Query received related to Insurance Policy and Transport Doc

[T.O.Lee]

Laurence,

To response to your comments, we would like to point out that if a banker knows the basics about insurance, an insured amount being 200% of CIF value of the goods or more would be automatically deemed as a discrepancy although the DC states "insured amount must be a minimum of 110% of CIF value of the goods".

IMPLIED WARRANTY IN INSURANCE

Why? According to the "implied warranty" (prime terms and conditions with which the insured must comply or the insurance would be voided), the insured cannot declare an insured amount which is unreasonably larger than the market value of the goods at the time of insurance declaration or that the insured knows that it is much over-valued, whether with a fraudulent intent or not.

"Implied warranty" terms and conditions may not be stated in the policy since they are implied terms and conditions. Perhaps here Jeremy would argue:' “I cannot see those implied warranty terms and conditions on the face of the insurance policy to help me to determine the discrepancies and so this “implied warranty” issue does not concern me as a banker".

LITERAL INTERPRETATION OF ARTICLE 13 OF UCP 500 DOES NOT HELP IN DETERMINATION OF DISCREPANCIES IN AN INSURANCE POLICY

Well, purely from UCP 500 Article 13 literal interpretation point of view, it may be so. However, this would lead to an argument from Laurence that 200% of CIF value or more would not be deemed as a discrepancy if the DC states "insured amount must be a minimum of 110% of CIF value of the goods".

So to be a real DC expert or technician, whatever one may be labelled, a banker should, at least from best practice point of view, know about the basics of insurance, as well as other trade practices in order to do his job well, or to help his customers to minimise problems rather than creating problems by introducing additional discrepancies due to his ignorance of other trade practices.

A STORY ABOUT AIDS TO DEMONSTRATE IMPLIED WARRANTY IN INSURANCE

There are other requirements from the “implied warranty” – an insurance jargon that takes a special meaning peculiar to the insurance industry alone.

We would like to share a story about AIDS with you.

A gentleman died of AIDS and the beneficiary claimed against his insurance policy. The insurer declined the claim as the insured had breached the “implied warranty” of “voluntary disclosure of the material facts that may affect the insurance cover”. The insurer also pointed out the fact that the insured knew that he had AIDS as his family doctor told him of this fact two weeks before he applied for the insurance.

The beneficiary’s legal retainer (who provided general commercial legal advice to his clients) argued:

“The insured had filled up all the boxes and answered all the questions in your insurance application form in which AIDS was never asked or included. It is due to your nelgigence in gathering information from the insured. So the insured needs not tell you this fact since it is not asked for or required in your application form”.

The insurer replied:

”Our decision is based on an “implied warranty” requirement imposed on the insured to disclose VOLUNTARILY any material facts that he knows that may have an impact on the insurance cover. At the time the insured applied for his insurance, AIDS was not as popular as it is today. So AIDS was not one of the items in our old application form. However, this does not waive the “implied warranty” requirements which are conditions precedent to effective coverage according to the applicable law of the insurance policy ”.

So the beneficiary’s claim was denied due to breach of one important “implied warranty” item. There are other implied warranty items that could only be detailed in an insurance workshop designed specifically for bankers.

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DISCLAIMERS:

The opinions, comments and/or advices expressed here are solely for discussion or debating purposes. They may change with time, for example, when new perspectives are taken or after new developments or changes in trade customs and practices are seen in the respective fields. You should not rely on or act accordingly to such opinions, comments and/or advices and should seek professional opinions from your own lawyers, experts and/or consultants. We do not assume any liability or responsibility for any damages, losses or consequences of whatever nature, whether directly or indirectly related to or caused by our opinions, comments and/or advices.

[edited 1/11/02 6:23:55 PM]

[T.O.Lee]

On second thought, we would like to add further comments here about over-insurance, as worried by Laurence.

DOUBLE INSURANCE IS ALSO OVER INSURANCE

In one insurance workshop, a participant challenged us with a query:

"If two policies are arranged to two separate insurers, each covering 110% of the CIF value of the goods, then as far as each insurer or each policy is concerned, there is no over-insurance. In that case can the insured claim full value against each of these two policies?"

“The answer is No.” we explained: “According insurance practice, each insurer will pay only 50% of the insurers’ total obligated amount (that means each insurer is responsible for only 55% of the CIF value of the goods) even though a total of 220% of the CIF value of the goods is covered in the two policies. So double insurance made to two separate insurers is also deemed as over insurance, according to insurance practice for “indemnity” policies".

