720

4. Drafts and Bills of Exchange

4a. Reading

Drafts and Bills of Exchange¹

Basically, a bill of exchange is a credit instrument or a piece of paper which can be turned into money

later.

The exporter writes a draft to the importer. The draft is a note telling them to pay a certain amount of money to a third party. The exporters are the drawers² of the draft, the importers are the drawees³ and the third party who the draft should be paid to is the payees . The drawer may send two copies (the first and second of exchange) in case one gets lost. The drawee has to accept one of the drafts by signing the front of it. The copy which the drawee doesn’t sign automatically becomes invalid. The draft has to be accepted by a wellknown bank representing the importers. This turns the draft into a bill of exchange which is sent to the payees, who are either the exporters or their bank. The payees know by the signature of the bank on the back that the bill will in fact be paid at maturity6. On this date the payee presents the bill for payment and gets his money. The payee can also negotiate the bill , but he has to endorse it first.

There are two categories of drafts depending on the time at which it matures.

Sight Drafts

Such a draft includes the words “Pay at sight”. The drawee has to pay as soon as the draft is presented (as soon as he sees it).

A sight draft is used when the exporter wishes to retain title to the shipment until it reaches its destination and payment is made. Before the shipment can be released to the buyer, the original ocean bill of lading must be properly endorsed by the buyer and surrendered9 to the carrier. It is important to note that air waybills of lading, on the other hand, do not need to be presented in order for the buyer to claim the goods. Hence, risk increases when a sight draft is used with an air shipment.

In actual practice, the ocean bill of lading is endorsed by the exporter and sent via the exporter's bank to the buyer's bank. It is accompanied by the sight draft, invoices, and other supporting documents that are specified by either the buyer or the buyer's country (e.g., packing lists, consular invoices, insurance certificates). The foreign bank notifies the buyer when it has received these documents. As soon as the draft is paid, the foreign bank turns over¹° the bill of lading thereby enabling the buyer to obtain the shipment.

There is still some risk when a sight draft is used to control transferring the title of a shipment. The buyer's ability or willingness to pay might change from the time the goods are shipped until the time the drafts are presented for payment; there is no bank promise to pay standing behind the buyer's obligation¹¹.

Time Drafts (Term Draft)¹2 and Date Dafts¹³

A time draft is used when the exporter extends credit¹ to the buyer. The draft states that payment is due by a specific time after the buyer accepts the time draft and receives the goods (e.g., the tenor¹ is 30 days after acceptance) “Pay at 30 days after sight”. By signing and writing "accepted" on the draft, the buyer is formally obligated to pay within the stated time. When this is done, the time draft is then called a trade acceptance16. It can be kept by the exporter until maturity or sold to a bank at a discount¹ for immediate payment.

A date draft differs slightly from a time draft. It specifies a date on which payment is due¹ , rather than a time period after the draft is accepted, for example “Pay at 60 days”. When either a sight draft or time draft is used, a buyer can delay payment by delaying acceptance of the draft. A date draft can prevent this delay in payment though it still must be accepted.

When a bank accepts a draft, it becomes an obligation of the bank and thus, a negotiable investment known as a banker's acceptance19. A banker's acceptance can also be sold to a bank at a discount for immediate payment.

If the payee needs his money before the bill of exchange reaches maturity, he can have it discounted. This means he can take it to a bank which will pay him its value minus interest and bank fees (the discount). The deducted amount²° depends on the length of time before the bill reaches maturity and on how high the risk is that the drawee won’t pay.

71

Notes:

¹ drafts and bills of exchange – тратты и векселя

² drawers – трассанты (лица, выставившие тратту) , векселедатели (переводного векселя)

³ drawees – трассаты (лица, на которые выставлена тратта) , плательщики (по переводному векселю)payees – получатели денег по векселю

to accept – акцептовать

6 at maturity – в срок, при наступлении срока

negotiate the bill – переуступить/продать/учесть/ вексель, пустить вексель в обращениеsight draft – тратта на предъявителя

9 must be surrendered to the carrier – должен быть передан перевозчику ¹° turns over – передает

¹¹ buyer's obligation – обязательство покупателя

¹² time (term) drafts – срочные тратты (подлежащие оплате в течение определенного срока после выдачи или акцепта)

¹³ date drafts – датированные тратты (подлежащие оплате в установленный день, не зависящий от даты акцепта)

¹ extends credit – предоставляет кредит ¹ tenor – срок

16 trade acceptance – акцептованный торговый вексель, торговый акцепт ¹ at a discount – ниже номинальной цены, со скидкой

¹ date on which payment is due – дата выплаты

19 a banker's acceptance – банковский акцепт; акцептованный банком вексель ²° deducted amount – удержанная сумма

4b. Comprehension

Match the terms on the left with the explanations on the right.

Study the bills of exchange below and answer the questions on each one:

1.Who is the drawer?

2.Who is the drawee?

3.Who is the payee?

4.What kind of bill of exchange is it?

5.When will it have to be paid?

A

Drawn under credit number JFDUT89167 of

UNIVERSAL BANK, NEWARK NJ dated 29th June 2000

72

B

Bills for collection

Letters of credit

Payment in Advance

4b. Give the words or word combinations which mean the following:

a person or company writing a draft; the price of one money in terms of another; fulfillment; an agreement to pay; a person or company who a draft is written to; a notifying bank; to prohibit; the period of bill to payment date; a person or company who a bill is to be paid to; to confirm; to discuss; to ban; money; the payment date of a bill; reliable; to put out (the L/C); a bill before it has become accepted; an issuing bank; trustworthy.

4c. Translate into English:

срочная тратта; неплатежеспособность; подвергаться рискам; товарный аккредитив; извещающий банк; удержанная сумма; документарное инкассо; устранять, исключать; в одностороннем порядке; заторы в порту; выставлять счёт; телеграфный перевод; датированная тратта; кредитоспособность; испытывать затруднения; валютный форвардный рынок; валютный курс; предоплата; обязательство покупателя; банк эмитент; предоставлять кредит; тратта на предъявителя; открытый счет; банк, производящий учет (переуступку) векселей; движение денежной наличности; ниже номинальной цены, со скидкой; банковский акцепт; поправка.

73

Chapter 5. Insurance Documents

1. How Insurance Works

1a. Reading.

How Insurance Works

Insurance¹ has become more and more important as commerce has developed. The idea of insurance is to obtain indemnity² in the event of any happening that may cause³ loss of money.

Marine insurance is the oldest form of insurance and the most complicated one. Back in the Middle Ages , ships were the most important form of transport, and their cargo was often very valuable. Sometimes traders would even risk their whole capital with just one shipment. So somebody came up with the idea of forming a group to spread the risk – and marine insurance was born.

Very generally, marine insurance works as follows: Insured6 A

The ship and cargo owners (the insured) each pay a percentage¹¹ of the value of their goods (the premium) into a fund¹² administered by the insurance company (the insurer). The insurers are also called underwriters¹³ and are said to underwrite the proportion of the indemnification¹ they are prepared to bear. The word originated with the insurer’s signature under (now usually beside) the proportion he agreed to pay. The insurers are either companies, like other business firms, or they belong to the famous organization of Lloyd’s¹ . This is a very old society that started in London in the 18th century. Unlike most of its competitors in the reinsurance market16, it is not a company.

There are two classes of people and firms active at Lloyd's. The first are members or providers of capital¹ , the second are agents, brokers, and other professionals who support the members, underwrite the risks, and represent outside customers (for example, individuals and companies seeking insurance, or insurance companies seeking reinsurance).

When one of the insured then suffers a loss, he can claim compensation from the insurer for the loss; this means he will receive money from the fund to the value of the loss that he suffered.

Goods are normally insured for the full amount of their value, which is calculated as: cost of goods + amount of freight + insurance premium + a percentage of the total sum to represent a reasonable profit for the seller.

