The Effective Date of a Cargo Insurance Policy

L/C Monitor, Volume 7, Issue 5, September - October 2005

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Before we deal with the issue of the effective date of a cargo insurance policy, let us first look at the cornerstone principles used by a document checker to determine compliance of a cargo insurance document (policy or certificate of insurance) in letter of credit operations.

According to Article 4 of UCP 500, a document checker deals only with a cargo insurance document as a document alone. He is not dealing with goods, services, or other performances to which the documents may relate.

Based on Article 3 of UCP 500, a document checker needs not refer to the terms and conditions of the underlying contracts of which a cargo insurance document is one.

As stipulated in Article 13 of UCP 500, a document checker must determine compliance solely based 'on the face' of a cargo insurance document. There is no need for him to verify the underlying events or material facts (e.g., the date on which the shipment or delivery commences).

A document checker, as a consumer, is also aware that some 'benefit' insurance policies, such as motor (third party), health, and life insurance to be precise should be 'assurance'), have an effective date clearly indicated on the policy, usually the issuing date of the insurance document. They then carry this concept forward to a cargo insurance document without knowing that cargo insurance is 'indemnity insurance' in nature, different from 'benefit insurance'.

Indemnity insurance does not work on the same principles as benefit insurance. For example, in benefit insurance, such as life assurance, the beneficiary may claim on as many policies as possible, provided the insured agrees to such coverage. But in indemnity insurance, the beneficiary can only claim on one policy, and the claim value for commodity goods (that may have wild fluctuations) is based on the market value of the cargo 'at the time of distress,' and may further be reduced by the 'maximum liability per package' limitations. Hence the effective date of indemnity insurance does not rely on a date stated in the policy as in benefit insurance, but is based upon the occurrence of a particular event, and for cargo insurance, on the date delivery or shipment commences.

Hence it is only natural that an ordinary document checker may treat an indemnity insurance as a benefit insurance and looks at the issuing date of a cargo insurance document to determine whether the cargo insurance becomes or is effective at least at the time of commencement of the delivery or shipment. In a bill of lading, this means the 'shipped/loaded on board' date according to Article 23 of UCP 500.

If the document checker finds that the issuing date of the cargo insurance document is later than the shipped/loaded on board date in a bill of lading, he will deem it as a valid discrepancy that will trigger on payment dishonour.

This line of thoughts is supported by ICC Opinion No. R 290, 'Insurance document bearing a date of issuance later than the date of loading on board,' on page 48 of 'More Queries and Responses on UCP 500, Opinions of the ICC Banking Commission 1997,' ICC Publication No. 596. The cargo insurance document shows on its face a sailing/dispatch date of April 4, 1997 and is issued on April 23, 1997. The 'Conclusion' states that:

'The inclusion of details of the journey for which the cover has been effected is a common feature of insurance documents. The inclusion of a "sailing date" does not provide adequate evidence that the insurance was effective as of that date, and therefore the document should be rejected.'

This reflects that the bankers who drafted this opinion may not know in what manner the effective date of a cargo insurance document is to be determined.

First we need to clarify that the issuing date of a cargo insurance document bears no relationship to its effectiveness. It merely indicates the date when the insurance document is issued and nothing more. The effective date of a cargo insurance document, as an indemnity insurance, is governed by the 'Transit Clause' under the 'Duration' section of:

Clause No. 8.1 in Institute Cargo Clauses (A), (B) or (C);

Clause No. 5.1 in the Institute Cargo Clauses (Air);

Institute War Clauses (Cargo) & Institute Strikes Clauses (Cargo);

Clause No. 3.1 in Institute War Clauses (Air Cargo) & Institute Strikes Clauses (Air Cargo); and

Clause No. 4 in Institute War Clauses (sending by Post). The 'Transit Clause' is worded as follows:

'This insurance attaches [becomes effective] from the time the goods [subject-matter insured] leaves the warehouse, or place of storage at the place named herein [premises] for [the purpose of] the commencement [beginning] of the transit [transport or carriage], continues during the ordinary [regular] course [procedure or route] of transit and terminates [becomes ineffective] either...or...'

