In general terms, protection against a wide range of defined insolvency events is outlined in each policy. Past due losses can also be covered by additional endorsements. In the case of certain export situations, political risk coverage is also provided. It is very important that the client ask for a specimen policy with relevant endorsements so that they can review the contract language and ask questions.

What's covered? What isn't?

Carriers will typically insure specific accounts for specific coverage limits. They may also provide discretionary or blanket coverage up to a predetermined level. Accounts that are not named for coverage or that are given a limit of zero are usually not covered. In some policies, if an account has undisputed amounts greater that 60 days past due at the inception of the policy, the account will not be covered. The carrier is simply attempting to avoid walking into a "preexisting condition". It is best to forward an aging to the broker you work with so these issues can be identified and addressed upfront.

How are disputes handled?

Carriers have specific language for addressing disputes. Until the outstanding amount in dispute can be shown to be a legally sustainable debt, the account is not covered. The carriers' position on this is basic. They are not a substitute for the legal system, and have no legally binding authority to declare a debt legitimate or not. Accordingly, in stating that they will not cover a disputed account, they protect themselves from paying on a claim which may never have been owed in the first place. As a result, the carrier first agrees to settle on any undisputed portions of a claim, and hold the disputed items open until a judgment is obtained against the debtor validating the debt as a legally sustainable obligation of the debtor. They will then settle a claim on that amount.

What about "nuisance disputes"?

On occasion, a debtor will raise a nuisance dispute to get out from under the payment obligation. While credit insurers recognize this, the debt must still be validated through normal legal channels. This is something the client would be required to do whether or not they had insurance. The benefit of having the policy comes once judgement has been secured. In a majority of cases, even after judgement, the debtor will still refuse to pay. Then a credit insurance policy provides protection and a loss payment to the client. In some special instances, carriers may advance a claim settlement with the understanding that if a judgment is not received, the client will return the funds. Such action is, of course, taken on a case by case basis.

What are the obligations of the insured?

Credit insurance policies spell out the obligations of the insured when a debtor defaults. Typically they are minimal, and are focused on cooperative efforts to reduce loss and maximize recovery. For example, the policy may state that the insured needs to file a notification of claim within 10 days of becoming aware of a defined insolvency event occurring with a covered account. It may also state, in general "boilerplate" terms, that it is the obligation of the insured to assist in documenting the claim and supporting efforts to recover from the debtor.

How can you be sure the coverage you purchase is the coverage you need?

Credit insurance can be an effective means of enhancing receivables based borrowing arrangements, safely expanding open credit sales, and hedging potentially catastrophic loss exposures on big accounts. But there are several key things to know and understand when structuring, implementing and managing a credit insurance program. In entering into a relationship with a carrier to insure receivables, it is the responsibility of the policyholder to read and understand the terms of the agreement. Specialty brokers who work exclusively with these programs are a tremendous asset in this regard. They can help clients understand the policy terms, and get further clarifications where required.

The client can appoint a specialty broker as its broker of record at no incremental cost. The broker should assist with properly structuring the policy, as well as making necessary changes as the needs of the business change. They also assist in the insurance process by making sure the client understands how to comply with the terms of the policy, thus ensuring that any claims can be settled without delay.

Credit insurance, both domestic and export, is a great financial tool, but it is critical that anyone using this type of coverage become fully aware of the contents of the policy. While carriers provide contracts that are fair and reasonable, without clarification of some of the finer details of coverage, misunderstandings can naturally result.

*****

Subscribe to the Credit-to-Cash Advisor
Monthly e-Newsletter -- It's Free

Printed with permission of Global Commercial Credit. Global Commercial Credit is a specialty broker of domestic and export credit and political risk insurance. Tel. 877-422-7475.

Many credit insurers require the policyholder to attempt to collect defaulted payments before they will pay out on claims. ABC-Amega provides collection assistance for credit insurance policyholders facing defaults. To find out more, complete our Information Request form.