Accounts receivable insurance is one of the most powerful and, perhaps, unexpected tools that businesses can use to spur new business growth and ensure they get paid for what they sell. But as with any insurance policy, the key to taking full advantage of their assets with A/R insurance—also known as trade credit insurance or credit risk insurance—is to know exactly what is covered and when claims are paid.
What’s it for?
There are two broad categories of non-payment and late-payment risks covered by this insurance: commercial and political.
Commercial risks fall into two categories: 1) Insolvency: This includes filing Chapter 7, 11 or the equivalent in the insured’s country of domicile 2) Protracted Default: In this scenario your customer is not insolvent but has been become delinquent for an extended period. Trade disputes as a reason for non-payment are not covered.
Political risks can result in claims in several situations, including when customers are no longer able to convert local currency into US dollars, transfer US dollars out of the country, have their licenses canceled, or conduct trade because of an embargo on imports or exports. It’s important to know that actions taken by our government are not covered causes of loss. As such, tariffs and trade wars themselves are not viewed as political causes of loss.
Filing a claim
When a business files a proof of loss, they usually are paid within 30 days. But this time frame can vary depending on the exact scenario. On one hand, the process should be fast when a customer becomes insolvent by filing Chapter 7 or 11. On the other hand, some claims can take much longer, such as in these cases:
- Protracted default: When a customer is not bankrupt but is not paying, there may be a waiting period of up to 120 days. In these cases, waiting may work in the insured’s favor. When a claim is filed, it may destroy a relationship that may be salvageable.
- Political risk: Proof of loss can be filed with notification at 90 days. These are cases where a customer has done nothing wrong but may be told by their government that they can no longer convert payments to dollars or can no longer transfer goods out of the country. These claims are frequently fully recovered however it can take months or years for this to happen. Claims payments in these situations serve as a valuable bridge between the settlement and final recovery.
Communication is key
There are a number of mitigating factors that can affect a claim, and insureds often have—or should have—questions when considering whether to file a claim: Does the policy require a company to work with a collections agency? What documentation is required (past due reports, etc.) before a claim is filed? Is there a maximum filing date that, if passed, will result in a claim being denied? What happens if a customer disputes the debt?
These are all important questions to ask and that’s why insurance agents and brokers should work with their Insureds so they fully understand how their policy works, what steps must be taken before filing a claim and what time frames must be adhered to.
At ReceivaSure, we are working to educate the industry on policy terms and simplify coverage for small-to-mid-sized business owners, commercial lenders and factoring firms. We share information and links about trade credit risks and accounts receivable insurance on Twitter and Facebook—follow and like us to stay up to date.