Letter of Credit Forum

Just to amplify a couple of points from Phill (from the court of the Crimson King):

1. If the LC is silent as regards insurance, bank may, as a matter of good practice, request confirmation from the applicant that the insurance cover has been effected, but as a matter of risk, the bank will only be concerned about whether goods have been insured if the bank is nominated as the designated consignee (or "to order" consignee), i,e that the bank is looking to the goods as contingent security under the LC. In the event of a claim needing to be made to offset the bank's liability, it needs to ensure that insurance cover is in place, to salvage the financial loss.

Excepting CIP/CIF incoterms, evidence that insurance cover has been taken out is not mandatory for either the applicant/buyer, or the supplier/beneficiary, and the LC can remain silent on the issue. It is of course expected that in such circumstances, (where the issuing bank has no interest in taking title to the underlying goods), either the buyer or the seller will have arranged insurance cover, but the issuing bank cannot impose any requirements on this front.     

2. UCP600 does not prescribe over the requirement for insurance, as this will depend on the contractual agreement between the applicant and beneficiary, and the "incoterm" under which the contract (and thereby the LC)  has been established. Of course, an LC issued on CIP/CIF terms, but without requiring presentation of an insurance certificate/policy will always be queried.

Hello

Just some thoughts which may help you…but others may have more to add.

Before going further, bear in mind that marine insurance is compulsory only in three instances.
1. When it is mandated by law – either by the country of origin or of destination. When such laws apply, there are sometimes further restrictions on how insurance is to be taken out and through whom.
2. When it is mandated by contract: this is to say when the parties to a contract agree to insurance. The actual contract that drives this agreement could be the sales contract or even the payment contract – such as the credit (of which more, later).
3. When it is mandated by the contract terms: for example, under the commercial term CIF or the Incoterm CIP, insurance is compulsory, but normally only to a minimum standard, modified by either 2 or 1 above.

Now, this list is a hierarchy; Law first, then the contract, then the contract terms. It follows that if none of these three mandate insurance, then the parties can choose to go without cover. We might have reservations about whether this is a clever thing to do, but we can say that it certainly isn’t compulsory.

In terms of the credit, this too will be subject first and foremost to law, let us keep it simple and just think about two laws - that of the issuing bank’s country and that of the beneficiary’s country. If there is nothing mandatory in either, then we may move to the next step i.e. what does the contract require?

Again, there is a hierarchy – the first contract of trade is the sales contract, but let us assume that this mentions nothing about insurance, so we can move on to the contract of payment, in this case the documentary credit. Now, someone else here on this forum will need to confirm whether the UCP makes insurance compulsory as it is not my forte (but it’s ok, you can relax, when someone here adds their confirmation to a post, such a confirmation normally doesn’t cost you anything). What I can say – from the common practice I note in trade – is that it is usual for the issuing bank to decline to open the credit in favour of a beneficiary unless a) the applicant has evidence of insurance or b) the credit demands the beneficiary offer proof of cover through the documents presented. That is to say, the bank wants evidence of cover from one of the two players. There is also an obscure possibility that insurance may be demanded by the carrier’s contract, but we can leave out of this dialogue for now.

For the third measure, (let us assume there is no credit and there is no mention of insurance in the sales contract), we look at the commercial term. Unfortunately, there is no global law of trade to help us absolutely understand what you mean by the term “FOB”, and as you are working with a credit and most likely also working with an on-board bill of lading all we can say is that your version of FOB is not the Incoterm version but that’s OK, because we said insurance is only dictated when we come across CIF or the Incoterm CIP – and “FOB” whatever you mean by it, is most likely not synonymous with either of these C-prefixed terms anyway.
So the broad point here is that “FOB” most likely does not compel either party to arrange cover.
And thus we have sifted through the available information.

But, as Albert Einstein said “information is not knowledge”. Even if you forget for a moment that he could blow you up for not listening to him, these are wise words.

So far, we have looked at two questions really, or two groups of questions: What is the insurance position for the unit comprising of the beneficiary & the applicant and secondly, what is the insurance position on the separate unit, that of the seller & the buyer. Note here the different names, for there is a third grouping we have not pondered, the position of the shipper and the consignee.
Who is the ‘shipper’ on the bill of lading (or whichever document we are using)? Is it the beneficiary? If not, then we can say that the above discusses the broad position in answer to your question and you may go home now – if the boss says anything, mention Einstein’s name.
But, if the answer is actually (and commonly) that the shipper and beneficiary are one in the same, then looking at the insurance position of the beneficiary, is not the same as looking at that of the shipper.
For example, think of a sales contract where the seller agrees to supply and load a vessel, but not pay the freight (some form of F-prefixed arrangement). As a beneficiary, they fail to align their payment contract with their sales contract and accept a credit where a bill of lading, marked ‘shipped on-board’, ‘freight collect’, is called for. Then, being keen to have this trigger document, they fail to align their transport contract with the sales agreement too – and they go and book as shipper in their own name.
The goods ship, the vessel goes into distress, and a General Average is declared.

The buyer, uninsured, abandons the goods and thus never becomes the consignee and never becomes party to the contract of carriage, thus avoiding liability to the carrier (and GA adjuster) for the GA.
So?
So, they go after the shipper for a contribution (often onerous) to the GA claim. It is now the shipper’s liability to meet the GA claim out of their own pocket or file for insolvency, one of the two (Great Choices of Our Time, number 26).
The ‘shipper’ cannot deflect liability by stating that as a ‘seller’ they have no risks beyond the ship’s rail – the ‘seller’ and the ‘shipper’ are two separate entities.
Thus, in your question, your beneficiary is being saved from a horrible death by the bank’s insistence on marine cover. It matters not that they have no risks as beneficiary or seller – if they are on the bill as the shipper, they are at risk should the cargo be uninsured and though this is ‘most-true’ in seafreight, it is in essence true of all forms of transport.

As intermediary parties can also have (for example) GA liabilities, a bank taking an interest in the documents would want to be sure that there is insurance cover in place to indemnify them against this. And while I must defer to other posters who can advise you absolutely on the banks position, it would not surprise me if insurance offered by the applicant or presented by the beneficiary IS compulsory in every credit, specifically so that the bank knows for sure that they can never be exposed in this manner. Rather than make a judgment call on a case-by-case basis, it may well further be that they demand insurance in every instance, just too be sure.

Of course, even bankers are subject to the law (yes, honestly, ask your mum) and so it is possible that a local law will override the banker’s preference.

While every effort is made to ensure quality of information, the management and staff accept no liability for the accuracy of this post. Terms and conditions apply. This is not a flotation device. Keep away from children (the last of which is exceptionally good advice all of itself, as your mum will attest)

cheers

phill doran

"...in armour bright, the merchant men..."