Basic Principles of ECGC Operation

By | December 29, 2016

There are two basic principles on which ECGC (Export Credit Guarantee Corporation of India Limited) works:

1. The spread of Risk: An exporter is required to insure all the shipments that may be made by him during the next two years. To avoid undue difficulty to the exporters, exceptions have been made in respect of transactions made against

(i) advance payment or
(ii) irrevocable letters of credit confirmed by banks in India.

Shipments made to agents and associates may also be excluded. Where the exporter deals in different types of goods, he may exclude those items which are not of an allied nature, The basic idea is that the exporter is not allowed to pick and choose bad risks only for insurance. This is also necessary to reduce Premia in general. It is open for the exporter to take political cover for transactions under this para.

2. An exporter is a co-insurer: ECGC normally pays 90 percent of the losses on account of political or commercial risks. In the event of loss due to a repudiation of contractual obligations by the buyer, ECGC indemnifies the exporter up to 90 percent of the loss. In this situation, a final and enforceable decree against the overseas buyer is obtained in a competent court of law in the buyer’s country. The Corporation, at its discretion, may waive such legal action where it is satisfied that such legal action is not worthwhile. In such cases, losses are indemnified up to 90 percent.

The insured will have to bear the rest of the loss. This is necessary to ensure that

  1. the exporter also takes necessary precaution in selecting the parties to which he may decide to export,
  2. he may not overextend credit and
  3. he may take all possible care to minimize the risk.

In addition to these two basic principles of ECGC operation, ECGC being in insurance business also follows three basic principles of insurance. They are:

  1. ECGC contracts are contracts of good faith which mean that non-disclosure of a material fact will render the contract void. In other words, the exporter is bound to disclose every material fact within his knowledge to the ECGC which may adversely affect the ECGC. Again, any material alteration of the risk arising from the date of the proposal and the issue of the policy must be disclosed to the ECGC.
  2. The insured is duty bound to minimize the loss. He should conduct his business with ordinary prudence and diligence and act as an uninsured. The action that needs to be taken depends upon the facts and circumstances of the case.
  3. Under the principles of subrogation, ECGC steps into the shoes of the exporter. If recoveries are made after the payment of the claim by ECGC, they are shared with the ECGC in the same proportion in which the loss was borne.