Article-28-UCP-600-Insurance Document and Coverage

There are certain risk in international shipment, whether thru air, road or sea, to avoid those risk an insurance document may be used to provide the cover for loss or damage to cargo while in transit. 

Article-28-UCP-600-Insurance Document and Coverage

a. An insurance document, such as an insurance policy, an insurance certificate or a declaration under an open cover, 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.

Let’s understand first the terms insurance policy, insurance certificate or a declaration under an open cover.

Insurance Policy: An insurance policy is a legal contract between the insurance company (the insurer) and the person(s), business, or entity being insured (the insured).

Declaration under and open cover and insurance certificate: The open cover is a contract for 12 months which gives the Insured continuous protection to cover large number of shipments and the premium of which would be adjusted from the respective cash deposit account maintained by the Insured. An insurance certificate may be issued under an open cover for part shipment.

Underwriter: An insurance underwriter analyses and assesses the risks in providing insurance to individuals and companies, and establishes the pricing of the insurance premium.

An Agent of underwriter or insurance company: An agent of underwriter or insurance company is the sales department of an insurance company or outsource as the case may be, in simple word an agents is the one who brings in business.

Proxy of an underwriter or insurance company: If authority given to a person to act for someone else (on behalf of underwriter or insurance company) is called proxy.

An insurance document is issued and signed by an insurance company or underwriter or their agent or proxy. For example, an insurance document issued and signed by "ABC Insurance Ltd" appears to have been issued by an insurance company. In case issuer is identified as "insurer", the insurance document need not indicate that it is an insurance company or underwriter.

An insurance document may also be issued on an insurance broker's stationery, provided the insurance document has been signed by an insurance company or underwriter or their agent or proxy. An insurance broker may sign an insurance document as agent or proxy for or on behalf of a named insurance company or named underwriter.

An insurance document signed by an agent or proxy is to indicate the name of the insurance company or underwriter for or on behalf of which the agent or proxy is signing, unless the insurance company or underwriter name has been identified elsewhere in the document. For example, when "ABC Insurance Ltd" has been identified as the insurer, the document may be signed "John Thomas (as proxy or agent) on behalf of the insurer" or "John Thomas (as proxy or agent) on behalf of ABC Insurance Ltd".

b. When the insurance document indicates that it has been issued in more than one original, all originals must be presented.

If a document examiner is able to identify that more than one original has been issued then all original need to be presented.

c. Cover notes will not be accepted.

A cover note is a temporary certificate of insurance issued by the Insurer before the issuance of a policy after the Insured has given a duly filled in proposal form and has paid the premium in full. However, in terms of letter of credit subject to UCP-600 does not allow the cover notes as an accepted document for insurance.

d. An insurance policy is acceptable in lieu of an insurance certificate or a declaration under an open cover.

An insurance policy is the coverage plan offered by the insurer wherein a certificate may be issued under an opened cover for part Shipment, certificate is a proof that insurance is there. However, the main coverage plan is under insurance policy that is the reason policy is acceptable in case certificate is called for but certificate is not acceptable in lieu of an insurance policy.

e. 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.

When the insurance document is dated later than the date of shipment, there must be evidence on the face of the insurance document to the effect that cover was effective no later than the date of shipment. In this respect, a clause stating ‘Goods shipped on 08 JAN 1994” would not be an indication that cover was effective as of the date of shipment, there must be clear indication on insurance document that the “cover is effective from dated 08 JAN 1994”  in case the insurance document issue date is 10 JAN 1994.

F.i.The insurance document must indicate the amount of insurance coverage and be in the same currency as The credit.

- An insurance document must indicate that what amount will be covered when the insurance is claimed, and must be in the same currency of the credit.

ii. A requirement in the credit for insurance coverage to be for a percentage of the value of the goods, of the invoice value or similar is deemed to be the minimum amount of coverage required. 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. When the CIF or CIP value cannot be determined from the documents, the amount of insurance coverage must be calculated on the basis of the amount for which honour or negotiation is requested or the gross value of the goods as shown on the invoice, whichever is greater.

