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From the Unpublished Queries 15 1099 entitled “Does sub-Article 35(c) apply when the insurance document details the insurance requirements?” ICC Banking Commission published an Opinion on the insurance policy presented under L/C, which stated 'Excluding rust, oxidization & discolouration unless directly caused by stranding, sinking, burning, collision and/or heavy weather only'. The requirement in the credit, for the insurance document was: 'Insurance policy/certificate endorsed in blank for 110% of invoice value covering Institute Cargo Clause (A)/Institute Strikes Clause (cargo)/Institute War Clauses (Cargo) with claims payable in Country S'.

Obviously the decision did not apply article 35 to this case. The Banking Commission reasoned that: “Sub- Article 35 (b) applies where the letter of credit is not specific in the insurance cover required for that specific transaction. The letter of credit in question detailed the insurance requirements and therefore this sub-Article does not apply. The exclusion of certain risks would be grounds to reject in the circumstances that have been outlined above.”

Mark Coleman from Australia, as I remember, also raised the query, in the discussion forum. In his query the “letter of credit calls for an insurance policy that includes “Institute Cargo Clauses (All risks)”. Insurance policy was issued that includes “Institute Cargo Clauses (All risks)” but it also states “Excluding Rust/ Oxidization / Discolouration.”

Although I do recognize that the nature of the query in the discussion from is different from the query raised before the ICC Banking Commission in the sense that in case of Mr. Mark Coleman credit, the stipulation was “Institute Cargo Clauses (All risks)” and not “Institute Cargo Clauses (A)” which is more specific in the later case, however the question is how would a banker be in a position to determine that this inclusion or exclusion is compliant or incompliant with the credit terms.

As pointed out by TO LEE "Rust, oxidization and decolouration" is a standard exclusion clause in insurance coverage for steel goods. Otherwise the insurance premium would be too high to be of practical value.” The insurance policy covering “Institute Cargo Clauses (A)” already contains exclusions perhaps more than the covered risks, therefore this would “add burden” (for me it is not) on bankers to know the basics of cargo insurance, particularly in determination of discrepancies that requires actual understanding of the trade practices in other trades, like shipping and cargo insurance.

I would be interested to share on what basis this is considered as a discrepancy, noting that “Institute Cargo Clauses (A)” covers the risks of “stranding, sinking, burning, collision and/or heavy weather” is it the application of the concept of “Proximate Cause”?


[edited 4/20/02 6:18:26 AM]

It is well known that Clause (A), although regarded as an "All Risks" policy, in fact does not include all risks. One example which is not covered is "inherent vice". This is easily explained in terms of foodstuffs requiring temperature and humidity control and with a short life span. I have no experience with shipments of steel, but it seems to me that the insurance company inserts a clause excluding rust etc as an exclusion similar to that of inherent vice. Ergo, this does not affect the fact that the insurance effected is, on its face, an "all risks" policy under Clause (A).

If there are specialists in steel shipments contributing, I would welcome edification by them.

Laurence

Hatem,

My personal views, without liability/responsibility, are:

Where an insurance document seems to give less cover than that stipulated in a doc cr, such as in the example given in Opinion R360 to which you refer, to me the insurance document can only be treated as non-compliant.

As I’m sure you appreciate, I do not regard it as a doc cr banker’s duty to have any knowledge of a particular trade’s practices. Therefore, I would not regard the fact that it is the practice in a particular trade to exclude a particular ‘sub-risk’ as being relevant to a banker determining compliance. I regard the onus as being on the applicant to reflect the trade practice in the doc cr terms and the beneficiary to verify this has happened. If they don’t, it’s the beneficiary’s problem, not the banks’.

Jeremy

The trouble with R360 (which I don't agree with) is that it throws up the following anomaly:

If the l/c calls for 'all risks' coverage it can be met by an ins cert stating 'ICC (A)' and certain risks can be excluded.

If, however, l/c specifically calls for ICC (A) no exclusion clauses can be shown

As clear as mud!

