If you’re thinking about purchasing a trade credit insurance policy, you may have some questions about what’s covered, based on a sample trade credit insurance policy.
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. Trade credit insurance policies are designed to aid in risk management and ensure you can trade with confidence when extending a line of credit to a buyer, whether in international trade or domestic trade.
This is accomplished by insuring your accounts receivable from bad debts, and ensuring your cash flow remains stable and steady. Trade credit insurance will pay out if:
- A customer or client becomes insolvent, bankrupt, or otherwise is unable to pay
- 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 insurance 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 A Trade Credit Insurance Policy
One of the additional benefits granted by most policies 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 trade credit insurance 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 trade credit insurance policy for compensation. You must engage in arbitration and negotiations with the customer, and go through the proper legal channels to resolve the dispute.
Trade Credit Discretionary Limits
When you purchase a trade credit 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 goods 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.
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 Trade Credit right away.
We can help clear up any questions you have about getting a trade credit insurance policy – and with our insurance brokerage services, we can help you find the right policy, tailor-made to your particular needs. Get started today, and protect your business!
*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.
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