Article

by T.O. Lee

A motor insurance policy shows the effective date and also the effective hours on its face (usually commencing at 00:00 hours). But cargo insurance works on a different schedule not based on any date on any document - rather on an event or material fact (details of carriage, such as the name of the ship, the port of loading and port of discharge) declared by the insured in good faith. In fact, under the updated Institute Cargo Clauses (A), (B) or (C) LMA/IUA 2009 quoted below, cargo insurance becomes effective at the time the transport commences, as indicated in the Duration/Transit Clause.

Duration

Transit Clause "8. 8.1 Subject to Clause 11 below, this insurance attaches (i.e. is effective) from the time the subject-matter insured (i.e., broadens the scope of 'goods') is first moved in the warehouse or at the place of storage (at the place named in the contract of insurance) for the purpose of the immediate loading into or onto the carrying vehicle or other conveyance for the commencement of transit (i.e. transport or carriage), continues during the ordinary course of transit and terminates either ... [emphases added]."

The revised wording in the clauses clarifies that the cargo insurance is effective from the moment the goods leave the warehouse for loading on board the first carrier for the purpose of commencing transport or carriage. This wording resolves the problems caused under the outdated warehouse-to-warehouse clause when read in conjunction with the older version of Institute Cargo Clauses 1982 or Incoterms 2010.

The vacuum period in insurance coverage during the period when goods have left the warehouse, but have not yet been loaded on the first carrier, has been removed when Incoterms are brought into the picture. Hence, the ICC Banking Commission's latest decision to reverse its former opinion on the warehouse-to-warehouse clause in a cargo insurance document (to indicate compliance on the effective date of cargo insurance), is no longer valid or necessary after the revised wording in the new 2009 version of the Institute Cargo Clauses

Annual Open Cover Policy

It is understandable that bankers who are not expected to be familiar with cargo insurance doctrines and practices may draft the articles of UCP 600 on compliance based on their assumption that cargo insurance works in the same way as motor insurance, both of which indicate an effective date on the policy. In my view, it is now clear that UCP 600 sub-article 28 (e) needs to be updated to be consistent with the revised 2009 version of the Institute Cargo Clauses. A case from the UK, US or EU in the near future would trigger the revision of UCP 600 sub-article 28 (e) when and if the rules are updated.

Annual coverage

Now consider the function of (i) the Cargo Insurance Annual Open Cover Policy (the Open Cover Policy) and (ii) the supplementary Marine Cargo Insurance Certificate (the Certificate).

Salesmen from insurance companies often encourage exporters and importers to arrange annual cargo insurance coverage under one standing insurance document called the Cargo Insurance Annual Open Cover Policy. This, it is said, will cover all exports and/or imports made during the year, and companies may offer a further bulk purchase discount as well as other incentives. In return for the insurer's support, the company may state that claims made during the year will be considered more favourably.

The Open Cover Policy will contain all the terms and conditions of insurance, as well as shipment data based on frequency and the CIF value of all shipments made during the year as estimated by the insured.

After each shipment, for presentation under an L/C or documentary collection, a Certificate will be issued under the Open Cover Policy, either (a) signed by the insurer or (b) a batch of many Certificates will be given to the insured beforehand, or available from the insurer's website on entry by passwords, all pre-signed by the insurer and/or countersigned by the insured after a shipment has been made. An arrangement involving (a) or (b) above will depend on the agreement made between the insured and the insurer.

If a batch of pre-signed Certificates is provided to the insured well in advance, there is no need to declare the details of each shipment before it occurs, since all shipments within the year are automatically held to be covered by the Open Cover Policy. Subject to approval by the insurer, export and/or import shipments made within a period may be declared collectively at the end of that period, say, weekly or monthly, as the case may be.

Function of Certificate

Since each shipment made that year is automatically held to be covered by the Open Cover Policy, the function of the Certificate in (a) or (b) above is obviously only to provide documentary proof to a third party that a particular shipment is already covered under the Open Cover Policy quoted in the Certificate. In other words, the issuing date of the Certificate is just an issuing date and nothing more, and is certainly not to be misinterpreted as the effective date of the insurance cover for that shipment.

It goes without saying that the issuing or signing date of the Certificate may be before, on or after the shipped on board date, as the case may be. This means that a banker need not worry about the effective date of a Certificate issued under an Open Cover Policy, one that automatically covers all shipments made within the year. To be prudent, the Certificate may indicate the effective cover period in the Open Cover Policy on which it is based. If the shipped on board date falls within the Policy's effective period, the Certificate is automatically compliant.

In the next revision of the ISBP, this would be a good issue to address.

T. O. Lee FAE MCIArb MITD is an accredited court expert and consultant in LC, CPBL, cargo insurance and frauds thereof under UCP 600. His website is www.tolee.com and his e-mail is experts@tolee.com