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タグ:Fire insurance ( 1 ) タグの人気記事

Fire insurance policy (AUD)

--- QUOTE : GLEIM-CD (AUD) 13.5--------------------

When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy’s absence most likely indicates the possibility of a (n)
a. Deficiency in the coinsurance provision
b. Insurance premium due but not recorded.
c. Understatement of insurance expense
d. Lien on the plant equipment.

The answer is (d).
----------------------------------UNQUOTE------------

GLEIM explains, “When liens are placed on equipment or property, the lienholder often requires that the assets be insured and that the lienholder be named as the beneficiary. Hence, the policy would likely be held by the lienholder even the client is required to pay the premiums.”

This reminds me of my experience of having worked in a loan section of a bank.
In order to persuade the credit dept. of the bank to approve my request for the extension of the line of credit to my client, I occasionally had to negotiate with my clients, talking them into pledging their plants or the office building as collateral. Once we agreed over the condition of the loan, then I had to collect various necessary documents from the borrower customer.

【to identify the borrower’s substance】
a copy of corporate registration 法人登記簿謄本
a certificate of registered seal, 印鑑証明書
the article of incorporation, 定款
etc… 

【as an evidence of our agreement over the terms of the loan】
promissory note 約束手形や金銭消費貸借契約証書
financing statement 融資申込書

【to secure the credit by means of mortgatge = for attachment】
・security agreement 担保契約証書

【to register the lien in the real property = for perfection of mortgage】
・a copy of real property registration 不動産登記簿謄本
・a copy of corporate registration  法人登記簿謄本
・a certificate of registered seal of mortgager 根抵当権設定者(債務者)の印鑑証明書
・borrower’s (mortgager’s) power of attorney 根抵当権設定者の委任状

【to secure the right to claim for fire-insurance = for attachment & perfection】
・the original copy of fire insurance policy 火災保険証券原本
・security agreement 担保差入契約書

Above are among the documents that I had to collect from my clients as a staff of a loan section. So, as I noted in the last part of the above list, I had to ask the client borrower-companies to submit the fire insurance policy for the real property that is pledged as collateral to the bank.

But, our business practice of in Japan is a bit different from the GLEIM’s explanation that I introduced at the beginning.
In many cases, the bank doesn’t have the borrower-clients specify the creditor-bank as the beneficiary of the insurance contract. The bank leaves the borrower, or the owner of the real property as the beneficiary. In case of an accidental damage by fire, we ask the borrower to claim, as the beneficiary, its right for the fire insurance proceeds to the insurance company, and to repay a part of the loan from a part of the proceeds that “the borrower” receives. The debtor-company doesn’t have choice anyway, because the original insurance policy is in the possession of the creditor-bank with the security agreement. I often mailed the original fire insurance policy, which had been in the custody of the creditor-bank, to the fire insurance company. (In this case, by the way, it could be said, that we were in the position of an agency coupled with interests.)
Then why does the bank leave the debtor client as the beneficiary of the insurance contract, which appears to be more tolerant action than is explained in GLEIM ? It’s because collecting loan from the fire insurance proceed is only one of many options for the banks. The bank could have it in many ways. On the other hand, in case of a fire accident, the debtor-company really needs to use the proceeds to rebuild or repair their plants or buildings which were damaged in the accident. Without recovering the damage somehow, the operation of the borrower-debtor could be critically impaired , which could give a negative impact for the debtor’s repayment schedule. Therefore, it is not always advantageous, actually, for the creditor-bank to exercise the right to use the proceeds only to reduce the credit line. In my experience, I’ve never had my client repay its loan from the fire insurance proceeds, but I rather discussed the rescheduling plan with my client.

But the above story is based on my own personal experience in a bank. As a CPA candidate, I shall remember that “the lienholder often requires that the assets be insured and that the lienholder be named as the beneficiary,” as is explained by GLEIM.

When I was in the line of the business, I was trained to “understand” what’s stated on the insurance policy. One of the topics I had to understand was insurable interest, which is another important theme in USCPA exam. So, when receiving the fire insurance policy in the above mentioned situation, I had to be careful so that I collect the insurance policy from all the parties that have their shares of insurable interest. For example, when a bank asks a borrower-company to pledge its building which is in the joint tenancy of the president and the chairman of the company, the bank has to confirm that both of the president’s and the chairman’s name are stated as the beneficiary of the insurance contract.

Although I wasn’t so happy when I was in the front line in the bank, I surely learned a lot of things there… But, you know, doing it in practice is one thing, applying the experience to the exam is another. And vice versa…

Wow, that means I got to study a lot more, and the time is limited!
[PR]
by nn_77 | 2006-05-18 12:28 | >AUD


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