF (Cost Insurance Freight) and CIP (Carriage and Insurance Paid to a named place of destination) trade terms, the cargo insurance premium must be paid for and arranged by the exporter.

Otherwise parties can freely determine the insurer party.

What Kinds of Cargo Insurance Policies are Available for Export / Import Purposes:

There are 3 main cargo insurance types available for sea and road shipments.

  • Institute Cargo Clauses (A),
  • Institute Cargo Clauses (B) and
  • Institute Cargo Clauses (C).

Institute Cargo Clauses (A), which is also known as all risk insurance, has the widest protection coverage.

Institute Cargo Clauses (C) has the minimum insurance coverage.

Institute Cargo Clauses (Air) used in air shipments.

* Institute Cargo Clauses (A) 1/1/09
* Institute Cargo Clauses (B) 1/1/09
* Institute Cargo Clauses (C) 1/1/09
* Institute Cargo Clauses (Air) (excluding sending by Post) 1/1/09

Which Additional Clauses Should be Included in to the Cargo Insurance Policy:

Under the letters of credit transactions, the issuing banks demand some additional clauses on the cargo insurance policies together with all risks coverage for more security.

Some of the most frequently used additional cargo insurance clauses are,

* Institute War Clauses (Cargo)
* Termination of Transit Clause (Terrorism) Amended
* War and Strikes Cancellation Clause (Cargo)

Starting and Ending Points of the Cargo Insurance Coverage:

Normally the cargo insurance covers the losses that is occurred between the starting and ending point of the main carriage.

For example, a cargo insurance covers the losses that is occurred between the port of loading and the port of discharge on a port-to-port sea shipment.

But sometimes issuing banks may demand an extended coverage.

The most frequently used clause for these kinds of extensions is “warehouse to warehouse” insurance coverage.

How to Use Insurance Documents in Letters of Credit Transactions:

  • An insurance document, 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.
  • An insurance policy is acceptable in lieu of an insurance certificate or a declaration under an open cover.
  • Cover notes will not be accepted.
  • 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.
  • An insurance document indicating that it covers Institute Cargo Clauses (A) satisfies a condition in a credit calling for an “all risks” clause or notation. (ISBP 2007)

Insurance Policy Sample:

cargo insurance policy sample

Insurance Certificate Sample:

sample insurance certificate

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:

Insurance Document Discrepancies

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insurance document discrepancies

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 Discrepancies

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:

  1. Shipping and Incoterms, Practice Guide, UNDP Practice Series, Page:18

Insurance Coverage is Insufficient Discrepancy

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Insurance Coverage is Insufficient Discrepancy Example

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:

  1. 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.
  2. 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:

Letter of Credit Conditions

Field 32 B: Currency Code, Amount
Currency: USD (US DOLLAR)
Amount: #150.000,00#

Field 39 B: Maximum Credit Amount: Not Exceeding

Field 43P: Partial Shipments: Not Allowed

Field 43T: Transhipment: Not Allowed

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:

  1. A signed invoice in duplicate indicating the details of the descriptions of goods as per the L/C.
  2. Certificate of Origin issued and certified by any Chamber of Commerce in India indicating that goods are of Indian origin.
  3. 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.
  4. 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

insurance cover insufficient discrepancy

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.

All Originals of Insurance Policies Have Not Been Presented Discrepancy

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letter of credit discrepancy example insurance policy

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:

  1. A signed invoice in duplicate indicating the details of the descriptions of goods as per the L/C
  2. Certificate of Origin issued and certified by the Chamber of Commerce in Beneficiary’s country indicating South African origin of the goods.
  3. 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.
  4. 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

marine insurance policy all originals discrepancy

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:

  1. Keenan, Marie. 2016. “Marine insurance.” Salem Press Encyclopedia Research Starters, EBSCO host (accessed February 24, 2018).

Insurance Policy not Issued and Signed by an Insurance Company or its Agent Discrepancy

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Insurance Policy not Issued and Signed by an Insurance Company or its Agent

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:

  1. 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.
  2. Certificate of Origin issued and certified by the Chamber of Commerce in Beneficiary’s country indicating Tunisian origin of the goods.
  3. 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.
  4. 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

marine insurance policy discrepancy example

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.