INSURER ALWAYS ONLY PAYS FOR THE VALUE OF THE GOODS AT TIME OF DISTRESS AND NO MORE

How much insurance the insured wishes to cover, that is entirely his own decision but for claim purposes, the insurer would only pay for the value of the goods at the time of the distress because cargo insurance is “indemnity” in nature.

REPLACEMENT CLAUSE

Under "ndemnity" policies, the insurer has an option to use the “replacement clause” in a policy to indemnify the loss of the insured with similar goods, if the market price of the goods (such as in commodities) has dropped drastically.

BENEFIT INSURANCE MAY HAVE NO INSURANCE LIMIT IF AGREED BY THE INSURER

Life insurance is “benefit” insurance in nature. So double or triple insurance can be met in full in claims because life is invaluable, one million, two million or ten million (would Hatem please confirm whether “million” (single number rather than plural) is used correctly here and the reasons why from English grammar point of view).

COMMON SENSE RULE

For Laurence, if a document examiner uses simple common sense to determine discrepancies, he should not deem 200% coverage as compliant with the DC terms and conditions that include, amongst other things, “Insured amount must be a minimum of 110% of the CIF value of the goods”.

DOUBLE INSURANCE MAKES DOUBLE “I “ IN CIF

Another point of concern is that 220% coverage would invariably incur double premium, which is not intended by the parties in the sales contract or in the DC. The “I” in the CIF” is “double I” (shall we call this “CIIF” in Incoterms 2002?). So this should be a material discrepancy. Fellow members, we have an exercise for you to polish your analytical mind, if the DC calls for "CIIF" then is double insurance a discrepancy?

Hence, we would not worry that stating a minimum of 110% of the CIF value of the goods in a DC would lead to the problems as worried by Laurence.

BEST PRACTICE IS NOT TO MENTION 110% OR ANY PERCENTAGE OF INSURANCE IN A DC

The best practice is not to mention any percentage of insurance in the DC because this 110% requirement has already been specified in the UCP 500 sub-Article 34 (f) (ii). Reiterating it in the DC is not only superfluous but also opening a can of worms.

OUR FINDINGS IN THE KITCHEN

We went to the kitchen and found out some reasons why the “110%” indication was put in the DC application forms provided by the banks.

(1) Some bankers wish to either show off their knowledge about the UCP or to satisfy their creativity needs, one of the many human needs. This is often seen in DC from some countries (to avoid sensitivity, we do not wish to mention their names here) quoting a lot of the contents of UCP Articles, making the DC four or five pages long.

(2) Some in-house legal counsels of the banks like to add 110% requirements on the DC application forms to show their worth (or to keep their jobs during headcounts cutting periods) in the banks. For an outsider legal counsel, 110% requirement is added to create a reason to charge for higher fees.

Similar additions in a “received for shipment" bill of lading, such as “The carrier reserves the right to change or substitute for another vessel....” (or words of similar effect) lead to the mis-interpretation of bankers to regard this as to trigger on the “intended vessel” situation under UCP 500 sub-Article 23 (a) (ii) and therefore demand a separate on board notion, even though the name of the vessel is already stated in the “Vessel Name” box in the bill of lading. We appreciate that the ICC Banking Commission reversed its decision after listening to advices from us and Thomas Song, the Korean representative and that of the ICC Transport Commission.

(3) A conservative banker dared not change anything that his predecessor had been using to void responsibilities when the DC application form was to be revised after UCP 500 replaced UCP 400.

(4) When a new bank is opened, all the stationery are copycats from other banks. So they copied everything, both the rights and the wrongs.

Maybe some members would share with us other reasons that we have missed out in the kitchen.

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DISCLAIMERS:

The opinions, comments and/or advices expressed here are solely for discussion or debating purposes. They may change with time, for example, when new perspectives are taken or after new developments or changes in trade customs and practices are seen in the respective fields. You should not rely on or act accordingly to such opinions, comments and/or advices and should seek professional opinions from your own lawyers, experts and/or consultants. We do not assume any liability or responsibility for any damages, losses or consequences of whatever nature, whether directly or indirectly related to or caused by our opinions, comments and/or advices.

[edited 1/11/02 9:11:26 PM]

[larryBacon]

T.O.

I am aware, of course, of the Uberrimae Fidei concept, but this does not alter my view. I have personally been involved in transactions where I arranged insurance above 110%. The highest genuine request I received was for 200%. The commodity in question was in short supply in the intended country of destination which forced the real market price up to double the European price.

