Trade Credit Insurance: Coverage, Claim & Renewal

Updated: 29-06-2023 11:25:55 AM

It is inevitable for business to face risks which are most of the times beyond the control of entrepreneur.  There are certain insurance policies which can help him mitigate the risk. One such policy is trade credit insurance. The need for Trade Credit Insurance is increasing with Indian companies doing business in the global market. This policy manages the risks caused due to failure of payment from one or several customers, thus helps the business man be certain in the uncertain markets.

What Is Trade Credit Insurance?

This insurance policy provides coverage to the supplier of goods and services against delay in payment due to either commercial or political risks. Under this policy, the insurer covers some of the buyers and in case of any event, pays an agreed percentage of an invoice.

What All Trade Credit Insurance Includes?

Trade Credit Insurance covers risks of both non- payment and delay in payment of debts. Both these issues are covered under the following eventualities.

• Protracted defaults- If the buyer fails to pay the receivables within a pre- defined time slot from the due date of the receivable
• Insolvency- Protection against non-payment if the buyer becomes insolvent
• Political risks- If there is loss of payment during exports due to political unrest, the same is covered under Trade Credit Insurance. Political issues covered under this plan are:-
  • War
  • Moratorium
  • Natural disasters
  • License cancellation
  • Export/ import restriction
  • Transfer restrictions/ in convertibility

The insurance plan can be extended to cover the following situations :

• Claim payment directly to the lending institution of the policy holder
• Pre- shipment coverage based on each shipment
• Risks associated with inventory on consignment
• Preference claims which are associated with bankruptcy

How Trade Credit Insurance Functions? 

• The policy seeker checks out the Trade Credit Insurance quotes from different websites of the insurance companies
• After choosing the policy, the required documents needs to be submitted to the insurance company
• The premium is calculated and the policy commences with the payment of the 1^st premium
• When any loss of debt or delay in payment occurs, the claimant intimates the insurance company
• Upon receiving the required claim documents and investigator from the insurer verifies the risk and accordingly pays the compensation amount
• If the claim is not liable for compensation, it will be rejected and same will be communicated to the insured
• If the insured is not happy with the solution, he/ she can raise a dispute in the court of law.

Eligibility Criteria For Trade Credit Insurance

• Any company that sells goods and services on credit terms and is exposed to the risk of non-payment
• Large, medium and small commercial enterprises
• Domestic suppliers and exporters of goods and services

How Is Trade Credit Insurance Claim Processed?

• The policy holder immediately intimates the insured event to the insurance company by submitting the required documents
• An investigator from the insurance company investigates the issue
• If the claim is as per the policy, the compensation is paid to the policy holder
• If the claim is found to be false or not as per the contract, the claim will be cancelled

Document Required For File Insurance Claim

The insured needs to provide the following documents to ensure timely claim settlement process,

• Duly filled claim form
• Stamped and valid evidence of loss

How Long Does It Take To Pay Out A Claim?

The insurance companies usually take 30 days’ time to settle a claim. If there is any legal dispute related to the claim, it might take more time to get the pay-out. 

Cases Where You Can’t Claim Trade Credit Insurance

Trade Credit Insurance does not cover the delay in payment or loss of debts due to the following factors:

• Trade disputes
• Reverse factoring policies
• Risk of currency fluctuations
• If it is a single buyer/ single shipment
• Commercial credit related to interest or penalty for repayment
• If the loss is covered through Letter of Credit or Bank Guarantees

Renewal Process 

If the policyholder wishes to renew his or her policy, S/he can do so before the due date of to prevent break in the policy. 

Insurance Companies Providing Trade Credit Insurance

Some of the insurance companies provide this type of insurance are as follows:

• SBI General
• HDFC Ergo General Insurance
• Atradius India

Important Aspects

Some critical aspects of Trade Credit Insurance are:

• Premium for this insurance policy can be paid on a flat or adjusted basis
• The whole turnover of the company should be taken into consideration by the insurance company before approving the policy
• The financial services are excluded from the Trade Credit Insurance

Advantages Of Buying A Trade Credit Insurance 

• Protects the company’s profit and loss, balance sheet against bad debt
• Insured will get better borrowing and financing options that further increase profitability
• Prevents losses before they occur
• Maintains cash flow and thus protects budget and business plan
• Protects investors and stakeholders

FAQ’s

Q1. What is the policy period of Trade Credit Insurance?

 The insured can buy this policy for one year which covers insured against the goods delivered to the customer.

Q2. Who can buy Trade Credit Insurance ideal?

Companies who sell goods on open credit basis should opt for this insurance policy as it will protect them from risks and uncertainty.

Q3. Is Trade Credit Insurance Standard or customized? 

Trade Credit Insurance is tailor made according to the circumstances and needs of the business. Some insurance companies offer special credit insurances for small and medium scale enterprises.