ICC Digital Library Forum

I would like opinions on the issue of negotiable insurance.
If a L/C calls for insurance policy or certificate in "negotiable form", is this satisfied by an insurance document showing a named party as assured and endorsed by them ?

NATURE OF INSURANCE POLICY & CERTIFICATE

Before we talk about negotiability or endorsement, we have to get it straight the difference between an insurance policy and an insurance certificate.

An insurance policy is issued by an insurance company or an underwriter (of the risks/perils held covered), with terms and conditions of coverage (expressly or implied, transit clause, cancellation clause, duty to declare material facts, voluntary disclosure, insurable interest, warranty precedent to cover etc.) stated therein as required by the MIA (Marine Insurance Act of UK for example).

There are many kinds of insurance policies. One popular kind is the "open" or "floating" policy, covering a long period of time, say, one year, for all the exports and/or imports of the insured for a discounted rate due to "bulk" purchase of insurance services.

To facilitate claims made overseas by the buyers, where the policy issuer may not have an office at those destinations, settling agents are appointed overseas. In letter of credit operations, which members of the DC PRO are interested, for each out-bound shipment, a declaration of the shipment details (vessel name, quantity, description of goods, CIF value etc.) is needed. A certificate of insurance will be issued by an agent against the "open" policy but without stating the terms and conditions in the "open" policy. The certificate merely REFERS to the terms and conditions in the "open policy". The certificate also nominates an overseas settling agent and has also an "Assignment Clause" to govern assignment, which is different from negotiation, although both processes need endorsement by the insured.

For certain good customers, who have "open" policy arrangements, a batch of say, 50 insurance certificates are pre-signed by the issuer and handed over to the insured so that he can add his own signature in to have it validatd after one export shipment has been made, instead of coming back to the issuer for issue. This practice saves both time and money for the insurer and the insured.

IMPLICATION FROM SUB ARTICLE 34 (D)

This practice is supported by sub Article 34 (d) of the UCP 500, stating that unless otherwise stipulated in the LC, an insurance certificate OR declaration under an open cover pre-signed by insurance companies or underwriters or their agents will be acceptable. It also states that if an insurance certificate or declaration is called for in the LC, an insurance policy (which is a better document) presented in lieu of an insurance certificate or declaration will be acceptable.

This sub Article gives the applicant his choice not to accept an insurance certificate or declaration by stating that this sub Article is applicable only if there is no restrictive stipulation in the LC. But an insurance policy can ALWAYS be acceptable EVEN IF the LC calls for an insurance certificate or declaration. In other words, there is no choice under the UCP 500 for parties not to accept an insurance policy. This is only a matter of common sense.

Viewers are requested to read this sub Article stipulation side by side with our opinions expressed and make their own judgement whether an insurance certificate and an insurance policy are the same thing.

INSURANCE POLICY IS THE "MOTHER" AND CERTIFICATE THE "KID"

A certificate of insurance has no terms and conditions of insurance (and merely referring to them) and owes its existence by referring to another insurance document, the "open" policy, against which it is issued and coming into effect. Due to these special features or differences, it should not qualify as a negotiable instrument although it is still assignable. In essence, it is merely a certificate to prove that insurance has been arranged for the listed perils, say, of the sea, under the "open" policy (its "mother" document).

On the other hand, an insurance policy must have terms and conditions of insurance as required by the MIA (Marine Insurance Act of UK of which most insurance laws are based) and should qualify as a "negotiable" instrument where the insured may endorse it to another party, in the same way as you endorse a bill of lading, since they are all "negotiable" instruments (but there are differences between these two documents according to Victor Dover, with reasons explained in the next opinion that appears when you scroll further down here). It is too lengthy to describe "negotiable" instrument and endorsement here. Mr. Bacon or those interested in this subject may see our article written for Lloyd's of London on different ways a bill of lading may be made out in our website after finishing with the DC PRO viewing.

