Purchasing business credit insurance can substantially reduce the
risk of exposure to customer non-payment, and an accompanying bad debt
write off. Commercial credit risk coverage can be written to cover
a company's entire customer base, or it may be targeted to cover only
certain specific customers or types of customers. A domestic credit
insurance policies [in contrast to an export credit insurance policy]
covers only "commercial risks."
Commercial risks can be thought of as events generally within the
control of buyers and may include [depending on the specific terms
of the domestic credit insurance policy]:
The buyer's insolvency or bankruptcy
Its inability to pay for financial reasons
Protracted payment default:
An unwillingness to pay for goods received
Repudiation of the shipment [when the buyer fails or refuses to
take delivery of goods].
Pre-credit risk; which is the risk related to losses caused by
a buyer's insolvency during the manufacturing period but before delivery
of the goods or completion of contract
Some of the disadvantages of a commercial risk credit insurance include:
Typically, certain customer accounts will have specific coverage
limits assigned to them by the insurer, and these limits may be far
less than the dollar amount requested by the creditor company.
Policies typically come with annual deductibles; as well as per
loss deductibles...in other words commercial credit insurance is
not a first dollar loss policy.
There are usually other exclusions and limitations on coverage.
Often, losses under a certain dollar amount are not covered losses.
Foreign [export] accounts are usually excluded from coverage.
The insurer may require detailed periodic reports from the creditor
company about the status of customers covered by the policy.
The credit insurance policy is a contract in which the creditor
company is required to comply with very specific requirements in
order for bad debt losses to be covered. Failure to comply with any
of the terms of the contract may invalidate the coverage.
Credit insurance policies will usually not pay the creditor company
if the debtor asserts that the balance due is in dispute...and customers
in serious financial trouble often claim the balance due is disputed
in order to delay collection or legal action.
The narrower the "spread" of risk being submitted to
the insurer, the more difficult it will be to get a credit insurance
policy that is worth purchasing.
Risk sharing accepted by the buyer including annual deductibles,
specific account exclusions, per loss deductibles, the annual dollar
cap on total paid losses, and a low dollar loss exclusions.
Usually, the insurer will decline to offer any coverage on certain
One final thought: The more account exclusions, the more coverage
limitations in the policy, the more restrictions, and the more terms
and conditions in the policy the more difficult it will be for the
company considering purchasing this type of insurance to determine
its value to the creditor company.