Use of insurance in trade and commodity finance transactions
Produced in partnership with Sullivan
Use of insurance in trade and commodity finance transactions

The following Banking & Finance guidance note Produced in partnership with Sullivan provides comprehensive and up to date legal information covering:

  • Use of insurance in trade and commodity finance transactions
  • Types of risks to be covered
  • Who should be responsible for taking out insurance?
  • Standard clauses under an insurance policy

Insurance plays an important role in trade and commodity finance transactions. While many of the risks inherent in financing trade can be mitigated or reduced through good structuring, including the taking of security where necessary, insurance provides an additional layer of protection for a financier. For example, security taken over goods that have been financed will be worthless to a financier if those goods are damaged or destroyed. Taking out appropriate insurance to protect against the risk of damage or destruction of the goods will protect the financier’s position if such risk should occur.

Insurance protection is an issue that should be considered at the outset of a transaction during the structuring phase. Questions to be considered include:

  1. what type of risks can, and should, be covered?

  2. who should be responsible for taking out the insurance?

The answers to these questions will need to be determined on a case-by-case basis. In particular, although insurance can be a useful tool in minimising risks in a transaction, it also represents an additional (and sometimes prohibitive) cost to be incurred. While attempting to cover all risks possible may seem the best position in theory, this may not be possible in practice given the cost implications.

Types of risks to be covered

There is a whole range of risks that can be covered by insurance and