TRAINING ON INSURANCE BASICS BENEFITS BANKERS

The LC received by Mr. Bacon, the enquirer, asking for insurance certificate "in negotiable form" shows that certain bankers need training on insurance basics (which we are glad to provide). An insurance certificate cannot be negotiated by endorsement (but is still assignable) for reasons given above.

UNDESIRABLE BANKING PRACTICE

Having said that, certain bankers do "negotiate" an insurance certificate by endorsement and get it passed by other bankers. Maybe this in fact only means assignment of insurance interest. In the same way it is quite common that certain bankers "negotiate" air waybills (also not being negotiable instruments) by endorsement. This is not a banking practice to be encouraged, particularly if they have passed the CDCS, they should not do things like this.

RISK FOR ADVISING SUCH LC

Mr. Bacon is wise to throw a query in DC PRO. If he had advised such an LC, his bank might get into trouble, particularly if he was working in the USA, where lawyers work on contingency basis and his bank might be sued for negligence due to advising such an LC. Fortunately Mr. Bacon appears to be practising in Ireland (where I had the best Guinnees stout) and such risk should be much reduced.

DISCLAIMER

Our opinions expressed above are just for informal discussion purpose only and parties, including but not limited to Mr. Bacon, should consult their insurance experts and/or legal counsel before taking our opinions, which we are not respsonsible for any loss or damages arising out of or related to reliance on or acting upon our opinions.

We are from www.tolee.com

[edited 7/2/02 9:56:34 PM]

The answer to the question is yes.

I'm not sure about all the comments made by T.O.Lee because I have regularly seen Ins Certs which state 'This Certificate requires endorsement in the event of assignment'.

If a credit calls for a negotiable Ins Cert I believe that a banker should check to see if the cert states 'losses payable to order of XYZ Co (the beneficiary) and, if so, check that the cert has been endorsed by them.

An Ins Cert which states 'losses payable to bearer' doesn't need endorsing and meets the 'negotiable' requirement of the l/c.

CLARIFICATION OF PREVIOUS OPINIONS

To avoid misinterpretation of our previous opinions made on above (please scroll up for it), we have done some edition to the beginning section regarding the difference between an insurance policy and an insurance certificate and other areas as well, to make our meaning more clear to the viewers. We recommend you to re-read the above opinions first before you read on this second part of our opinions.

ASSIGNMENT VS. NEGOTIATION

To respond to the comments from Mr. PGauntlett, "assignable" (ASSIGNMENT) is different from "negotiable" (NEGOTIATION), although both process need endorsement (signature of endorsor with date).

RIGHT TO ASSIGN PROTECTED BY LAW

The right to assign assets, interests or rights is a right protected by the law. That is why an insurance certificate can be assigned to another party and yet it is not a negotiable instrument. Insurance interest can always be assigned so that insurance coverage or interest may move with the goods from one party (a seller) to another (a buyer) without the need and complexity involved for each party to arrange insurance separately by himself.

To respect the law that allows a party to assign his assets, we have "assignment of proceeds" under Article 49 of the UCP 500 to allow ALL LCS to be assigned to a third party under LC although an LC may NOT ALLOW TRANSFER and/or NEGOTIATION and payable ONLY to the beneficiary on its face.

FURTHER COMPLICATIONS ON "NEGOTIABLE INSTRUMENT"

With no intention to complicate the issue or to create thrills, may we quote from an authoritative publication in our private consultancy library - Victor Dover's "A Handbook to Marine Insurance" 8th Edition, page 393 that states:

"A POLICY of marine insurance is NOT a NEGOTIABLE INSTRUMENT. (Remarks by T. O.: The sentence that follows explains the reason upon which the above statement is based) An assignee CANNOT acquire a better title than that possessed by the original assured, but a mortgagee on whose behalf the policy is effected is not prejudiced by the misconduct of the mortgagor. This was decided in Small v. United Kingdom Marine Insurance Company, Ltd., 1897, when it was held that the wilful misconduct of a master, part-owner of a vessel, did not prejudice the position of innocent co-owner...".