There is nothing in UCP which imposes an upper limit on the insurance percentage if it is described as a minimum. Likewise UCP does not call for "common sense" to be used in this respect. The case I cited above is exceptional, but must be permitted under the UCP.

The real difficulty is in determining which 200% is genuine and which is not. This is not a job for L/C checkers, nor for the UCP.

If it seems "common sense" to dishonour for 200%, how can we determine the critical point where the percentage passes from acceptable to unacceptable ? If 200% is unacceptable, then the critical point must be somewhere between 110 & 200%, but precisely where ? As far as I know, there is no such internationally agreed transition point, but if others are aware of this I would be pleased to hear of it.

Laurence

[NigelHolt]

My response to Laurence’s first posting, after my own, is that I do not see how any bank that had issued/confirmed a credit requiring an insurance document for a minimum of 110% of the goods value could, on the basis of sub-Article 13a, reject an insurance cert for any figure above 110%, e.g. 1,000%. That the beneficiary and/or applicant MIGHT be trying to defraud an insurance co is not –to me- of any concern to a banker discharging its obligations under a credit. However, I would be willing to accept that presentation of an insurance document for substantially more than 110% MAY indicate the document itself is fraudulent, e.g. forged, and therefore -under the governing law of the credit- this MAY require further investigation by the bank.

Incidentally, the ICC opinion to which Laurence referred, in an earlier posting, is now on DC-Pro and headed ‘Sub-Articles 34(f)(ii), 34(e) and 35(b) UCP 500 Questions concering whether insurance must be precisely 110% or whether it can be rounded up ……’.

As to T.O.’s query as to why banks put the ‘(minimum) 110% provision’ in their credit application forms, as we do, I imagine it is so that the applicant is aware for how much the goods will be insured unless they state otherwise, a knowledge of UCP500 often not being held by applicants (or beneficiaries)!

Finally, as usual T.O. and I would appear to disagree as to the level of knowledge a banker should have regarding the practices of other ‘trades’.


[edited 1/14/02 1:22:14 PM]

[larryBacon]

Jeremy,

as I stated in earlier postings, banks would have no option but to accept insurance for any amount above 110%, where the L/C called for a minimum 110%. Nevertheless, inordinately high amounts would give rise to suspicions about fraud. Even if the document itself was not fraudulent, if fraud was to be perpetrated, the bank may find itself drawn into an ensuing court case over its failure to reject documents on the suspicion of fraud. The bank would be in a difficult situation here. Under UCP it must accept the documents, but doing so whilst suspecting fraud may appear to make the bank almost complicit in any subsequent criminal activities. At the very least it would be bad P.R. for the bank.

Laurence
[edited 1/14/02 1:44:47 PM]

[larryBacon]

Jeremy,

thanks for pointing out that the opinion is available in DC-PRO. Sub-Article 34(f )(ii) reads: "Unless otherwise stipulated in the Credit, the minimum amount for which the insurance document must indicate the insurance cover to have been effected is the CIF (cost, insurance and freight (... "named port of destination")) or CIP (carriage and insurance paid to (... "named place of destination")) value of the goods, as the case may be, plus 10%, but only when the CIF or CIP value can be determined from the documents on their face. Otherwise, banks will accept as such minimum amount 110% of the amount for which payment, acceptance or negotiation is requested under the Credit, or 110% of the gross amount of the invoice, whichever is the greater."

I suggest that where a L/C calls for 110% cover, that percentage is the only cover acceptable, partly because it is specifically and accurately described in the L/C, but also because Article 34(f)(ii) allows for exceptions to minimum cover because it says "Unless otherwise stipulated in the Credit....."
Thus Article 34 permits a minimum 110% where no amount is stipulated, but where the amount is stipulated, (e.g. 110%), it falls under the category of "otherwise stipulated".

I acknowledge that I oppose the current Official Opinion, but this overturned the previous Opinion which I believe was correct.

Laurence

[NigelHolt]

Laurence,

I sympathise with your views regarding this latest ICC Opinion. Incidentally, ICC UK opposed the draft, in writing. Also, I notice -with regard to Question 1- ‘we’ said:

‘We would prefer that the sentence ‘The UCP does not provide for any maximum percentage.’ were deleted. While we do not disgree with this statement, we believe it could be interpreted that insurance for substantially large proportions,e.g. 300%, could never be discrepant.’

