Standard Policies
The ECGC has designed four types of Standard Policies to provide cover for shipment made on short-term credit.
i) Shipments (Comprehensive Risks) Policy -to cover both commercial and political risks from the date of shipment.
ii) Shipments (Political Risks) Policy -to cover only Political risk from the date of shipment
iii) Contracts (Comprehensive Risks) Policy - to cover both commercial and political risks from the date of contract.
iv) Contract (Political Risks) Policy - to cover only political risks from the date of contract.
The Shipments (Comprehensive Risks) Policy is the one ideally suited to cover risks in respect of goods exported on short-term credit. This policy covers both commercial and political risks from the date of shipment. Risk of pre-shipment losses due to frustration of export contracts is nil or very low since goods exported on short-term credit are raw materials, primary goods, consumer goods or consumer durables which can be resold easily. Contract policies, which cover risk from the date of contract, are issued only in special cases when goods to be exported are manufactured to non-standard specifications of a buyer. Risks covered under Standard Policies: Risks covered under standard policies fall into the following two categories.
1) Commercial Risks: This includes:
i) the insolvency of the buyer
ii) the buyer's protracted default to pay (within 4 months of due date) for goods accepted by him; and
iii) in some special circumstances specified In the policy, buyer's failure to accept the goods, when such non-acceptance is not due to exporter's action.
2) Political Risks: This includes:
i) imposition of restrictions on remittances by the Government in the buyer's country or any government action which may block or delay payment to the exporter
ii) war, revolution or civil disturbances in the buyer's country
iii) new import licensing restrictions or cancellation of a valid import licence in the buyer's country, after the date of shipment or contract as applicable
iv) cancellation of export licence or imposition of new export licensing restrictions in India after effective date of contract (under contracts policy)
v) payment of additional handling, transport or insurance charges occasioned by interruption or diversion of voyage which cannot be recovered from the buyer; and
vi) any other cause of loss occurring outside India, not normally insured by general insurers, and beyond the control of the exporter and /or the buyer.
In cases where the buyer happens to be a foreign Government or a Government department and it refuses to pay, the default will fall under the category of political risks.
Risks not covered: The standard policies do not cover losses due to the following risks:
i) Commercial disputes including quality disputes raised by the buyer, unless the exporter obtains a decree from a competent court of law in the buyer's country in his favour
ii) causes inherent in the nature of the goods
iii) buyer's failure to obtain necessary import or exchange authorisation from authorities in his country
iv) insolvency or default of any agent of the exporter or of the collecting bank
v) loss or damage to goods which can be covered by general insurers
vi) failure of the exporter to fulfil the terms of the export contract or negligence on his part
vii) exchange rate fluctuation (except under schemes mentioned later in the chapter).
The ECGC also does not cover risks which can normally be insured with commercial insurers.
An exporter may either take a comprehensive risks policy covering both political and commercial risks or secure himself against political risks only, depending upon his requirements. It must, however, be noted that ECGC does not issue policies to cover commercial risks only.
When to take a Contracts Policy: You have learnt that in most cases Shipments (Comprehensive Risks) Policy will meet the requirements of most exporters, it would be desirable to take contracts policy for two reasons. (1) If goods are manufactured to a specific buyer's requirements, they may not be easily solved to alternate buyers in case he decides to cancel the contract, and (2) the risk of loss due to Government ban on export of goods after the date of the contract is covered only in a contracts policy.
Consignment Exports : Exports on consignment basis may be covered under Shipments (Comprehensive Risks) Policy by a suitable endorsement thereon. While political risks are covered from the date of shipment till the date of receipt of payment in India, commercial risk are covered only after the Agent/Stockholder submits the 'Accounts Sales' to the exporter. The risk of the Agent/ Stockholder not returning the unsold goods is not covered under the Policy.