Indonesia - Does National Insurance Requirement Mean Rough Seas For Coal Shipments?
Legal News & Analysis - Asia Pacific - Indonesia - Shipping Maritime & Aviation- Insurance & Reinsurance
4 October, 2019
A recently published surveyor report (laporan surveryor) on Indonesian coal exports noted that as of March 2019, of 1,095 coal shipments in 2019 only 9% were insured under a national insurance company. This number is alarming for both the Government and coal exporters in Indonesia, given that just two years ago the Ministry of Trade issued MOT Regulation No. 82 of 2017 regarding Provisions for the Utilization of National Maritime Transportation and Insurance for the Export and Import of Certain Goods (Reg. 82). This regulation has been amended several times since it was issued, most recently by MOT Regulation No. 80 of 2018 (Reg. 82 as amended).
The regulation was issued in an effort to create more opportunities for national shipping companies and national insurance companies that engage in import and export activities. Initially, Reg. 82 gave exporters and importers the choice of using national or foreign shipping and insurance companies. However, a more restrictive approach has since been taken, specifically for coal, crude palm oil, rice and goods for government procurement.
Under Reg. 82, exports of coal and crude palm oil can only be undertaken by national shipping companies and can only be insured with national insurance. Similar obligations have been imposed for imports of rice and government procurements.
Exporters and importers can be exempted from the obligation to use national shipping companies when such companies are limited or unavailable. There was a similar exemption for the use of national insurance, but under Reg. 82 as amended, exporters and importers, without exception, must now use national insurance. The provision previously granting exporters and importers the possibility of utilizing foreign insurance has been removed.
It is worth noting that failure to satisfy the requirement to utilize national insurance for the export and import of coal, crude palm oil, rice and goods for government procurement has potentially grave implications for exporters and importers. According to Reg. 82 as amended, incompliant exporters and importers may be subject to administrative sanction in the form of the suspension or revocation of their license.
The obligation to use national maritime transportation is scheduled to come into force starting May 1, 2020, while the obligation to use national insurance came into force on February 1, 2019, but was postponed to June 1, 2019 through Director General of Foreign Trade (DGFT) Circular Letter No. 123/DAGLU/SD/2019.
Understanding that the obligation to use national insurance is already binding, this article only addresses the practical issues for coal supply and transportation contracts in Indonesia in view of this national insurance obligation.
There are two practical issues that may arise, namely (i) whether existing foreign insurance under coal supply and transportation contracts that existed prior to the implementation of this national insurance requirement must be switched to national insurance, and (ii) whether the holder of the insurance policy should be the exporter or the foreign purchaser of the coal.
Existing Foreign Insurance
We note that none of the provisions within these regulations incorporate any grandfathering exception for pre-existing coal supply and transportation contracts. This means the national insurance obligation vested under Reg. 82 as amended is enforceable even for contracts that existed before the enactment of the regulation. Our recent non-formal discussions with the MOT support this understanding.
This raises practical issues in adjusting pre-existing contracts in Indonesia that were mostly concluded by way of adopting the International Commercial Terms (Incoterms). One of the key Incoterms often adopted by companies engaging in coal supply and transportation activities is the Free on Board (FOB) term. In essence, the FOB term prescribes that the buyer will be responsible for costs/liabilities once goods are shipped. This includes the costs of insuring the goods. It is likely that buyers outside Indonesia, using the FOB term, will obtain insurance from foreign insurance companies rather than from national insurance companies in Indonesia.
Our reading of Reg. 82 as amended and its implementing guidelines, i.e., DGFT Regulation No. 02/DAGLU/PER/1/2019 regarding Technical Guidance for the Implementation of the Obligation to Use a National Insurance Company for the Export and Import of Certain Goods (Reg. 02), is that the holder of existing insurance from a foreign insurance company for the shipment of coal will still have to procure insurance from a national insurance company. We received a non-formal confirmation from an MOT official on this.
The national insurance companies referred to under Reg. 82 as amended and Reg. 02 need not be wholly Indonesian owned, whether directly or indirectly. Insurance from national insurance companies can be used for the shipment of coal if it qualifies for registration with the MOT. This means it is obtained from a general or sharia insurance company established under the laws of Indonesia and licensed by the Financial Services Authority (Otoritas Jasa Keuangan or OJK). It is therefore possible for the national insurance company to be a subsidiary or affiliate of an international insurance company.
Holder of Insurance Policy
In practice, under the FOB term, the buyer of the coal procures insurance from an insurance company and acts as the policyholder and the insured. This is in contrast with the requirement under Reg. 82 as amended that the exporter is the party that procures the insurance from a national insurance company.
According to our reading of Reg. 82 as amended and Reg. 02, the holder of the insurance policy need not necessarily be the coal exporter; it depends on the terms adopted under the contracts. This conclusion was reached upon reviewing Reg. 02, which requires exporters to “submit” an application for an insurance policy to a national insurance company. Within this context, a plain reading of the word “submit” indicates that the exporter need not be the one holding the national insurance, and merely is required to “submit” the application for the national insurance, regardless of which party holds it. Our recent non-formal discussions with the MOT support this interpretation.
Further, an MOT official asserted that Reg. 02, which requires that an insurance application submission include
(a) a Taxpayer Identity Number (Nomor Pokok Wajib Pajak or NPWP),
(b) the name of the insured, (c) the address of the insured and
(d) the type of goods, does not limit the holder of the insurance policy. While we understand that only an Indonesian national or legal entity will have an NPWP, the requirement set out under Reg. 02 may simply be disregarded for the simple reason that the requirement is not applicable.
This article first appeared in Coal & Minerals Asia magazine, published by Petromindo. For more information, go to www.petromindo.com/.
For further information, please contact:
Soewito Suhardiman Eddymurthy Kardono