Perhaps I may have gone a bit ‘over board’ with my 1,000% example above?

Regards, Jeremy

[larryBacon]

Jeremy,

on the contrary, I think that your reference to 1000% is justified, as not only is there no upper limit under the UCP, but when taking this Official Opinion into account, even L/Cs which specify 110% are not constrained by any upper limit.

Laurence

[T.O.Lee]

Jeremy and Laurence (in alphabetical order)

UCP SHOULD NOT INTERFERE WITH THE UNDERLYING TRADE

Purely from UCP 500 point of view, there is no limit for an insured amount being a multiple of the CIF value of the goods because UCP does not wish to interfere with the underlying transaction and to respect the trading practices in different trades, that may have different percentages of profits (hence different insured amounts) as some trades are more profitable than others. The UCP is only to regulate DC operations and a banker’s payment undertaking against presentation of compliant documents. It is not made to police the trade, although many Ls/C are used as such, which is not intended by the ICC Banking Commission.

DO NOT DRIFT FROM THE BASICS IN OUR ARGUMENTS

Now as a consultant covering all trading technologies under DC, we take a broader perspective than a banker. Hence we will see the over-insurance issue from the perspectives of cargo insurance, trading practices, carrier liabilities, and so on. Hence our opinions may not be the same as those from bankers and we believe our views are more practical, reasonable, convincing and functional. We should not drift away from the basics in our arguments and should not forget the following basics:

(1) The UCP is to facilitate the trades rather than to hinder or interfere with the underlying transactions and the trade practices of other industries.

(2) The transaction is the “king”, and DC is to serve the “king”. It is only a tool to guarantee payment.

(3) UCP cannot violate insurance warranties as the basic terms and conditions precedent to effective insurance cover. “Bankers should not mow the lawns of their neighbours”, comments we often heard from the carriers and the insurers we met.

UTMOST GOOD FAITH AS ONE OF THE WARRANTIES IN INSURANCE

If a seller tells the insurer honestly about the market value of the goods and explains the reasons why he wishes to insure the goods for 200-1,000 % of its CIF value, then it is up to the insurer to refuse or accept the application. If the application is accepted, then in case of loss or damage to the goods, the insurer is liable to pay for the full 200-1,000% insured amount although at the time of distress the market value of the goods is much less than that. This is a contract made in “utmost good faith”, which is one of the warranties of insurance where the insured has observed it by telling the whole truth to the insurer at the time of insurance application.

LOSS OR NO LOSS CLAUSE

Similarly, if the insured does not know that the goods were already destroyed by a fire yesterday and he believes that they still exist today and applies for insurance cover accordingly, the policy is still valid because the insured has observed “utmost good faith” warranty requirements in his application, even though at the time of insurance, the goods do not exist. This is the beauty of cargo insurance. This practice is reflected in the “loss or no loss” clause.

BANKERS NEED TO LEARN OTHER TRADE PRACTICES TO DO THEIR JOBS WELL

So if bankers understand warranties of insurance such as those mentioned above, it would help them to determine discrepancies more accurately and confidently whether or not the over-insurance is a fraudulent declaration/discrepancy or a trade practice (hence being compliant). If bankers shut their doors and refuse to go out to the market place to know the update information and trade practices, they can never perform their jobs well. We cannot live alone, particularly in this Internet world where everybody is pulled together in the net. There is no more ”Sorry I am only a banker, this doe not concern me” attitude.

Bankers should not determine discrepancies on over-insurance issues just based on their limited knowledge about cargo insurance. They should not refuse to learn or update themselves, particularly in this “knowledge is power” high tech “global village” Internet trade environment. That is also one of the purposes of CDCS to ask for CPD (Continuous Personal Development) credit points from attending workshops in order to have exemption from re-examination after passing the CDCS examination for three years.

WE AS A CONSUTLANT TAKE A BROADER VIEW ON ISSUES THAN BANKERS

As a consultant, we are providing that sort of services, which the market is lacking. That is why our opinions are respected by the international courts, due to their practicality and broader coverage of views from different perspectives, which judicial decisions are all about, besides taking the legal perspectives. Law always follow practices is an important doctrine in laws, which we learn from our university commercial law programmes.

I do not make myself a lawyer to avoid conflict of interest with lawyers who are also my customers. Also award of a lawyer licence includes laws that are not trade related, such as laws on marriage, human rights, criminal offences, constitutional rights, probate and so on, which we have no interest and time for them.

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