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Insurance Documents in Letters of Credit Transactions











Definition :

Insurance defined by merriam-webster dictionary as "a coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril." Insurance covers a wide range of activities including but not limited to agricultural insurance, health insurance, life insurance, vehicle insurance etc... We will be focusing on Cargo Insurances on this page.

Cargo Insurance :

Cargo insurance is defined as an insurance policy taken up to protect insurance holder against loss of or damage to the goods during the transportation. Cargo insurance is one of the most important elements of the international trade transactions. Details of the cargo insurance should be determined under the sale contracts. 

  • Who is going to arrange and pay for the cargo insurance : If, either CIF (Cost Insurance Freight) or CIP (Carriage and Insurance Paid to a named place of destination) trade terms is chosen, then the cargo insurance premium must be paid for and arranged by the exporter. Otherwise parties can freely determine the insurer party.  
  • What kind of cargo insurance is required for the purpose of the business transaction : There are 3 main cargo insurance types available for sea and road shipments.Institute Cargo Clauses (A), Institute Cargo Clauses (B) and Institute Cargo Clauses (C). Institute Cargo Clauses (A), which is also known as all risk insurance, has the widest protection coverage. Institute Cargo Clauses (C) has the minimum insurance coverage. Institute Cargo Clauses (Air) used in air shipments. 
            *    Institute Cargo Clauses (A) 1/1/09
            *    Institute Cargo Clauses (B) 1/1/09 
            *    Institute Cargo Clauses (C) 1/1/09
            *    Institute Cargo Clauses (Air) (excluding sendings by Post) 1/1/09       
             
  • Which additional clauses should be included in to the cargo insurance policy : Whatever cargo insurance type is selected importer or issuing bank may want to see some additional clauses on the cargo insurance policy. Some of the most frequently used clauses on the letter of credit texts are,
            *    Institute War Clauses (Cargo)
            *    Termination of Transit Clause (Terrorism) Amended
            *    War and Strikes Cancellation Clause (Cargo)
  • Starting and Ending Point of the Cargo Insurance Coverage : Normally cargo insurance covers the losses that is occurred between the starting and ending point of the main carriage. For example cargo insurance covers the losses that is occurred between port of loading and port of discharge on a port-to-port sea shipment. But sometimes issuing banks may want to extend these distances. The most frequently used clause for these kind of extension is "warehouse to warehouse" insurance coverage. 

Special Hints on Insurance Documents for Letters of Credit Transactions :

Insurance documents covered under article 28 in UCP 600 titled with "Insurance Document and Coverage". 

  • An insurance document, must appear to be issued and signed by an insurance company, an underwriter or their agents or their proxies. Any signature by an agent or proxy must indicate whether the agent or proxy has signed for or on behalf of the insurance company or underwriter.
  • An insurance policy is acceptable in lieu of an insurance certificate or a declaration under an open cover.
  • Cover notes will not be accepted.
  • The date of the insurance document must be no later than the date of shipment, unless it appears from the insurance document that the cover is effective from a date not later than the date of shipment.
  • The insurance document must indicate the amount of insurance coverage and be in the same currency as the credit.
  • An insurance document indicating that it covers Institute Cargo Clauses (A) satisfies a condition in a credit calling for an “all risks” clause or notation. (ISBP 2007)
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What is insurance policy? How can we use an insurance policy in a letter of credit transaction? 
Cargo insurance is defined as an insurance policy taken up to protect insurance policy holder/assured against loss of or damage to the goods during the transportation. Cargo insurance is one of the most important elements of the international trade transactions.



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