Which is the best insurance type that should be selected against non-delivery risks?
Question comes from Lus Miguel, Porto, Portugal:
First of all, congratulations for your website, it has been a great help. I'd like to ask you some questions regarding insurance versus letters of credit.
Knowing that if the credit is under the UCP 600 the insurance terms is agreed between exporter and importer (INCOTERMS) the banks sometimes ask for a Clause A plus extra coverage. I think (and this is my doubt) that the banks at the bottom line can ask a minimum clause insurance (110%) if they trust their client financial capability to support a cargo loss/accident. It is always a commercial decision.
Am I right at my conclusion? The reason for my question is that nowadays we usually approve with clause A but if the commercials ask we lower the type of coverage to B or C.
I was looking for case studies, but I believe the risk when the cargo does not arrive to destiny is always on the side of importers/exporters (INCOTERMS chosen) and the bank is always defended since if the documents are good we have to pay them to the exporter.
Do you have knowledge of other situations that banks got "burned" regarding insurance problems when docs were okay?
My answer is as belows: Thanks for your question. Actually answering your question is not easy as it is really complicated. I will try to analyse as simple as possible.
Insurance coverage under Incoterms: According to Incoterms 2010, seller has to make the insurance agreement with an insurance company and has to supply an insurance policy or certificate by paying the insurance premium under two trade terms: CIF(cost insurance freight) and CIP(carriage insurance paid to). Both CIF and CIP incoterms outlines a minimum insurance coverage, which is Institute Marine Cargo Clauses, C. Exporters and importers are free to determine a more detailed insurance coverage such as Institute Marine Cargo Clauses, A (all risks). Furthermore they can choose to include additional clauses to an all risk policy such as WSRCC (War, strikes, riots and civil commotion) clause or Theft, Pilferage and Non-Delivery clause. All of these extra insurance coverage must be paid by the buyer.
Delivery place under CIF incoterms: Many people think that under CIF incoterms, seller delivers goods to the buyer at the port of discharge but this is not correct. Seller delivers goods to the buyer at the port of loading once goods shipped on board a named vessel under CIF incoterms. For this reason as a bank non delivery risk under a letter of credit is not different between FOB incoterms and CIF incoterms. Exporter delivers good under both incoterms at the port of loading and if you received a complying presentation you have to honor whether or not the goods arrive to the port of discharge.
Insurance coverage under letter of credit rules: Letter of credit rules, UCP 600, does not give directions either banks or their customers that what type of insurance cover must be selected. Just on the contrary, letter of credit rules tell that a credit should state the type of insurance required and, if any, the additional risks to be covered.
Non-delivery Risk of Goods: As a bank, your non-delivery risk remains the same under various incoterms such as FOB and CIF. As a result you can cover just a portion of non-delivery risks if you focus on only CIF and CIP incoterms. As you have indicated above banks have to honor complying presentations whether or not goods arrive port of discharge. In practice issuing banks have to decide accepting or rejecting presentations while goods are still in transit, long before they have completed their journey.
Establishing Internal Standards: Perhaps you should establish an internal standards against non-delivery of goods risks. This can be done by requesting all risks insurance policy covering additional clauses such as war, strikes, riots and civil commotion and theft, pilferage and non-delivery under CIF and CIP incoterms. For the remaining incoterms you may indicate on the letter of credit application form that your bank will be arranging an insurance policy on behalf of your customer in order to secure delivery of goods. Alternatively you can indemnify yourself against such risks by holding your customer fully responsible against non-delivery of goods under complying presentations.
Implementation: In order to establish a well structured internal guidelines I can suggest you to get in touch with ICC Banking committee in Portugal. You can contact them from following information details: