Understanding Insurance Coverage Under a Letter of Credit (LC): Should Customs Duty Be Included in 110%?
In international trade, insurance plays a critical role — especially when the shipment is covered under a Letter of Credit (LC). One of the most common conditions is the requirement to insure goods for “110%” of the invoice value or CIF value.
In this blog post, you’ll learn:
✅ What 110% insurance coverage means
✅ Whether customs duty can be included in that 110%
✅ How to insure correctly with or without customs
✅ What UCP 600 and ISBP guidelines say
✅ Real examples showing accepted insurance amounts
🔹 What Does “110% Insurance” Mean in LC?
Many LCs state that insurance should be for “110% of the invoice value” or “110% of CIF value.” This is to ensure the buyer is protected with extra coverage in case of loss or damage during shipment.
📘 As per UCP 600 Article 28 f ii:
“A requirement in the credit for insurance coverage to be for a percentage of the value of the goods, of the invoice value or similar is deemed to be the minimum amount of coverage required.
If there is no indication in the credit of the insurance coverage required, the amount of insurance coverage must be at least 110% of the CIF or CIP value of the goods.
When the CIF or CIP value cannot be determined from the documents, the amount of insurance coverage must be calculated on the basis of the amount for which honour or negotiation is requested or the gross value of the goods as shown on the invoice, whichever is greater.”
📝 In summary:
→ Insurance must be for at least 110% of the goods’ value
→ Customs duty is not included in that percentage unless specifically asked
❌ Wrong: Including Customs Inside the 110%
Let’s say:
Goods Invoice Value = USD 50,000
Customs Duty = USD 5,000
Total Insurance = USD 55,000
❌ This seems like 110%, but actually you’re only covering:
100% of goods = 50,000
10% for customs = 5,000
➡ This means you didn’t insure 110% of the goods value — which is mandatory.
🛑 This is NOT acceptable for LC compliance.
✅ Correct: Customs Covered Separately
To meet LC terms and also protect your customs duty, structure insurance like this:
| Goods Value (100%) | USD 50,000 |
| 110% of Goods | USD 55,000 ✅ |
| Customs Duty (100%) | USD 5,000 ✅ |
| Optional: Customs at 110% | USD 5,500 ✅ |
| Total Insurance Options: | |
| – Without Customs Duty | USD 55,000 ✅ |
| – With Customs at 100% | USD 60,000 ✅ |
| – With Customs at 110% | USD 60,500 ✅ |
🎯 All 3 amounts above are acceptable depending on whether you want to insure customs duty:
✅ USD 55,000 → acceptable when no customs duty is covered
✅ USD 60,000 → covers 110% of goods + 100% of customs
✅ USD 60,500 → covers 110% of goods + 110% of customs
—
📊 Summary Table
| Scenario | Goods Cover | Customs Cover | Total Insurance | LC Compliant? |
|---|---|---|---|---|
| ✅ 110% Goods Only (No Customs) | 55,000 | ❌ Not Covered | 55,000 | ✅ Yes |
| ❌ Customs Included Within 110% (Wrong) | 50,000 | 5,000 Included | 55,000 | ❌ No |
| ✅ 110% Goods + Customs at 100% | 55,000 | 5,000 | 60,000 | ✅ Yes |
| ✅ 110% Goods + Customs at 110% | 55,000 | 5,500 | 60,500 | ✅ Yes |
—
🧾 What is “Customs Sum Insured”?
When goods are cleared from customs and the duty is paid, there’s still a risk: if the goods are lost or damaged after clearance (e.g., during inland transit), the government won’t refund the duty.
So, if you paid USD 5,000 in customs, you can choose to insure it for:
✔ 100% = USD 5,000
✔ 110% = USD 5,500
You add this to your goods insurance to get full protection.
—
🟢 Conclusion
✅ LCs typically require 110% of invoice or CIF value to be insured
❌ Customs duty cannot be included inside the 110%
✅ If customs is to be insured, it must be added separately
✅ Accepted total insurance amounts are:
USD 55,000 (no customs) ✅
USD 60,000 (with 100% customs) ✅
USD 60,500 (with 110% customs) ✅
💡 Pro Tip: Always read LC clauses carefully. If you’re unsure, coordinate with your bank and insurer to avoid costly document rejection.
