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 confirmed by the exporter’s bank which thus guarantees the obligation of the foreign importer’s bank. The insured is the confirming bank of the exporter 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.
An insurance loss is a partial or full non-repayment of the insured receivable 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.