Article

by Xuehui Wang (Ofei)

In ICC Banking Commission Opinion TA 688, published in the Spring 2010 issue of DCInsight, the Commission considered the endorsement issue as it applies to insurance documents. However, the Commission's conclusions leave some matters unclear, and it is worth reviewing them.

An insurance document is a document used to claim against the insurer when insured goods incur losses or damages that are within the scope of coverage. An endorsement of an insurance document is concerned with the transfer of insurance documents to enable the new holder to lodge claims against the insurer if losses or damages have occurred. Of course, in practice the claimant needs to obtain the insurable interest and present other documents (such as invoice, packing list, bills of lading, survey report, correspondence exchanged with the carriers and other parties concerning their liability for the loss or damages, etc.) for compensation from the insurer.

One significant phenomenon is that the insurable interest is often transferred with the transfer of bills of lading if the ocean transportation mode is used. That's also why, when the claimant lodges claims against the insurer, he needs to present an original or signed copy of the bill of lading.

Endorsement

When referring to the "endorsement" issue, it's important to note that "negotiable" and "transferable" are different concepts. This has been misunderstood for a long time. A bill of lading should be deemed a "transferable" rather than a "negotiable" document. It is transferable in that the endorsement of the bill of lading can pass title to the goods and the rights under the contract of carriage. But unlike a negotiable instrument, such as a bill of exchange, the new holder's rights in the bill of lading cannot be protected if there are flaws in obtaining it. This means that the new holder can have no better rights than the previous holder with regard to the bill of lading, whereas the new holder can have better rights in a bill of exchange. Therefore, a bill of lading is at best regarded as a "transferable document" (also called a "quasi-negotiable instrument", though, in my view, the term "transferable document" is preferable).

When a CIF or CIP Incoterm is used, the beneficiary under the L/C will apply for insurance to the insurer and then obtain the insurance documents. The application form does not need to be transferred with the transfer of insurance documents. So the insurance documents are also, at best, regarded as "transferable documents".

Of course, whether or not such documents (including insurance documents and bills of lading) can be transferred depends on how they are issued.

There are no relevant clauses in marine insurance acts to indicate the circumstances under which an insurance document needs to be endorsed and how it will be endorsed. Usually, practitioners follow the same practice as with bills of lading. A bill of lading may be made out "to order" or "to the order of XXX". Then it will be endorsed by the shipper or the named XXX. A similar process applies to insurance documents, except that insurance documents will normally name the original insured party but will not name the consignee.

Special and blank endorsement

Endorsement of the document is usually of two kinds: namely, special endorsement or blank endorsement. Unfortunately, no specific clauses concerning the endorsement issue can be found in any laws, acts or rules. But the Convention Providing a Uniform Law for Bills of Exchange and Promissory Notes (Geneva, 1930) and the UK Bills of Exchange Act 1882 address endorsement as it concerns drafts. In the Convention's article 12 one finds the following language: "An endorsement [emphasis added] 'to bearer' is equivalent to an endorsement in blank." The Bills of Exchange Act in article 34 (1) says: "An indorsement in blank specifies no indorsee, and a bill so indorsed becomes payable to bearer."

However, the above clauses are often misused in insurance documents. Take the Geneva Convention as an example. The original meaning of article 12 means that if an endorser (transferer) writes down its name and the wording "(Pay) to bearer", this has the same effect as an endorsement in blank, which still constitutes an endorsement. But if a bill is originally payable to bearer, it does not need any endorsement; it will be only transferred by delivery. This is totally different from an endorsement "to bearer". In fact, blank endorsement emphasizes that the holder of an instrument need not make an endorsement if it wants to re-transfer. But the endorser (transferer) needs to write its name on the back of the instrument in order to fulfil the requirements for a blank endorsement and deliver it to the subsequent holder. The use of endorsement in negotiable instruments can also be the same as regards insurance documents and transport documents.

Query TA 688

In Cases 1 and 3 in the ICC Banking Commission's query TA 688, the L/C required an insurance document blank endorsed. There were no other requirements concerning how it was to be issued. The presented insurance policy did not have an endorsement, but indicated "To bearer" or "To order". The Banking Commission concluded that this was acceptable according to ISBP Paragraph 1791. Moreover, the Commission also agreed that "to order" was, in effect, the same as "to bearer". The same idea was also stated in a previous Banking Commission Opinion, R 322.

However, the last paragraph of the conclusion to TA 688 states: "To avoid some of the issues identified in this query, insurance documents should not evidence or be required to evidence the assured as 'To Order' or 'To Bearer.'" Apparently, the Opinion contends that an endorsement is necessary if it is required in an L/C, but that it can also be satisfied by other means, such as placing "to bearer" on the face of an insurance document, for example.

I have some difficulty understanding the Opinion. As mentioned above, if an insurance policy is made out "to order" or in the form "to order of XXX", it needs an endorsement (either a special endorsement or a blank endorsement) if a transfer is involved. However, if an insurance policy is made out "to bearer", it does not need any endorsement. Such an insurance policy will be transferred by delivery only. Obviously, "blank endorsement" and "without endorsement" are two different concepts, but ICC's Opinion TA 688, as well as ISBP 681 paragraph 179, consider blank endorsement to have the same effect as "to bearer".

Quite apart from this, it is not clear whether an insurance document must be endorsed if it is assigned.

Marine insurance acts

It is difficult to find relevant clauses on this subject in any marine insurance act. The English Marine Insurance Act 1906 article 50 (3) reads: "A marine policy may be assigned by endorsement thereon or in other customary manner." A similar stipulation also appears in other marine insurance acts, such as those of India and Canada. What I can gather from these clauses is that an insurance document can be transferred either by endorsement or delivery; it depends on what requirements in this respect are to be found in other documents, an L/C for example. However, the wording "in other customary manner" is ambiguous.

Section 23 (1) of this Act states that a marine policy must specify the name of the insured or of some person who effects the insurance on its behalf. London market practice is that the insured is identified on the insurance contract. Consequently, a contract of insurance subject to English law, which is issued simply "to bearer" without any indication concerning the identity of the original insured party, is arguably not a valid contract of insurance, nor is it in accordance with best practice. Since many other related acts are much influenced by English law, to be in line with market practice, it is best to clearly state the name of the specific insured party.

Conclusion

With regard to these issues, I would suggest the following to clarify the endorsement issue:

1. A clear statement concerning endorsement should be included in a new Position Paper by the ICC Banking Commission;

2. The apparent confusion surrounding endorsement should be cleared up during the current revision of ISBP 681; and

3. An insurance document should specify a named party or some person who effects the insurance on its behalf. And if an L/C requires an endorsement (whether special or blank), the insurance policy should reflect this.

Xuehui WANG (Ofei) is a Lecturer in the School of Economics and Management at Anhui Agricultural University in Hefei, Anhui, China. Her e-mail is ofeiliya@hotmail.com.

The author would like express her gratitude to Stephen Tricks for his assistance in preparing this article.

1. "An insurance document must be in the form as required by the credit and, where necessary, be endorsed by the party to whose order claims are payable. A document issued to bearer is acceptable where the credit requires an insurance document endorsed in blank and vice versa."