How to Prevent NOT Getting Paid on Your Trade Credit Insurance Policy

One of the more challenging events that a credit department can experience is trying to determine after the fact if the company's credit insurance policy will pay for the loss from a large client. Credit insurance is one of the most powerful tools you can have to facilitate trade and get paid for what you sell. Critical guidance from an insurance broker or credit insurance carrier is paramount to making your business whole.

Before Filing a Claim

Do we have a claim? All insurance policies have specific conditions under which to consider an unpaid receivable as a loss. Some polices allow you to file a claim when the receivable is one-day past due. Others require you to work with a collection agency or attorney for 180 days before the carrier will consider it, and certain carriers mandate that your customer be deemed insolvent before they consider it a claim. Prior to a formal insolvency filing, most polices initially treat a claim as a collection account for a period of time, as the carrier will try to collect the debt before converting it into a credit default or insolvency claim. Understanding how your policy operates prior to a claim is central to a successful resolution.

We have a claim. Credit insurance policies, while similar in many of their provisions, contain a variety of critical policy conditions. For example, one policy form requires policyholders to file past due reports. Another carrier expects policyholders to stop shipping after the account goes a certain number of days past terms of sale and a specific dollar amount. Some policies are based on shipment date, and some are based on invoice date. It is important to have a full understanding of the triggering mechanisms and policy mechanics before a formal claim is filed.

How to Avoid Common Reasons for Denial

I filed my claim late. Will I still get paid? For most credit insurance carriers, filing a claim beyond the maximum claim filing date is the No. 1 reason a claim is denied. Numerous studies show the relationship between time and money. The longer a bad debt is outstanding, the less likely it will be recovered. Insurance policies include a maximum claim filing period to ensure the best chance of recovery or mitigation of loss. If a claim is denied for this reason, policyholders can appeal. In select cases, insurance companies may assist a client even if the claim is filed late. To avoid this hassle, do not file your claim later than the maximum claim filing period.

My customer is disputing the debt. An insurance company will not mediate a dispute with a customer. Most disputes are settled between the two parties without pursuing legal action. If you file a claim and a customer disputes it, the carrier will reserve funds (an amount set aside for potential claim payments at a later date) for the likely outcome of the dispute. In some cases, legal action is required. If the legal outcome is in the policyholder's favor and the customer still fails to pay, the insurance carrier will then make the policyholder whole. A dispute will not cause a claim to be denied, but it will significantly hold up the payment of the claim.

My customer defaulted. We set up a payment plan, but now the customer has defaulted on the payment plan. The insurance company is there to ensure the best outcome for recovery. If you implement a payment plan without the carrier's approval and the customer defaults, the claim will be denied. Most logical repayment plans are usually agreed to by the carrier.

It is also possible that the customer knows this requirement and if the carrier hasn't approved the payment plan, the customer might intentionally enter into a payment plan that it does not intend to honor. When the claim is denied, that customer would avoid recourse from the insurance company. To avoid a denial, we strongly counsel clients to seek agreement from the insurance carrier before accepting a payment plan.

My invoice has 60-day terms of sale, but I am really trading at 120-days terms of sale. When filling out an application for a credit insurance policy, applicants are making representations of their businesses. If the invoice states the maximum terms of sale are 60 days, but the company is really trading at 120 days and there is a loss, the claim will be denied. This and other application statements are considered warranties to the issuance of the insurance policy. A carrier can endorse terms of sale that are longer than stated on the policy to accommodate seasonality, dating programs, "one-off" sales on a caseby-case basis, but the carrier must be informed of this before starting to ship on extended terms. Selling on terms of sale that are longer than what is allowed under the policy is deemed a breach of the policy. To avoid a denial, follow the terms allowed under the policy and consult with a broker or carrier before giving extended terms.

Know who you are selling to. When submitting a new customer to the insurance company for coverage and monitoring, it is very important to have the correct entity.

Just because your customer is a subsidiary of a large corporation does not mean that the large corporation is responsible for the subsidiary's debt. You may think the coverage protects one company, only to find out when you file a claim that you had the wrong entity insured. This will cause a claim to be denied. Only you truly know who is buying your product. Communicate with your carrier or broker to ensure that you are insuring the proper entity.

I only want to submit a portion of my loss. Most policies require business owners to submit the whole debt, even if they believe they can collect a portion of the debt. Speak to your carrier and seek agreement to get paid directly from the customer. As money comes in, the carrier will prorate coverage based on the amount already received. All payments received must be reported to the carrier. An agreement must be reached before collecting money or the claim may be denied.

For example, with an exposure of $1 million and total coverage of $250,000, the policyholder's share of this debt would be 75% and the carrier's responsibility would be 25%. Any payments received from the customer would reduce the coverage by 25%. If $500,000 is received from the customer, the $250,000 coverage is reduced by 25% of the total outstanding amount, leaving the policyholder with $125,000 of coverage. Again, consult with the carrier and broker before collecting a portion of the debt.

Communication is the key to successful claim payments and a strong commercial relationship with your insurance company. Credit insurance is one of the best ways to mitigate bad debt losses, expand sales to new markets and enhance banking relationships. Your broker should be able to handle and advocate for you when dealing with your credit insurance policy. Seek an expert for this specialized coverage. A credit insurance carrier is a true trade partner. When the client, broker and carrier work closely together and the client understands the mechanics of the policy, 99% of claim denials are avoided. Ultimately, your objectives are in alignment-minimize the loss to your business, the client and the credit insurance carrier.

For most credit insurance carriers, filing a claim beyond the maximum claim filing date is the No. 1 reason a claim is denied.

Selling on terms of sale that are longer than what is allowed under the policy is deemed a breach of the policy.

See the second and third installment in this series at http://www.cookmaran.com/blog/how-to-prevent-not-getting-paidon-your-trade-credit-insurance-policy.

Vincent Furio, account executive with Cook Maran, has spent the last decade structuring credit, political, financial and transactional risk programs for domestic and multinational clients. His primary focus is on financial institutions, private equity firms, factoring companies, distributors, manufacturers, oil and gas firms, international exposures, general liability risks and contingent risks.