Article

By Pavel Andrle

Insurance documents and their role in documentary credit practice are among the most problematic issues confronting bankers and insurers. Why is this the case? Why do bankers, beneficiaries, applicants and insurance providers experience so many misunderstandings with regard to the credit requirements and document refusals involving insurance documents?

The players

Bankers rightly claim they are not supposed to be experts in cargo insurance. They examine insurance documents as per the credit terms and conditions, the applicable provisions of UCP 600 and in line with international standard banking practice. But the way a banker examines an insurance document under documentary credits inevitably differs from the manner in which an insurance expert would examine the same document as per the applicable law and/or its industry practice.

In like manner, an insurer is not required to know banking rules and practices. One must acknowledge that laws and practices related to cargo insurance can differ from one country to another. Arguably, in the case of international cargo insurance, the parties in most cases follow standard English cargo insurance practice (which has effectively become the international practice). However, the knowledge of, and experience with, this practice is frequently inadequate.

Insurers follow the law and local regulations and practices. In case they provide international cargo insurance cover such as Institute Cargo Clauses A, B or C, no doubt they do their best to follow what they understand to be English standard practice. In doing so, however, they might experience conflicts with local regulations, practice or laws.

Negotiability

For instance, the whole question of the negotiability of insurance documents is very messy worldwide. The laws in many countries do not support negotiability of these documents at all. The English Marine Insurance Act 1906 does not speak of "negotiability"1 but of "assignment of policy".2 In the context of insurance documents, arguably this means "assignable", i.e., a policy not containing terms expressly prohibiting assignment3.

Thus, in many countries, there is no direct (legal) basis for insurance documents being issued to or to order (of) (with or without of a named party) or to bearer4.

However, it would be wrong to downplay these practices, as they are commonplace. How many times have credits been issued, advised and/or confirmed requesting that an insurance document be issued to the order of the beneficiary and blank-endorsed, or to the order of the applicant, the issuing bank, or to bearer or in negotiable form?

Playing it safe

However, even with all of these uncertainties, which inevitably create considerable room for misunderstandings and mistakes, one can play it safe.

The beneficiary and the applicant have to understand the rules of the business they're in. This means paying attention to detail. Documentation is a highly technical matter, and documentary credits are exclusively about documents. Playing it safe starts with getting the conditions of the contract right.

Considerations for the applicant

Generally, the applicant requests the presentation of an insurance document under a credit when the delivery term agreed with the seller (the beneficiary) is CIF or CIP Incoterms 2010. In such a case, it's the duty of the seller to obtain, at its own expense, cargo insurance in favour of the buyer.

But the applicant should be aware that CIF and CIP Incoterms 2010 require the seller, unless otherwise agreed, to obtain only the minimum cover as provided by Clauses (C) of the Institute Cargo Clauses. However, this might not be adequate for the goods in question. If additional cover is needed, it should be clearly requested in the contract and the credit. Be aware that war risk cover is usually available only for sea transport or multimodal transport which includes sea.

L/C conditions and article 28

The applicant should not ask for "all-risk" cover. This expression is regularly used by the parties when they actually mean "ICC A" cover. In fact, the dangers of having requested all-risk cover in the credit are pretty evident - see UCP 600 sub-article 28 (h). The same could be said about other vague terms such as "usual risks", "customary risks", or "usual transport risks", etc. (see UCP 600 sub-article 28 (g)).

The applicant needs to be aware that UCP 600 sub-article 28 (i) allows an insurance document to contain reference to an exclusion clause. As many exclusion clauses are now common standard insurance practice, it would be unrealistic to prohibit them outright. If one wishes to allow only some, or otherwise to limit the exclusions, he should first consult with an experienced insurance specialist.

As per UCP 600 sub-article 28 (j), an insurance document may indicate that cover is subject to a franchise or excess (deductible). This can have a significant impact on the insured (applicant). Again, such clauses are very common these days, so it might not be a good idea to forbid them, since the cover could then become prohibitively expensive or even not available at all. Consultation with an insurance expert is advisable, as this might result in limiting the amount of the franchise/excess.

It also might be a good idea to request the insurance document to show the name, address and contact details of a survey agent. It makes sense to require that the survey agent be located in the country of destination, or even in the place of destination (the port of discharge). In case the country of destination is a busy trading place, this should not be a problem. The same is true with regard to the specific place, such as the port of discharge. Insurance companies normally have survey agents at their disposal in main international sea ports, though this is generally not the case in other ports.

Often a credit requests that the insurance document show a settling agent in the country of destination. The settling agent is a person authorized to pay losses out of funds provided by the insurer. Needless to say, insurers don't have a network of settling agents in all countries.

In any case, one can question what value a local presence of the settling agent brings to the insured. If the agent (or, if there is none, the insurer itself ) is based in another country with an acceptable country risk, this should not be a matter of much concern. The payment of the claim will be paid in the currency of the insurance document into the bank account of the insured.

Considerations for the beneficiary

Beneficiaries can suffer considerable problems when the credit imposes unrealistic requirements. If the credit requests something that the beneficiary cannot obtain on the insurance market, he can be in big trouble.

To avoid such a situation, the beneficiary must negotiate the contract of sale and the credit terms and conditions with skill. This involves being equipped with knowledge obtained from experts. Any requirement for a nonstandard, unusual condition should be questioned. When the credit is advised to the beneficiary, it's necessary that he again study all of its terms and conditions to make sure they comply and are achievable. This may require additional consultations and even an amendment to the credit. Moreover, before the credit insurance document is finally issued, it might be advisable to request drafts of the documents and to pass them to the banker for pre-examination (possibly with drafts of other documents to be presented under the credit).

Above all, the beneficiary should be careful with regard to the conditions related to risk cover, prohibition of exclusion clauses, franchise and/or excess, names, addresses, and contact details of various agents in places of destination or elsewhere. Are these achievable, and at what cost?

Considerations for the banker

The role of the bank, the issuing bank and the confirming bank, if any, is that of an independent paymaster. When it comes to making a decision as to whether the presentation complies or not, the bank needs to be independent and neutral, both as regards the applicant and the beneficiary. Yet, at the same time, the bank, with its knowledge and experience, is there to assist and support its customer. It can be a delicate balancing act to be both neutral and supportive, and to succeed in this the banker must be knowledgeable and experienced. To avoid arguments, he should be familiar with international standard banking practice and adhere to established terms and wording. Even when practice provides no clear answers, it's the banker's duty, as a representative of the international banking community, to bring as much clarity as possible to his customer.

Conclusion

Even in a single foreign trade transaction there is a range of (legally) separate documents, players and relationships - such as the contract of sale, carriage, forwarding agencies, agency, cargo insurance and documentary credits. Although some of these are legally independent, they are nonetheless linked to one another and interdependent. It's necessary for the players in their respective fields to reach out to others, to explain their practices and to learn from others about their own practices.

In time, the aim should be to create rules and best standard practices that work across all industry sectors.

Pavel Andrle is an international trade finance trainer and consultant and Secretary to the Banking Commission of ICC Czech Republic. His e-mail is pa@ cmail.cz

1. By "negotiation" in this context I mean a transfer of a right to claim under the insurance policy/certificate from one person (insured) to another by endorsement and delivery (if issued to order of the insured) or by delivery (issued to bearer).

2. Paragraph 50.

3. T he Marine Act 1906 does not provide for how the assignment is to be executed. Obviously the endorsement might be one means.

4. I n the case described above. However, the law and/or practice in other places might well support such an issuance.