When Is an Insurance Document Really ‘Negotiable’? – Understanding ISBP 821 (K19–K21)

Insurance documents under a Letter of Credit can be tricky — especially when the LC calls for a document “in negotiable form” or “issued to the order of” a bank. What exactly does “negotiable form” mean? When is an endorsement required? And what happens if the LC doesn’t specify who the insured party should be?

Below is a detailed question from Nishanth — and Mr. Old Man’s attempt to untangle the knots, one clause at a time.

QUESTION

Dear Mr. Old Man,

How are you?

I have some questions regarding insurance documents under a Letter of Credit.

K19)

According to the rule:

“An insurance document must be in the form required by the credit and, where necessary, be endorsed by the entity to whose order or in whose favour claims are payable.”

The L/C requires:

INSURANCE POLICY OR CERTIFICATE IN NEGOTIABLE FORM

ISSUED TO THE ORDER OF XYZ BANK SHOWING CLAIM PAYABLE AT DESTINATION FOR FULL INVOICE VALUE PLUS 10%, FROM WAREHOUSE TO WAREHOUSE, COVERING THE FOLLOWING RISKS: INSTITUTE CARGO CLAUSE (A), INSTITUTE WAR CLAUSE CARGO, INSTITUTE STRIKE CLAUSE CARGO.

INSURANCE DOCUMENT MUST SHOW PREMIUM PAID, CERTIFICATE NO. AND ISSUE DATE.

Questions:

1. Does “in negotiable form” mean the insurance document must be an original?
2. If the insurance certificate states both:
   • Consignee: “To the order of XYZ Bank”, and
   • Insured: “XYZ Bank”,

does it still need to be endorsed by XYZ Bank?

Or would the lack of XYZ Bank’s endorsement be treated as a discrepancy?

K20)

(a) The rule says:

“A credit should not require an insurance document to be issued ‘to bearer’ or ‘to order’. A credit should indicate the name of an insured party.”

Does this mean the insurance document should show:

• Insured: XYZ Bank
• Consignee: XYZ Bank

(b) The rule also says:

“When a credit requires an insurance document to be issued ‘to the order of (named entity)’, the document need not indicate ‘to order’ provided that the named entity is shown as the insured party or that claims are payable to it, and endorsement is not prohibited.”

Does this mean that if the L/C requires “to the order of XYZ Bank”, the insurance document can simply show:

• Insured: XYZ Bank
• Consignee: XYZ Bank

and still be acceptable?

K21)

The rule says:

“When a credit is silent about the insured party, an insurance document must not show that claims are payable to the beneficiary or to any other entity, unless it is endorsed in blank or in favour of the issuing bank or the applicant.”

Can you please explain this rule with an example? It’s a bit confusing.

Best regards,

C.R. Nishanth

_____________

ANSWER

Dear Nishanth,

Thank you for your detailed question — it touches on several important points about insurance documents under a Letter of Credit. Let’s go through them one by one.

1. “In negotiable form”

Not necessarily an original. The term refers to the insurance document being transferable — that is, it allows the insured party to transfer the right to receive payment under it.

Of course, endorsement can only be made on an original, not on a copy. (See K9 and K21(b) ISBP 821.)

2. Endorsement requirement

According to K21(b), if the insurance document is issued to the order of XYZ Bank, it should be endorsed by XYZ Bank so that the right to claim under it can be transferred.

However, this assumes that XYZ Bank is not the issuing bank. If XYZ Bank is the issuing bank, it cannot raise a discrepancy against itself for not endorsing the document — in that case, endorsement would not normally be required because the claim right already rests with the issuing bank.

3. Meaning of K20(a)

K20(a) advises that an LC should avoid requiring an insurance document to be issued “to bearer” or “to order,” but instead name a specific insured party.

The insured party may be the seller (beneficiary), the bank, or the applicant.

If the insured is the beneficiary and the LC requires the document to be in negotiable form, the beneficiary must endorse the original insurance document.

4. Meaning of K21(a)

When a credit is silent about the insured party, an insurance document must not show that claims are payable to the beneficiary or to any other entity unless it is endorsed in blank or in favour of the issuing bank or the applicant.

Example:

LC is silent about who should be insured.

The insurance certificate shows “Insured: ABC Exporter (beneficiary).”

To comply, ABC must endorse it either in blank or in favour of the issuing bank or the applicant.

Without endorsement, it is a discrepancy because the right to claim remains with the beneficiary.

I hope this clarifies your questions about insurance documents under an LC.

Best regards,

Mr. Old Man