Phil,

I can't find an opinion that says one can accept ICC(A) for 'all risks'. Which one is this please?

Jeremy

Philip,

I fail to see the anomaly. If "All Risks" is referred to, any all risks policy/cert will suffice as the term is non-specific and for the same reason permits exclusion clauses.

However, if ICC(A) is called for, this is very specific and only this term will be permitted. However, one must bear in mind that ICC(A) is an all risks cover which already incorporates standard exclusion clauses, there being no such thing as a truly comprehensive "All Risks" policy.

Laurence
[edited 4/15/02 5:25:35 PM]

ALL RISKS V. ICC (A)

For cargo insurance, the old versions, AR (All Risks), WA (With Average) & FPA (Free of Particular Average) were updated many years ago, and with new legislations to go with them, into now what we call ICC (Institute Cargo Clauses) (A), (B) & (C) respectively.

The updating is necessary to incorporate some changes to follow the changing trade practices and as a result of the judicial decisions in insurance court disputes in the meantime. Since the Discussion Forum is not for giving lecture, please excuse us for not providing explanation on what is meant by “average” and not providing other detailed information here. It is better to leave these to a cargo insurance workshop. Otherwise more questions would be raised, such as “general average”, “sue and labour”, so on and so forth.

THE INTENT OF THE APPLICANT IS THE SAME

So, when a party still uses the old term “All Risks” in a DC application form (some banks may not update the terms they use), his intention is actually ICC (A). So there should be no difference as to which term is being used. The intention should be the same.

In fact, a couple of years ago some insurance agencies have not yet changed their policy formats and one would find the magic words “All Risks” still being used there instead of ICC (A). As we have said, anything may happen these days and don’t argue with the facts. There are lots of reasons for this. Whenever you have human beings being involved, you have an opportunity to make mistakes.

ICC INSURANCE COMMISSION SHOULD BE CONSULTED

Hence we would comment that if the ICC Banking Commission had consulted the ICC Insurance Commission, then Opinion R360 should look quite different. In fact, the CEO of ICC Head Quarters, Maria Cattuai always encourages close liaison amongst different ICC Commissions. If this is done adequately, there should not be such problems.

REFUSAL OF EXCLUSION RIDERS IS NOT PRACTICAL

We still remember that when we shipped out glass products, we always got an exclusion rider for breakage. Otherwise we had to pay a heavy premium, which made the transaction not so worthwhile. The same commercial practice still holds today, as this is simple common sense as well as sound commercial sense.

If we do not allow rust and denting exclusions in steel products, which are not expensive products, the premiums would just kill the trade. Without such exclusions riders, the insurer would have to meet the claims in practically each and every shipment because the high humidity and hot climate at high sea would without doubt create rust and longshoremen would automatically create denting on loading and discharge, as a by product.

Not allowing exclusions in steel and glass products and the like in DC operations is in fact impractical and would hinder international trade development, which is not the intent of DC operations and the UCP.

We always insist that banker should have some basic knowledge on cargo insurance for this reason, although Jeremy may not agree to this. Now we have a perfect example if you don’t.

www.tolee.com

[edited 4/15/02 7:34:27 PM]

Dear Laurence,

I really do appreciate the point you have raised regarding certain exclusions that might appear in the insurance policy even though it covers ICC (A). Inherent vice is a good example of that, in fact there are many exclusions to the ICC (A) that normally appear in the policy itself, hence my question on what basis the ICC banking commission has decided that “'Excluding rust, oxidization & discolouration unless directly caused by stranding, sinking, burning, collision and/or heavy weather only” is a discrepancy since the credit calls for an insurance policy covering ICC (A)only without any specific reference to such risks to be covered? This decision would really require an expert in insurance to decide whether this exclusion clause was correct or should have been covered under such policy. What if the insurance practice in steal trade does exclude this particular risk, would then the ICC banking commission revise its decision? This would again raise the question of what is customary coverage and what is not? A document checker like Jeremy who is reluctant to go beyond the purely banking issues and not get involved in insurance practices, transport practices, would simply accept such document as long as it states that it covers ICC (A) and of course he cannot be blamed for that because he is not, and is expected not to be, an insurance expert. We cannot blame Jeremy for this because UCP 500 does not list the requirement of ICC (A) covered risks and perils.

