In a letter of credit transaction where an insurance policy or certificate is required, amount of coverage must be determined in accordance with the letter of credit conditions and current L/C rules.
It is worth mentioning that there is no maximum percentage of insurance coverage. If issuing banks find out that insurance coverage is less what is required under a letter of credit, they will raise a discrepancy which is known as insurance coverage is insufficient discrepancy.
Discrepancy Example: Insurance coverage is insufficient:
A letter of credit has been issued in SWIFT format, subject to UCP latest version, with the following details:
Field 32 B: Currency Code, Amount
Currency: USD (US DOLLAR)
Field 39 B:Maximum Credit Amount
Field 43P: Partial Shipments: Not Allowed Field 43T: Transhipment: Not Allowed
Field 45A: Description of Goods and or Services: 100 pcs of 200mm Concrete Drainage Pipes. Delivery Terms: CIF Port of Apapa, Lagos Incoterms 2010.
Field 46A: Documents Required:
A signed invoice in duplicate indicating the details of the descriptions of goods as per the L/C.
Certificate of Origin issued and certified by any Chamber of Commerce in India indicating that goods are of Indian origin.
Insurance policy/certificate endorsed in blank for covering Institute Cargo Clause (A), Institute Strikes Clause (cargo), Institute War Clauses (Cargo) with claims payable in Nigeria.
Full set of clean on board bill(s) of lading issued or endorsed to the order of issuing bank, notify applicant showing “freight prepaid” and showing full name and address of the shipping company agent or his representative in Nigeria.
The beneficiary presented an insurance policy as shown on the below picture.
Reason for Discrepancy: If there is no indication in the credit of the insurance coverage required, the amount of insurance coverage must be at least 110% of the CIF or CIP value of the goods.
We can talk about two possibilities for the insurance coverage amount: First possibility is that when a credit indicates an amount to be insured. In this case insurance policy coverage must match the indicated amount in the credit. Second possibility is that when the credit is silent about the insurance coverage amount or percentage. In that case an insurance document is to be issued in the currency of and, as a minimum, for the amount indicated under UCP 600 sub‐article 28 (f) (ii).
The insurance policy indicates the amount of coverage is 150.000USD which corresponds to 100% commercial invoice value. Letter of credit rules requires that minimum insurance cover must be at least 110% of the invoice value. Insurance cover should have been at least 165.000USD.