ICC Digital Library Forum

We have a letter of credit that asks for an insurance certificate for 110% of invoice value. The invoice is for $15,759.90. 110% of the invoice value is $17,335.89. The shipment has been insured for $17,336.00 which is $0.11 more. This has been called as a discrepancy as it has been insured for more than 110%. (110.0006%). I believe that this is not a discrepancy as it has just been round up to the next whole dollar but it has been called as one.
I have searched DC Pro and the UCP and ISBP for a ruling on this rounding up to the next dollar with no luck. I did find one thing on insurance for 115% and 120% but it did not really cover this issue. Can anyone help me with a ruling on this?

Thanks
Mark

Hi Mark,

If you do a site search for "invoice + 110" you will find the relevant information.

Then following is an extract from the conclusion of ICC Opinion 468:

Question 2

The inclusion in an L/C of a term such as " Insurance for 110 % invoice value" is a bank's way of trying to mirror the UCP requirement of 110 %. However, it has not always been translated as such. Consistent with the UCP construction, banks that issue credits with such a clause generally are looking for a minimum coverage rather than an exact one. If a bank requires the insurance document to be issued for exactly X% or X amount or words to similar effect, then the credit must expressly state this requirement. This opinion overrides Issue 2 of query R195 which appears in ICC Publication No. 565.

Also Paragraph 191 of ISBP:

191) An insurance document must be issued in the currency of and, as a minimum, for the amount required by the credit. If a credit does not state a minimum percentage amount, then the minimum insurance amount must be 110 % of the CIF value, or 110 % of CIP value, as determined by the amounts reflected on the invoice or any other required document. A requirement for “ Insurance for 110 %”, or the like, is deemed to be the minimum amount of insurance coverage required. The UCP does not provide for any maximum percentage.

The problem would be avoided if all banks issued credits properly, i.e. in this instance they followed the wording of sub 34f and specified insurance be for a ‘minimum’ (or similar, e.g. ‘at least’) 110%.

Within ISBP paragraph 191 is the following: "A requirement for 'Insurance for 100%', or the like is deemed to be the minimum amount of insurance coverage required." I would state this is the international practice and understanding that such a statement means minimum not exact. The use of the "for 110%" is the issuers method and intent of restating what the UCP states as a minimum. But to prevent such problems, banks should discourage attempts to issue LCs with the statement "for 110%..."

The opinions expressed regarding 110% being interpreted as a minimum 110% are correct in relation to the official Banking Commission opinions. However in my opinion, the opinion is still flawed in one vital respect. There is no maximum amount. This is my only objection to this interpretation. As I stated at the time this was discussed at a previous Banking Commission meeting, in the vast majority of cases, this interpretation will serve all parties well. However, it is glaringly obvious that it can be used to perpetrate a fraud by significantly overdeclaring the value of goods. Even if bankers identify such overdeclaration of value and suspect fraud, under the above official opinion, they will be unable to regard it as discrepant.

Laurence

Laurence,

This question of fraud, regarding insurance, is yet something else over which I’ve puzzled from time to time. Firstly, it is unclear to me how the fraud would work. In order to make a valid claim the goods would have to be damaged/lost in transit, presumably. Therefore, to arrange for this loss/damage to happen would logically require the complicity of the carrier or warehouse co etc as well as the applicant who would be the party making the claim. Would this be the m.o.? If so, it seems rather complicated and therefore risky to the fraudster(s).

Secondly, I’d be curious to learn what official maximum amount you had in mind and the reason(s) therefor.

Regards, Jeremy

Jeremy,

a simple example might be sealing a container which was empty and declaring a full load of goods. We know of examples of seals being opened and closed without evidence of tampering. Typically, the shipper arranges insurance which is transferable. However, he may claim that the deal with a prospective buyer has fallen through and wishes to reclaim his goods. He then feigns surprise when the container is found to be empty and claims against insurance. A variation on this might be to have the driver sign for a sealed container, but unknown to him, the seal is removed before he leaves.
These are examples of fraud perpetrated by a single person or company. I'm sure that there are variations involving complicity of other parties, but their complicitous involvement is not necessarily required.

The maximum amount is something I would prefer insurance industry professionals to give advice on, and hopefully this is an issue we can address with their help in UCP 600.

Laurence
[edited 8/4/03 9:20:01 PM]

Laurence,

Thank you for this explanation.

The only thought I am left with is that, in the example you give, the seller would presumably not present documents under the credit? Having said that, I can see the possibility of seller – buyer collusion involving an empty container.

Jeremy

I agree that in the example I gave, the exporter would not present documents under the credit, but he may be forced to "go through the motions" of agreeing to payment by L/C (e.g. countries where it is compulsory).
If there is collusion between buyer & seller, it is easy to imagine a variation of the earlier example, where the exporter presents documents & is paid. The buyer then claims on insurance at the higher insured value.

Laurence

I have no idea how greedy these fraudsters might become but I would suppose that they would not risk by overinsuring the shipment so significantly to draw attention of the insurance surveys when claiming under the insurance policy. I would guess that they would be happy to make 110% of declared value of „empty “container.

Pavel Andrle