The Principle of Subrogation

The aggrieved party has the legal right to recover from the offending party.  However, if the aggrieved party has insurance on his property, claimed from and indemnified by the insurance company, the legal right to recover is transferred to the insurance company.  This is called “subrogation”.  Without “subrogation” the insured can still recover from the offending party; thus he could profit from his misfortune.

Once the insurance company indemnified the insured, the insured will sign a document subrogating the right to recover to the insurance company.

The principle of subrogation is applicable to contracts of indemnity only.

Trade Credit Insurance

Last Friday, I attended the “Briefing / Seminar on Credit Insurance” conducted by Philexim and COFACE.  And, I’d like to share what I’ve learned.

Most export transactions now use an “Open Account” as the term of payment over “advance payment”, “cash on delivery”, and “consignment”.  An “Open Account” is a payment of international trade transactions, in which:

• The seller ships the goods and forwards the documents directly to the buyer
• The buyer clears the goods upon arrival
• The buyer arranges for payment. 

The seller loses control of the goods as soon as they are dispatched, because he/she has to trust that the buyer will remit the funds.

Exporters should extend this type of payment to importers, whom they know and trust.  They must also be comfortable with the commercial and country risks associated with the transaction. However, the risk of non-payment or default still exists.  And, the exporter must protect his account receivables.  He can do this through Trade Credit Insurance (TCI).

TCI covers non-payment of account receivables attributable to the following:

    1.    Buyer (Credit)
            a.    Insolvency
            b.    Protracted default

    2.    Country in which it operates in (political)
            a.    Government Moratorium
            b.    Non-transfer of Risks
            c.    Cancellation of Import License
            d.    Occurrence of War or Revolution

The following are not covered:

    1.    Buyer (Credit)
            a.    Non Acceptance of Goods
            b.    Trade Dispute

    2.    Country in which it operates in (political)
            a.    Devaluation or Depreciation of Currencies

If you are dealing with an “Open Account” payment system, it is advisable to cover it with Trade Credit Insurance. It is an effective credit management tool in time of uncertainties.