Using a Letter of Credit in an Organ Transplant

I received a call from the administrator of the University of Colorado (CU) Health Sciences Center. He said they had a patient from Italy on whom the Health Sciences Center would perform an organ transplant.

The patient claimed she had coverage from an insurance company in Italy. He expressed concern about the coverage on the policy and his ability to process a claim.

We discussed the possibility that his patient could have her bank in Italy issue a letter of credit to guarantee payment. In this case, I suggested a variation of a letter of credit, a standby letter of credit. After discussions with her, it seemed the best solution.

A Standby Letter of Credit

She requested her bank to issue a standby letter of credit in favor of CU. As the beneficiary, CU could collect payment on the letter of credit with the simple statement as follows: “We hereby certify we have performed the transplant and have been unable to collect payment from the insurance company.”

The intent of a standby letter of credit is that the beneficiary will never need to draw on it, hence, the name. This distinguishes it from a commercial letter of credit, sometimes referred to as a documentary letter of credit.

The bank honors a commercial letter of credit when the beneficiary performs, i.e. ships goods and presents documents that comply with the terms and conditions of the export letter of credit. The bank honors a standby letter of credit in the event of nonperformance by the applicant.

In this story, if the patient’s insurance company refused to pay, then CU would draw on the letter of credit. The insurance company apparently paid because CU made no demand against the letter of credit.

This turned into a typical standby scenario. The beneficiary demands payment against a standby letter of credit when an issue concerning nonperformance, or in this case, nonpayment, exists.