(The words in bracket shown above are added for better understanding and are not part of the original text.)

From the wording of the 'Transit Clause' quoted above, it is clear that a cargo insurance document is in fact effective from the time the first leg of carriage (the 'pre-carriage' at place/point of delivery/receipt in Incoterms 2000) commences; for example, at the moment when the truck carrying the cargo/goods (to use the precise terminology, 'goods' in a commercial invoice and 'cargo' in a transport document) stowed in a container starts its journey at the place of receipt. That means the cargo insurance document is effective from a time that may be even earlier than the shipped/loaded on board date in a bill of lading!

Therefore, if a cargo insurance document provides 'on its face' a good linkage to the goods described in the commercial invoice or cargoes in the related bill of lading, without any inconsistency, the goods/cargo would be automatically held covered by the insurer and the cargo insurance document also satisfies the requirement that 'it appears from the insurance document that the cover is effective at the latest from the date of loading on board or dispatch or taking in charge of the goods' as stipulated in UCP 500 Article 34 (e) despite being issued later than the shipped/loaded on board date and even if there is no effective date stated in the cargo insurance document.

Other data contents that may establish a good linkage with the related bill of lading are description of goods/cargo, container numbers, shipping marks and numbers, vessel name, voyage number, sailing date, port of loading, port of discharge, the L/C No., the contract No., and similar facts.

It is not practical, and also not advisable, for the insurer to indicate the effective date in a cargo insurance document for the following reasons:

The effective date of cargo insurance is governed by the time of commencement of the first leg of carriage as stipulated in the 'Transit Clause,' which the shipper, the carrier, or the insurer cannot control or pre-assign, as it is subject to many variables, for example, certain cargo cannot be loaded on rainy days and some hydrocarbons cannot be loaded in certain atmospheric conditions, such as temperature, humidity, and 'flash point' restrictions. As a result the parties cannot ascertain in advance which day is definitely suitable for loading of certain hazardous cargoes.
There are other variables that may effect the time of commencement of the first leg of carriage, for example, engine breakdown, strikes, storms, tsunami, hurricanes, and other Act of God perils.
There would be no flexibility in cargo handling, which is important in multimodal transport to achieve the objective of moving cargoes speedily, safely, and cost effectively from one inland point to another.
If the cargoes were to be transported one or two days earlier than the effective date specified on the cargo insurance document, the freight forwarder and the shipper would run the risk of transporting the cargoes without effective insurance coverage at the time of loading on board or commencement of carriage.

However, to avoid wrongful dishonour of this nature, I would suggest that the insurer adds to the cargo insurance document, by a pre-printed clause or stamp, the following statement:

"This cargo insurance document becomes effective automatically from the time of commencement of the first leg of carriage (pre-carriage at the place/point of delivery/receipt in Incoterms 2000) of the goods/cargo held covered herein and such effective date is not affected by the issuing date of this document, which may be later than the shipped/loaded on board date in the related transport documents" or words of similar effect.

In the revision of the UCP 500, which will lead to the creation of a new UCP, the 'UCP 600,' the related insurance article might be worded as follows to reflect the principle of 'Transit Clause':

'Banks may accept a cargo insurance document that bears good linkage to the goods in the commercial invoice or the shipment of the cargoes stated in the related transport document, even if its issuing date is later than the shipped/loaded on board date as stated in the related transport document' or words of similar effect.

