SHOULD THE ISSUING BANK REQUIRE THE INSURANCE POLICY TO NAME ITSELF AS THE ASSURED PARTY?

The Sea of Da Nang in the Morning

QUESTION

Dear Mr. Old Man
We opened many LCs under CFR or FOB term whereby insurance are covered by final buyer instead of applicant. We asked for copy of insurance but applicant is unable to supply/obtain from final buyer. This point is raised by auditor reason being the issuing bank has no knowledge whether the goods are fully insured. Is it very significant to the issuing bank?
Auditor also raised another point that the issuing bank should call for Insurance Policy to show insured party as the issuing bank instead of the beneficiary for CIF term. Is it the market practice now? Do you think beneficiary would agree to this arrangement?
I would like to seek your expert advice for the best solution to mitigate the risks on issuing bank in order to comply with auditor’s recommendation.
Hope to hear from you at your earliest convenience!

Many thanks to you!
MKL

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ANSWER

Dear MKL,

I understand you are asking the question as the issuing bank.

It is agreed that under CFR or FOB terms neither the seller nor the buyer is responsible for buying insurance. However, under these terms the risk of loss or damage to the goods is transferred from the seller to the buyer when the goods are loaded on board the vessel.

So, if the LC is financed by the issuing bank, the issuing bank would insist the applicant to buy insurance for his goods.  At least at the time of applying for opening LC, the applicant must submit an application/register for insurance with the insurance company’s confirmation that they agree to issue an insurance policy/certificate when furnished with full particulars of shipment. The applicant is requested to furnish the issuing bank with the insurance policy/certificate when taking up the documents. If the LC is self-financed with 100% deposit as security, the issuing bank would not care whether the applicant buys insurance for the goods or not.

The issuing bank may insist on an insurance policy/certificate naming itself as the insured party. However, this is not a common market practice. I do not think banks should insist on this requirement because banks are not familiar with claim procedure which requires complicated documentation.  I don’t think the auditor’s recommendation is practical and relevant.

Where goods are imported under CIF terms, LCs issued by banks would require presentation of an insurance document as follows:

“Insurance Policy/certificate IN ASSIGNABLE FORM AND ENDORSED IN BLANK for 110% of invoice value covering all risks …”

This is satisfactory to all parties concerned.

Kind regards,

Mr. Old Man