The premium is quoted¹ as a percentage. In Britain the rate is quoted as so many pence for every £100 value: 25 p% is 25 p premium for £100 of merchandise covered.

In the USA the general rate19 of the insurance premium is 1% of the amount insured. The premium rates may vary, for example, from 0.5% to 2.5% or more depending on factors such as:

Type of goods

The goods that are more susceptible²° to damage demand a higher premium. For example, glassware has a higher premium rate than the hammer.

The country and distance of destination

Countries with a history of higher risks of loss or damage or at a war zone require a higher premium. The longer the distance of voyage, the greater the risks of loss or damage are, thus, the higher premium rate is.

Value of the goods

The higher the value of the goods, the higher the amount the insurer will compensate in the event of loss or damage, thus a higher premium rate. For example, the precious jewellery has a higher premium rate than costume jewellery.

Mode of transportation

Generally, ocean freight has a higher premium than land freight, and land freight has a higher premium than air freight. Air freight, in general, has better cargo security than ocean and land freight and it is faster to reach the destination by air, thus, there is less exposure²¹ to the risks of loss or damage.

74

The type of risks covered

The more risks are covered, the higher the premium.

Container or break-bulk²² shipment

Containers provide better protection for the cargo. Therefore, container shipments have a lower premium than break-bulk shipments.

Type of packing

The better the goods are protected, the lower the premium.

Some of the risks against which it is possible to take out insurance include:

–so-called Acts of God²³ such as fire, floods, earthquakes, etc.;

–loss of the goods through being washed over-board² ;

–damage to the goods, e.g. by breaking, bending, etc.;

–damage to the goods by vermin such as rats and mice;

–loss of the ship on which the goods are being transported, e.g. by sinking or collision² with another ship;

–loss of the goods through theft or non-delivery.

Notes:

¹ insurance – страхование

² to obtain indemnity – получить возмещение, выплату, компенсацию ³ cause – послужить причиной, поводом

loss – потеря

the Middle Ages – средние века

6 insured – страхователь (лицо, страхующее имущество), застрахованныйpay premiums – платить страховые премии

insurers – страховщики

9 suffers a loss – терпит убыток

¹° makes a claim – предъявляет иск

¹¹ a percentage – процентное отношение; процентное содержание ¹² a fund – фонд

¹³ underwriters – андеррайтеры (страховщики) ¹ indemnification – возмещение, компенсация

¹ Lloyd’s – Ллойд (морское страховое объединение) 16 reinsurance market – рынок вторичного страхования

¹ providers of capital – организации, предоставляющие финансы ¹ is quoted – котируется, назначается

19 rate – ставка

²°susceptible – восприимчивый ²¹ exposure – подверженность

²² break-bulk – разбивать крупную партию на мелкие партии ²³ Acts of God – стихийные бедствия

² over-board – за борт

² collision – столкновение

1b. Vocabulary

Find the words or word combinations in the text which mean the following:

1)difficult

2)to share

3)journey

75

2. Types of Losses

2a. Reading.

Types of Losses

As far as marine insurance is concerned, insurers distinguish between total loss¹ and partial loss².

Total loss

1. An actual total loss³ (ATL)

An actual total loss is said to have occurred when the ship and cargo have sunk and cannot be recov-

ered.

If the ship disappears after leaving the port or if it is long overdue , this is also considered to be an actual total loss. If the ship then turns up after a claim for ATL has been settled , it automatically becomes the property of the insurers.

2. Constructive total loss6 (CTL)

A constructive total loss occurs when the ship or goods are so badly damaged that the cost of repairing them would be greater than their market value. It also occurs when a ship sinks and is left because the cost of recovery would be too high or the risk to human life too great.

Partial loss

1. Particular average

Particular average occurs when the object insured is lost or damaged because of an accident such as fire or flood on board the ship. The loss is borne9 by the person who the object belonged to.

2. General average¹°

General average occurs when the object insured is sacrificed in order to prevent a total loss; for example, goods may be thrown overboard in order to stop a ship sinking. The loss is borne by all parties – both the ship owner and the cargo owners.

