Understanding A Sample Trade Credit Insurance Policy

January 17, 2022

If you’re thinking about purchasing a trade credit insurance policy, you may have some questions about what this insurance protects.
If so, you’re in the right place. In this blog, we’ll consider a sample trade credit insurance policy, and discuss the different coverages that are available, what you can expect to pay, and more details.

Sample Coverage For A Trade Credit Insurance Policy

First, let’s discuss what events are actually covered by the trade insurance policy itself. Policies are designed to aid in credit risk management and ensure you can trade with confidence when extending a line of credit to a buyer, whether in domestic trade or international trade and are domestic and export customers.
This is accomplished by insuring your accounts receivable from bad debts, and ensuring your cash flow remains stable and steady. They will pay out if:

  • A customer or client becomes insolvent, bankrupt, or otherwise is unable to pay – resulting in a protracted default
  • A customer or client becomes impossible to contact and does not pay, or a court judgment is issued against them

This helps ensure that you are paid for your goods and services issued on trade credit. Depending on your policy, you may be compensated for between 75-95% of the value of the debt.

In addition, many trade credit policies are also sold with political risk insurance. This type of insurance is similar, but it protects you from political risks such as:

  • The expropriation or seizure of your assets by a foreign government
  • Political violence (war, insurrection, terrorism, etc.)
  • Banking and currency conversion issues or inability to move currency to your country
  • Breach of contract or contract frustration by a government
  • Business interruption

Additional Benefits Granted By This Policy

One of the additional benefits offered by most credit risk insurers is that, if you need to take legal action against a client who has not paid, these costs will be covered by your insurance policy. The cost of hiring a debt collection service and other related fees may also be covered by your policy.

Limitations Of Coverage

The specific limitations of your policy will vary, based on the policy you purchase. However, it’s important to note that most policies will not cover customer disputes which result in non-payment.

For example, if you deliver a $100,000 order to a customer, and they claim that the items were missing, damaged, or not satisfactory, and they do not pay, you cannot simply turn to your policy for compensation. You must engage in arbitration and negotiations with the customer, and go through the proper legal channels to resolve the dispute. Therefore, it is your responsibility to assess the risk of nonpayment yourself when dealing with clientele. However if this is outside your capacity you may want to seek Single Buyer insurance to mitigate this risk.

Trade Credit Discretionary Limits

When you purchase an insurance policy, your insurer will likely give you a discretionary limit. This limit outlines the maximum business credit limit you can issue to a customer without getting approval from your insurer.

In other words, if your discretionary limit is set at $50,000, you cannot sell products or services on credit to a company in excess of that limit, unless you contact your insurer, and they perform a credit check and other necessary due diligence checks, and issue their approval for the transaction. You will always be vulnerable to debtors if you sell goods or services on credit terms.

Understanding Premium Costs

Your premium costs are usually calculated as a percentage of your overall revenue. The most common rate is at 0.1 to 0.3 cents per dollar of revenue. So, if your business did $5 million in sales per year, you could expect to pay around $10,000 in insurance premiums.

This will vary based on if your business has a history of collecting bad debt, the companies with which you’re working, the average value of your transactions, and a number of other factors. Your own export credit insurance premium costs could be higher or lower than this number.

Need More Help Understanding Trade Credit Insurance? Contact Us Today!

If you’d like us to provide you with a sample insurance policy and walk you through the coverage you can expect in more detail, contact the team at Niche TC right away.

We can help clear up any questions you have about our trade credit insurance products – and our insurance brokers can help you find the right policy, tailor-made to your particular needs. Get business insurance today and get started!

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