Formal Insurance

Formal Insurance, as opposed to open cover or a cover note, is a form of insurance in international trade in which the insured and the insurer explicitly reach an insurance agreement for a specific shipment of goods and issue a formal Insurance Policy. It is typically used when the sales contract or letter of credit requires submission of a formal insurance policy as a negotiating document; the exporter or importer must then effect insurance with the insurer on a transaction-by-transaction basis and obtain a policy with full legal effect. Points to note include: the contents of the formal insurance policy must strictly conform to the letter of credit, such as the insured, risks covered, insured amount, and shipment details; the insured amount is generally 110% of the invoice value; the insurance date must not be later than the shipment date; and the risks covered must meet the contract or letter of credit requirements. The difference from open cover is that open cover is an automatic coverage arrangement under long-term cooperation, whereas formal insurance is a separate policy clearly effected for each transaction. Compared with a cover note, a formal insurance policy has final effect, while a cover note only temporarily proves that insurance exists and becomes invalid once the formal policy is issued. Foreign trade practitioners should ensure that the formal insurance policy complies with UCP600 and the letter of credit requirements to avoid refusal of payment due to discrepant documents.