Notes:

¹ total loss – полная гибель

² partial loss – частичная гибель

³ actual total loss – действительная полная гибельoverdue – просроченный

settled – улаженный

6 сonstructive total loss – подразумеваемая полная гибельrecovery – восстановление

particular average – частная авария

9 to bear a loss – нести убыток, принять убыток на свой счет, платить за потерю, нести ответственность за потерю

¹° general аverage – общая авария

2b. Comprehension

What type of loss was this?

1.A ship disappeared while sailing through the Bermuda Triangle.

2.A ship carrying cheap general cargo sank close to the coast of France.

3.Two boxes of goods were lost overboard as a result of bad weather.

4.In 1912, the supposedly unsinkable Titanic hit an iceberg and sank in the Atlantic.

5.A ship carrying oil barrels caught fire, and the crew threw the barrels into the sea to prevent an explosion.

6.Pirates boarded a ship and stole part of the cargo.

3. Principles of Insurance

3a. Reading.

Principles of Insurance

For insurance to function properly, the insurer and insured have to make sure that certain basic requirements are fulfilled when the insurance policy¹ is drawn up.

76

1. Utmost goods faith (uberrimae fidei)²

When someone fills out a form applying to take out insurance³, he is obliged to tell the truth about the value and condition of the goods to be insured, and also to mention anything which might increase the risk of the goods being stolen or damaged. The insurer accepts the application in “utmost good faith” that all the details supplied by the insured are correct, and fixes the level of the premium accordingly.

For his part, the insurer is obliged to deal fairly with the insured, for example by making all the conditions of the insurance policy clear to him.

2. Insurable interest

It is essential that the insured has an insurable interest in the goods to be insured: this means he has to suffer a financial loss if the goods are stolen or damaged. Generally this means that you can take out insurance for your own property, but not for someone else’s.

3. Indemnity6

The idea of indemnity is that if the insured suffers a loss, he has to be paid sufficient compensation to bring him back to the same financial condition as he was before the loss – not more and not less. This prevents people from over-insuring their goods in the hope of making a profit.

4. Subrogation

Once the insurer has compensated the insured for his loss, he has the right to recover the amount in question from the party responsible for the loss (for example, if the insurer can prove that the ship was not seaworthy9, he can take legal steps against the ship owner).

Buying an insurance policy does not entitle¹° the insured person to sit back and take no further interest in the fate of the goods. He must continue to behave as though uninsured and at all times protect the interests of his insurer.

This duty requires the insured person to:

1.Pack the goods in a secure and proper manner. An insurer only insures risks and not certain disaster, which is the natural outcome¹¹ of insufficiency of packing.

2.Select employees and subcontractors¹² with care.

3.Maintain¹³ adequately any vehicles or equipment used in the business.

4.Give notice¹ of loss or damage to carriers within the latter's time-limits. It is most important that the insurer's subrogation rights should not be nullified¹ by a late notice. Where the sender relies on the consignee to inform him of damage, it should be made clear in the terms of sale that the consignee must do this immediately.

5.Make a claim on the policy without delay and forward to the insurer a copy of all correspondence which has passed between the exporter and the carrier together with other supporting documentation.

Notes:

¹ insurance policy – страховой полис

² utmost goods faith (uberrimae fidei) – высшее доверие ³ to take out insurance – взять страховку

to deal fairly – вести дела честно

insurable interest – страховой интерес 6 indemnity – возмещение, выплата

over - insuring – чрезмерное страхование

subrogation – суброгация, переход прав страхователя к страховщику 9 seaworthy – годный для плавания

¹° entitle – давать право ¹¹ outcome – результат

¹² subcontractors – субподрядчик ¹³ maintain – поддерживать

¹ give notice – извещать

¹ nullified – аннулированный

77

3b. Comprehension What is wrong here?

1.Mr.Smith’s insurance company refused to pay him when his house was broken into, as they found out from police records that it had already been broken into twice before he took out insurance. Why?

