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Banks are finicky when examining documents. If they find a discrepancy between the document presented and their description in the letters of the credit they might not pay. If they pay nevertheless, the buyer of the goods might refuse to reimburse the bank for paying the documents.
How then do insurance documents need to be prepared to pass muster.
The guiding regulation is Article 28 of the Uniform Customs and Practices issued by the International Chamber of Commerce (Paris) in its publication UCP 600.
This rule prescribes that an insurance document (either an insurance policy, an insurance certificate, of a declaration under an open cover) myst be issued by an insurance company, an underwriter or their agents or their proxies.
What becomes immediately clear from this wording is that documents issued by an insurance broker are not acceptable. The UCP 600 mention particularly that “cover notes” are not acceptable. However, it is acceptable that the broker signs on behalf of the insurance company.
If the letter of credit requires a certificate of insurance of a declaration under an open cover, it is acceptable to present an insurance policy; however the reverse is not true. If the LC requres an insurance policy, a certificate or declaration will be rejected as discrepant.
The effective date of coverage must start no later than the date of shipment. If the insurance document is issued after the shipment date, the document is acceptable as long as it covers the goods since the shipment date.
If the letter of credit does not mention the required insurance coverage, the coverage amount must be at least 110 % of the CIF or CIP value of the goods. If this value cannot be determined from the documents, the amount of coverage must be calculated on the basis of the LC amount, that is the amount of payment/negotiation. Alternatively the gross value of the goods as displayed on the invoice will be used, whichever of the two is greater.
Often a letter of credit will require insurance against all risks. However, it is acceptable that certain risks are excluded. The ISBP (International Standard Banking Practice) considered acceptable to exclude radioactive contamination and cyberattack from an all risk insurance. The limitation of coverage is only harmful to acceptance if the exclusion relates to clauses specifically required in the letter of credit.
The UCP 600 furthermore permit reference to any exclusion clause. The drafters of the UCP originally intended to list all acceptable exlusions. However, since these industry standard exclusions are constantly revised, the general reference was the only solution. This seems risky: The importer/buyer relies on the bank to accept proper insurance documents. The bank however will accept insurance coverage that might be effectuvely neutered by the insurance industry drafted standard exclusion. The only recommendation for an importer is to spell out what type of insurance he wants and which exclusions are not acceptable.
Click here if you want to know more about letters of credit.