- There are two incoterms whereas insurance is by default included ei CIF and CIP, in case credit states for minimum amount for insurance coverage, there should not be any doubt and insurance document must need to cover the amount stated in the credit, an insurance document more than the required amount also acceptable. However, in case the minimum value is not called for in credit then the insurance coverage must show on an insurance document at least 110% of the CIF or CIP value.

In case CIF or CIP value is not determinable on the basis of the document then the insurance coverage must be calculated on the basis of the honour or negotiation is requested by the beneficiary or on behalf of beneficiary thru their cover letter, same will be compared to invoice and the higher amount will be considered for insurance coverage.

iii. The insurance document must indicate that risks are covered at least between the place of taking in charge or shipment and the place of discharge or final destination as stated in the credit.

- Because an insurance document in trade is obtained to mitigate the transit risk, the insurance document must indicate that risks are covered at least between the place of taking charge or shipment to place of discharge or final destination stated in the credit.

g. A credit should state the type of insurance required and, if any, the additional risks to be covered. An insurance document will be accepted without regard to any risks that are not covered if the credit uses imprecise terms such as "usual risks" or "customary risks".

The type of insurance requirement maybe segregated in various parts, it depends on the need and type of shipment being used for particular case, there are 3 types of insurance clause which is frequently used:

Clause A: Also known as “all risks”, Clause A covers all physical loss or damage to the cargo from any external cause. While it is the widest form of insurance coverage, it also has the highest premium.

Clause B: Institute Cargo Clauses (B) is the medium cover cargo insurance policy it covers more risks than ICC (C) cargo clauses but covers less risks than ICC (A) All Risks insurance policies, basicly clause B is used to cover Breakage, Scratching/Splitting, hooks, holing, bursting, tearing, leakage, Fresh, rain water damage, theft pilferage & non-delivery.

Clause C: Institute Cargo Clauses (C) covers very limited risks most of them which must be happen during the carriage in forms of accidents.

Institute cargo clause (air) is used for air shipment only.

An applicant should request the issuing bank to add the insurance requirement in credit as per their need, however, if credit mentions Usual or customary risk to be covered then an insurance document may exclude any particular risk and that will not be quoted as discrepancy, in order to avoid this an issuing bank must  need to precisely mention the requirement for the insurance document. 

h. When a credit requires insurance against "all risks" and an insurance document is presented containing any "all risks" notation or clause, whether or not bearing the heading "all risks", the insurance document will be accepted without regard to any risks stated to be excluded.

If a credit requires insurance document against all risks, an insurance document can be accepted if the insurance document is not having a clause or heading as “all risks” and even if any particular risk is not cover and having an exclusion clause.

i. An insurance document may contain reference to any exclusion clause.

j. An insurance document may indicate that the cover is subject to a franchise or excess (deductible).

Excess (deductible): is the amount deducted from the claim, however, if the claim amount is less than the excess (deductible amount) then claim will not be honoured.

Example : One has an insurance for the vehicle for USD 10,000 subject to 5% of excess (deductible), in case got an accident and claimed for vehicle USD 2000 then the 5% of the amount ei USD 500 will be deducted while settling the claim and claimed will be honoured for the value USD 1500. However, in same case loss is only for USD 400 (which is less than 5%) then no claim will be honoured.

Franchise: The Franchise Clause in Insurance applies the minimum amount of claim acceptable by the insurer. Generally, insurers decide the franchise limit based on the type of insurance and the feasibility of recovering the loss from the erring party.

Example : Let’s take the above same example, if the insurance is subject to 5% of franchise then if the damage is more than 5% USD 2000 , will  be paid in full without any deduction and less than 5% no claim will be honoured.

Coming back to sub-article 28(j) if credit does not specifically states irrespective of percentage then the insurance document may be subject to a franchise or excess (deductible).