2.Mary’s mother lent Mary some expensive jewelry. However, when Mary applied to have it covered by her house hold insurance policy, the insurance company refused. Why?

3.Mr.Adams wanted to insure the goods in his warehouse for $200,000, which was the price at which he could sell them. However, the insurance company told him that they could only insure the goods for $120,000. Why?

4.Insurance Documents

4a. Reading.

Insurance Documents

Depending on the international commercial terms, either the seller or the buyer is responsible for insuring the cargo.

Written evidence of the insurance contract is provided in the insurance policy which is the principal insurance document. If insurance is needed at short notice, the insurer can provide the insured with a cover note¹ to fulfil this function until the insurance policy is ready. The following types of cover are available: hull policies² cover the ship itself, but not the goods being carried; cargo policies³ cover the goods carried on board the ship, but not the ship itself.

The format of insurance policy forms varies from insurer to insurer.

The policy must be issued and signed by an insurance company or its agent. If more than one original is issued and is so indicated in the policy, all the originals must be presented to the bank, unless otherwise authorized in the letter of credit.

The insurance policy, either a specific policy or an open policy , is issued once by the insurer. In the case of the exporter holding an open policy, he cannot send that sole policy to all the buyers and for all the shipments made over a period of time. Therefore, an insurance certificate (certificate of insurance) is issued by the exporter to each shipment. The blank insurance certificates are supplied by the insurer pre-signed and bearing the open policy number of the exporter.

Voyage policy6

This type of policy covers the ship and/or cargo for one voyage only. This kind of policy may specify a date limit within which the ship is expected to have arrived at the port of destination. It is used by people or companies who only have to ship occasionally.

Time policy

This is the type of policy used most often. It covers all shipments made within a certain period of time. The premium is paid in advance and then adjusted at the end of the period of insurance, depending on the number and value of shipments made. The insured has the responsibility of filling out an insurance certificate for each shipment, so that an accurate record can be presented at the end of the period of insurance.

Floating policy9 (blanket policy¹°)

With a floating policy, the insured and insurer agree in advance on a certain sum at which the goods are to be insured. The insured can then make as many shipments as he wants until this value has been reached, at which point the policy expires. The exporter is required to periodically (monthly usually) declare every shipment made to any location, covering any type of goods, and using any means of conveyance¹¹, including multimodal transport and transhipment, in order that the insurer may calculate the insurance premiums and invoice them accordingly.

Mixed policy¹²

This is a combination of the voyage and time policies. The ship and/or cargo are covered for all voyages between two named ports for a certain period or time (for example, for all voyages from Liverpool to New York over a period of one year).

78

Notes:

¹ cover note – ковернота, временное свидетельство о страховании, страховой сертификат ² hull policies – полисы страхования судна

³ cargo policies – грузовые полисы

open policy – полис с неуказанной страховой суммой, невалютированный полисinsurance certificate – страховой сертификат

6 voyage policy – рейсовый полис

time policy – срочный полис, полис страхования на срокis adjusted – корректируется

9 floating policy – генеральный полис

¹° blanket policy – блок-полис (полис, покрывающий ряд однородных перевозок) ¹¹ conveyance – перевозка, транспортировка

¹² mixed policy – смешанный полис

4b. Comprehension

What type of insurance policy would you use in each situation?

1.A customer in Sri-Lanka placed a trial order.

2.A company in Canada received a standing order from a company in Boston.

3.A carpet importer in Italy often places orders with a company in Morocco. However, as sales fluctuate, the size and value of the orders tend to vary and are not always predictable.

4.An exporter in Japan was offered a one-year contract to supply goods to various branches of an American corporation.

5.A family emigrating from England to Australia sent most of their household goods by ship.

Study the Certificate of Insurance (Fig.25) and answer the questions.

1.Who is the insurer?

2.Who is the insured?

3.What policies are mentioned?

4.What is insured?

5.When is the certificate issued?

5. Revision

5a. Complete the diagram and give a summary of the text.

Types of losses

79

Figure 25. Sample Certificate of Insurance

80