It is regrettable that due to pressure from the insured, as the beneficiary in a letter of credit, some insurers have already started adding a validity date to their cargo insurance documents. This is in fact contradictory to the cornerstone cargo insurance principle as reflected by the transit clause and should be discouraged. In a case where a multimodal transport operator intends to execute the shipment earlier than the validity date stipulated in the cargo insurance document, it has to make the appropriate amendment to the document every time. This involves additional operating costs and creates inconvenience to the parties since the flexibility provided by the transit clause has been stripped off. If such disputes are brought to the international court, the judges will make judicial decisions based on the Marine Insurance Act (MIA) of UK, which is modeled in most of the local cargo insurance legislations, that is consistent with the transit clause. This would be an unpleasant surprise to those insurers who choose to yield to the pressure from the insured, their customers.

If we look at the rules and legislation in international trade, such as Incoterms 2000, transport, cargo insurance, arbitration, and the like, we may be amazed that there are from time to time inconsistencies among them and these can only be rectified after a landmark case from an international court. The effective date of a cargo insurance policy is only one example.

On top of that, shipments from most, if not all, exporters should be automatically covered by an annual open cover policy, in which an exporter can enjoy more discount and other benefits due to "bulk purchase", not to mention that this close business relationship would make claims more easily approved. Under an annual open cover policy, that covers all shipments in imports and/or exports made within that year, as the case may be, there is no need to report a shipment before the shipped/loaded on board date to ensure effectiveness of insurance. Exporters usually make a report monthly for all the import/export shipments made within that month. In exchange the insurer provides a batch of pre-signed certificates of insurance to the insured. After each shipment, the insured, as a beneficiary, will present a certificate of insurance under a letter of credit after countersigning on it. So it does not matter when the date the certificate of insurance is issued as the goods/cargo is automatically held covered, under the annual open cover policy that covers all shipments made within that one-year period. So even if the certificate of insurance is issued one week behind the shipped/loaded on board date, it is still held covered unless the annual open cover policy has expired in the meantime.

Hence naming a discrepancy rely on the fact that the issuing date of a certificate of insurance is behind the shipped/loaded on board date shows that the document examiner is not familiar with cargo insurance practice and Article 34(e) of UCP is unclear and misleading.

A prudent banker who has provided import and export financing to his customer should always demand an original of the annual open cover policy naming the financing bank as the beneficiary to be held as a security. When no finance is provided, the banker should at least demand a copy of the annual open cover policy to ensure that the goods are covered by appropriate insurance at time of shipment. Then it is easy for the document checker to verify whether or not the cargo insurance is effective at time of shipment. He can simply refer to the copy of the annual open cover policy in hand. If the shipment is made within the expiry of the annual open cover policy, then no matter what the issuing date of the insurance document is, the goods are held covered.

I always lament: 'The more you know, the more you don't know!'

Mr. T. O. Lee FAE, MCIArb, MITD is a consultant, expert witness, trainer, and arbitrator specialized in resolving international trade disputes involving letters of credit, bills of lading, charter parties, Incoterms 2000, trade frauds, and China trade. He represents Canada in various ICC Commissions, such as Banking, Commercial Trade Practice, Electronic Commerce, Mediation, and Arbitration. He was appointed by ICC Paris in 2003 as a Member of the UCP 500 Revision (UCP 600) Consulting Group and is rated as one of the nine best letter of credit specialists in the world in a recent global survey by L/C Views of USA. He is a member of the United Nations International Multimodal Transport Association, Geneva; Accredited Arbitrator of the International Center for Letter of Credit Arbitration, USA; a Fellow and an Accredited Expert (Letter of Credit) of the Academy of Experts, Gray's Inn, England; and a columnist in ICC Documentary Credit Insight (1994-1999); 'Maritime Asia/Intermodal Asia' by Lloyd's of London Press, and 'Hong Kong Economic Journal.' He works closely with the ICC Commercial Crime Bureau on commercial frauds involving bills of lading, air waybills, and letters of credit. He also provides training for the carriers, freight forwarders, bankers, traders, insurers, and lawyers on these subjects. Articles on bills of lading, letters of credit, CDCS exercises, highlights of dispute cases resolved, and training programmes can be found in his website http://www.tolee.com.

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