On the other hand, we may have an issuing bank that has come across this opinion and might reject this document based on the ICC banking commission decision, however if TO LEE is at the other end as a nominated bank he may say that “Rust, oxidization and discolouration is a standard exclusion clause in insurance coverage for steel goods. Otherwise the insurance premium would be too high to be of practical value.” He already did.

The decision of the ICC banking commission refers to ICC (A) as a specific stipulation as if the commission is sure that these risks should be covered under such ICC (A)policy. This would mean that the document checker has to know what is to be covered and what is not. How would a document checker on the basis of UCP 500 decide that an insurance policy covering ICC (B) but indicates an exclusion of leakage?

Dear Jeremy

The credit stated that insurance policy should cover ICC (A), the insurance policy presented did cover ICC (A) but it stated that “Rust, oxidization and discolouration unless directly caused by stranding, sinking, burning, collision and/or heavy weather only" hence I agree with you that this decision should be decided between the beneficiary and the applicant, however what would be the banks position in determining that this insurance policy is compliant or not. What if the applicant says it is a discrepancy but the beneficiary says it is compliant. What if the decision of the bank was to regard this as compliant in the absence of any specific requirement in the L/C regarding this “rusty clause”?

Dear Philip,

I agree with you it is as clear as mud. The question really is, what are standard exclusions clauses and what are not? If one reviews the insurance policy, one would notice that most of them restate the clauses of risks covered by printing them again in the insurance policy. Now in case of an exclusion clause like this appearing in the insurance policy would require the document checker to compare it with the rider to ensure that thus exclusion is standard or not. In this case the poor documents checker would really need to ensure that his banks credit extend the reasonable time to 14 days to finish such a donkeys job of he has a lot of L/Cs calling for insurance policies.

Although I do recognize the fact that ICC (A) is very specific and not general as (ALL RISKS) I would be interested to know on what basis bankers will decide what are standard exclusions that are acceptable and what are not?

Regards

APPLICATION OF MURPHY'S LAW

While one can appreciate the rationale of the ICC Opinion in this case, it does not take account of what may be common practice for insurance purposes in the steel industry. However, if it did take such account, one might argue that it would set a precedent requiring the UCP to take account of common practice for every industry, which would be impracticable. Instead, I would recommend beneficiaries and applicants to make daily reference to Murphy's Law in drafting DCs. If more banks were to follow suit at the DC application stage, they would improve their customer service and simultaneously see an overall reduction in hours spent in discussions over what is or is not acceptable.

Laurence

Jeremy, there isn't an opinion as such. I've based my view on the draft standard banking practice doc and 'ucp74/83 revisions explained' (pub 411) re ART39 as it then was. Although, no doubt, you have pub 411 I'll quote the relevant section for the benefiy of anyone who hasn't:
Quote:In 1982 Lloyds and the Institute of London Underwriters made major changes in their policy and clauses. Because no 'all risks' clause covers ALL risks, they replaced the clause headed 'all risks' by one headed 'Clause A'. Paragraph 1 of Clause A states ''This insurance covers all risks.....except as provided.....below''. The UCP re-drafting is necessary to cover the new position. The widely used ILU Clause A does not bear ''the heading 'all risks''', but it does clearly contain an '''all risks' notation'', although ''indicating that certain risks are excluded''. Unquote

If, perhaps, the Banking Commission had looked at pub 411, R360 might have been answered differently.

Anyway I have decided that our bank will only handle FOB and C&F credits from now on!

Phil

PS Jeremy, did you enter the marathon?You might've stood a chance against the guy in the diving suit if you'd managed your East London pace!