This whole certification has so far dealt with a receivable: goods have shipped, an invoice exists, a payment does not arrive. There is nevertheless a moment when the risk is already complete although no receivable has arisen, and that is manufacture. A manufacturer that has committed steel, hours and a production line to a bespoke piece of equipment has delivered nothing, invoiced nothing, and has already spent. If the destination country closes its imports at that moment, the loss is real and no receivable policy sees it, because there is no receivable. It is that gap pre-shipment cover fills, and it works on a logic different from everything that precedes.
The difference in nature appears in what is indemnified. On a receivable, the indemnity is computed on a certain amount, that of the unpaid invoice, and the difficulty is proving the cause of default. Before shipment there is no invoice: what is reimbursed is a committed cost, that is, an accounting value the insured establishes itself, with its purchases, its hours and its allocated overheads. The cover therefore becomes indemnity-based in the strict sense, it requires cost accounting able to reconstruct progress at a date, and the insured without that accounting discovers at the loss that it cannot quantify its own loss.
The triggering event changes too, and it is harder to grasp than non-payment. Here, the loss is the interruption of the contract: a public decision prohibiting importation, a termination by a public buyer, an embargo, a lasting impossibility of performance. Those events have no obvious date as an unpaid maturity does, they are often built up in stages, and policies frequently require the interruption to be established as definitive or prolonged beyond a period. The insured is then in an uncomfortable position: it must decide to stop production, which fixes its loss, without yet knowing whether the event will be characterized as covered.
Then comes a question discovered too late: what to do with what has been made. Standard equipment can be resold, and the insurer will rightly take that into account by deducting the recoverable value. Bespoke equipment, designed for one site, one electrical voltage or one local standard, resells only for scrap or after costly modification. The distinction is not incidental because it decides most of the indemnity, and because it is largely determined at product design, long before anyone thinks about insurance. An insured therefore has an interest in documenting very early the bespoke character of what it makes, failing which the argument about recoverable value will be conducted on assertions.
A second mechanism deserves to be known because it changes what to do: the duty to mitigate. Most pre-shipment covers require the insured to stop commitments as soon as the event is known, and often bear the reasonable costs of that stoppage, including termination payments to subcontractors. Continuing to manufacture out of optimism, or to keep a workshop loaded, aggravates the loss and the insurer may refuse to indemnify the part thus added. The decision to stop, commercially painful, is therefore also an insurance decision, and it is taken knowingly.
Finally, this cover must be articulated with the receivable cover, since the two do not accumulate but hand over to each other. Until the goods are shipped, it is the committed cost that is covered; once shipment is made, it is the receivable. The switching point is defined in the contract, ordinarily loading, and it is subtler than it looks on contracts delivered in lots or installed on site: part of the equipment can have left while the rest is still in the workshop, so that both covers operate simultaneously on different parts of one contract. Knowing which responds, on which part, and at which date, is exactly what a well-kept file allows to be stated in one page.
The method comes down to three requirements, and all of them precede the loss. Keep cost accounting able to give progress and committed cost at any date, because that is the measure of the indemnity. Document the bespoke character of the equipment from design, because that is the measure of the recoverable value. And know, before it happens, which event triggers the cover and what duty to stop follows from it, because the decision to continue or to stop is taken in a few days and determines the share of the loss that will stay with the insured.
A French manufacturer is building a 5.4 million euro packaging line for a public buyer in Central Asia. At May 14, progress is 80 percent, that is 3.9 million of committed costs, including 1.1 million of firm orders placed with subcontractors and not yet delivered. On May 14, the destination country suspends imports of industrial equipment with no stated duration. The pre-shipment policy requires an interruption established as definitive or prolonged beyond four months. The line is bespoke: voltage, interface language and local standards. The industrial director wants to finish the remaining 20 percent so as not to disrupt the workshop. What should be decided?
Finishing is the most expensive of the three available decisions, and its reason, keeping the workshop loaded, is not an insurance reason. Most pre-shipment covers require commitments to be stopped as soon as the event is known and bear the reasonable costs of that stoppage: the share of cost added after May 14 in knowledge of the suspension stands a strong chance of staying with the manufacturer, which will therefore have paid to aggravate its own loss. The right step is to stop and to document it, including termination payments negotiated on the 1.1 million of firm orders, which fall under mitigation costs rather than production cost. The file's discomfort lies elsewhere, and it must be named: the suspension states no duration, the policy requires four months or a definitive character, so the manufacturer must fix its loss now without knowing whether the event will be characterized as covered in September. That asymmetry is structural and is handled by preserving everything that will date the decision rather than by waiting. That leaves the point that will decide most of the amount: the line is bespoke by its voltage, its interface and its standards, so its recoverable value is close to scrap and not to a resale price. It falls to the manufacturer to establish this, with the original specifications, and it is now that those documents are assembled, while the design file is open.
- 01Before shipment the risk is complete although no receivable exists: what is covered is a committed cost, not an unpaid invoice.
- 02The indemnity is measured on cost accounting able to give progress at a date: without it, the insured cannot quantify its own loss.
- 03Recoverable value decides most of the amount, and the bespoke character of equipment is documented at design, not at the loss.
- 04Continuing to manufacture after the event aggravates the loss, and the added share can stay with the insured: stopping is also an insurance decision.
- 05The two covers hand over at shipment and can operate simultaneously on different parts of one contract delivered in lots.