EInsurance of confirmed letter of credit or purchase of receivables from a letter of credit

A Documentary Letter of Credit is a written obligation of a bank of a foreign importer to pay to an exporter for delivered goods and services after presentation of prescribed documentation.

The issued Documentary Letter of Credit shall be

a) confirmed by the exporter’s bank which thus guarantees the obligation of the issuing bank (foreign importer’s bank). The insured is the confirming bank (the exporter´s bank) that is covered against the risk of material damage resulting from a full or partial non-payment in accordance with conditions of the confirmed Documentary Letter of Credit. Insurance also covers a so-called silent confirmation of the Documentary Letter of Credit. Both issuing and confirming banks only control whether all documents prescribed by the Letter of Credit have been presented; they do not control the goods or services and payments from the Letter of Credit are completely separated from contracts of sale; or

b) purchased by the exporter's bank and thus assumes the risk of the issuing bank (bank of the foreign importer). The insured is the purchasing bank (exporter's bank), which purchases the claim from the letter of credit opened by the issuing bank (foreign importer's bank) and insures it against the risk of property damage due to total or partial non-payment according to the terms of the documentary credit.

An insurance loss is a partial or full non-repayment of the insured receivable from the Letter of Credit by the issuing bank from commercial or political reasons or their combination. Commercial reasons are general inability of an issuing bank to pay for own due obligations (insolvency) or refusal of the payment without any legal reason (protracted default). Among political reasons belong e.g. administrative decisions or legislative measures of the foreign country preventing the issuing bank from payment from the L/C, or restrictions in conversion of payments as a result of political occurrences in the country of the issuing bank as well as other events in the country of the issuing bank as war, revolution, civil disorders and natural catastrophes.

The amount of insurance premium depends on validity period of the L/C, its maturity date and on the amount of the self-retention. The negotiated amount of the insurance premium already includes possible increase or decrease of the insurance risk and is unchangeable during the whole duration of insurance.

• The share of value of supplies with the origin in the Czech Republic in the export value – rules you can find here,
• trouble-free credit history1 of the issuing bank,
• in negotiating the export credit, the exporter did not violate provisions of norms and practices of international law the Czech Republic is bound by, and legal regulations in the area of bribing were not violated,
• the issuing bank has existed and executed the activity as a bank for no less than 2 years before submitting the application for insurance, or its activity follows up on the activity of its legal predecessor – a person that carried the activity for no less than 2 years before submitting the application for insurance,
• it is an irrevocable letter of credit, issued based on an application of the mandator by the issuing bank with a clause that it is subject to the Uniform Customs and Rules for Documentary Credits published by the International Chamber of Commerce in Paris.
• Credit insurance/claims in connection with the export of selected agricultural products listed in annex No. 1 of the Agreement on Agriculture, which is part of the Agreement Establishing the World Trade Organization (WTO), the maximum repayment term shall not exceed 18 months (from the starting point of credit to the end of the contractual date of the final payment).