So, based on certain perspectives, even an insurance POLICY itself may NOT be considered as a negotiable instrument, according to this author who is well respected in the marine cargo insurance community, although he has passed away already. His statement is probably right when he refers to a special feature of a negotiable instrument that "an endorsee should have a better title than the endorsor".

Incidentally, this also explains the underlying reason for an LC to demand a bill of lading made out "To order and blank endorsed" instead of directly consigned to the same issuing bank. The purpose is to put the issuing bank, in an endorsee position, in order to enjoy a better title than the shipper/beneficiary or a straight consignee (such as in fraud cases). For further details you may refer to our article on this subject written for Lloyd's of London in our website when you have finished browsing the DC PRO.

Hence, it all depends on what one really intends when one refers to the terms "negotiation" or "negotiable" and also under which context (drafts, bills of lading, letters of credit or insurance policies) one is referring to. For example, the term "negotiation" may take different meanings in a letter of credit (focused on "giving value" as a banker like Charles del Busto did in his ICC Position Papers) and in an insurance policy (focused on "endorsee's better title" as compared with the endorsor as an insurance expert, Victor Dover did).

We have to stop right here, considering that members of the DC PRO are mostly bankers who may not wish to go so deep into this technical issue of "negotiable instrument" in insurance documents.

FOR US, LC IS NOT MERELY BANKING ALONE

From our view, letter of credit is not merely a banking thing. For trouble free operations, practitioners should know basic knowledge and trade practices on shipping, freight forwarding, cargo insurance, Incoterms, and law of contract. For excellence, they should also know marine chartering, merchantile laws, conventions (Rome, Vienna etc.), arbitration and ADR. However, all these would not help if they do not have common sense.

We appreciate and thank Mr. PGauntlett for his telling us his doubts promptly so that we may have a chance to edit and to explain our meaning further to avoid our opinions being interpreted in a way we have never intended.

DISCLAIMER

Our opinions expressed above are just for informal discussion purpose only and parties, including but not limited to Mr. Bacon and Mr. PGauntlett, should consult their insurance experts and/or legal counsel before taking our opinions, which we are not respsonsible for any loss or damages arising out of or related to reliance on or acting upon our opinions.

We are from www.tolee.com

[edited 7/2/02 9:44:17 PM]

Referring to the lengthy explanation given by Mr. Lee I would like to point on an important issue regarding the insurance certificate. Many Banks are invariably stipulating in letters of credit insurance policy or certificate as if they are of the same effect. I agree with Mr. Lee that insurance policy is not an insurance certificate and vise versa. However some banks are illusioned by this fact because most of our letter of credit training regarding documents is based on the “however named” assumption.

It is worthy to inquire whether the “however named or described” is applicable to insurance certificate if it is issued in a manner that it states all risks covered, and is made to order as required by the l/c but entitled as insurance certificate and refers to an open insurance policy.

I personally feel that the above is a mix up but this is what is happening that many a bank goes directly for certain items in the certificate without considering its legal effect or other correlated issues.

If we agree that insurance policy is different from insurance certificate simply because they serve different purpose (which we should) then we need not bulldoze them into the letter of credit in the same manner under the same effect.

Thanks for the enlightening comments from Mr. Shehab that are very encouraging indeed, particularly from a banker.

BREVITY IS OFTEN NOT CLARITY

To be honest, being a self-employed consultant, with unsteady income, we have not the luxury of giving lengthy explanation here. However, we also realise from our experience in doing training and article writing that brevity often leads to misinterpretation or misleading the audience unintentionally. We wish we could possess such brevity powers. For a very complicated subject like "negotiable" instruments, which are quite abstract in nature, we have to use more words to ensure that our real intention is carried across to the DC PRO members of different backgrounds and understanding of the same subject in terms of breadth and depth.

Our attitude is: Either we do not respond at all if we are busy, or we have to do it in the best way we could.

Time cost is not a consideration if we choose to respond.

We are from www.tolee.com

[edited 7/6/01 3:35:09 PM]