Insurance Requirement “Irrespective of Percentage” – Can It Be Removed from an LC?

Introduction

A reader asked whether an issuing bank may agree to amend a letter of credit by removing the phrase “irrespective of percentage” from the insurance requirement. Would such an amendment create any risk for the bank, particularly where the insurance policy or certificate is required to be endorsed in favour of the issuing bank? The answer lies in understanding the purpose of this phrase under ISBP 821 and distinguishing documentary compliance from commercial risk.

Question

Dear Sir,

I hope this message finds you well.

I have some queries regarding the insurance clause in an LC.

I would like to seek your guidance regarding the following insurance requirement in a letter of credit:

“INSURANCE POLICY OR CERTIFICATE ONE (1) ORIGINAL AND TWO (2) COPIES ENDORSED IN FAVOUR OF HIMALAYAN BANK LIMITED FOR THE CIP VALUE OF THE GOODS PLUS 10 PERCENT COVERING FOLLOWING RISKS AS PER INSTITUTE AIR CARGO CLAUSE, INSTITUTE WAR CLAUSE, SRCC, TPND, CLAUSE OF TERRORISM AND SABOTAGE AND COVERING ALL RISKS INCLUDING ROAD RISKS UPTO THE FINAL DESTINATION IN NEPAL AND TRANSSHIPMENT RISKS IF APPLICABLE IRRESPECTIVE OF PERCENTAGE. CLAIMS IF ANY IS PAYABLE IN NEPAL IN CURRENCY OF CREDIT.”

One of our valued clients has requested that the phrase “IRRESPECTIVE OF PERCENTAGE” be removed from the above clause.

In this regard, I would appreciate your expert advice on whether removing this phrase could have any implications or create any risk for the bank, particularly in relation to insurance claim coverage and LC compliance requirements.

Your guidance would be greatly appreciated.

Thank you.

Sanju Budhathoki

Answer

Dear Sanju,

Thank you for your question.

The phrase “irrespective of percentage” means that the insurance cover is not subject to any franchise or excess (deductible). In other words, the insurer remains liable for covered losses regardless of their percentage or amount, including losses that might otherwise fall below a deductible.

According to ISBP 821 paragraph K14, an insurance document may indicate that the cover is subject to a franchise or an excess (deductible). However, where a credit requires the insurance cover to be “irrespective of percentage”, the insurance document must not contain a clause stating that the cover is subject to a franchise or an excess (deductible). The insurance document itself is not required to state the words “irrespective of percentage.”

Accordingly, if the credit is amended to remove the phrase “irrespective of percentage”, the credit no longer prohibits an insurance document from indicating that the cover is subject to a franchise or excess (deductible). Therefore, such an insurance document would be acceptable, provided it complies with all other terms and conditions of the credit.

From a documentary credit perspective, this amendment merely relaxes the documentary requirement and does not create any additional LC compliance risk for the issuing bank.

However, there is a commercial consideration. Since the insurance policy or certificate is required to be endorsed in favour of Himalayan Bank Limited, removing the requirement for cover to be “irrespective of percentage” may reduce the level of insurance protection available to the bank. If the policy is subject to a franchise or excess (deductible), certain losses or portions of losses may not be recoverable under the insurance policy. This is a matter of commercial risk allocation between the applicant, the insurer and the bank, rather than a matter of documentary compliance under UCP 600 or ISBP 821.

In my opinion, the requested amendment should be acceptable. Removing the words “irrespective of percentage” merely relaxes the documentary requirement under the credit. It does not create any additional LC compliance risk. However, it may allow an insurance document to indicate that the cover is subject to a franchise or excess (deductible), thereby reducing the extent of insurance protection available to the bank as the endorsed party. This is a commercial consideration rather than a documentary compliance issue.

Best regards,

Mr. Old Man