Why trade credit insurance claims fail: disputes, late overdue reports, trading over the limit, set-off and fraud. What to do so yours pays.
The customer has gone into administration. You owe your own suppliers, your payroll is due on Friday, and the one comfort is that the account was insured. Then the claims handler asks for the date you first reported the debt as overdue, and you realise nobody did.
Most credit insurance claims are paid. When one fails, it is rarely because the insurer found a clever loophole. It is usually because of something the policyholder did, or did not do, months before the loss. The mistake is to treat the policy as a safety net you can forget about. It is a contract with obligations on both sides, and almost all of yours fall due before anything goes wrong.
This article sets out the five situations where cover does not respond, what a claim needs, and the habits that keep a policy working. If you are new to the product, our plain-English guide to how credit insurance works covers the basics first.
An unpaid invoice from an insolvent customer is usually lost. We have read the administrators' reports for more than 500 recent UK administrations. Where the administrators gave an estimate, nearly nine in ten expected to pay unsecured creditors nothing at all. The median amount owed to unsecured creditors in each case was about £900,000.
Creditors are also running out of patience. In September, compulsory liquidations in England and Wales, where a creditor goes to court to wind a company up, were 25% higher than a year earlier, according to the Insolvency Service.
So when a claim fails, there is rarely a second route to the money. That is why the reasons are worth knowing in advance.
Credit insurance covers a customer that cannot pay, or will not pay without any reason. It does not cover a customer that says it should not have to pay. If the buyer disputes the debt, because it says the goods were faulty, late or not what was ordered, the insurer will normally wait until the dispute is settled in your favour, by agreement, judgment or arbitration.
Disputes often appear at the worst moment. A customer heading for trouble will sometimes raise complaints about old invoices to buy time. In the administrations we read, about one in ten named a contract dispute among the causes of failure.
Every policy sets a deadline for telling the insurer that an invoice has gone unpaid, usually a fixed number of days after the original due date. Miss it, and the insurer can reduce or refuse the claim. Some policies also ask you to stop supplying an overdue customer, or to get the insurer's agreement before shipping again.
This is the most frustrating failure, because the debt itself was covered. It happens when the person who chases payments does not know the policy exists, or when a trusted customer is given grace "because they always pay in the end".
The insurer covers each customer up to the credit limit it has agreed. If a customer has a £100,000 limit and owes you £160,000 on the day it fails, the extra £60,000 is your loss. The same applies if the insurer reduced or withdrew the limit and you carried on shipping: deliveries made after the change are not covered, although earlier deliveries usually are.
Limits move. Insurers watch payment behaviour and filings across thousands of policyholders, and they act early. A limit cut is a warning to read, not an admin task to file.
In construction and some contract trades, the customer may not refuse to pay outright. Instead it deducts money: contra charges for alleged defects, claims for delay, or sums it says you owe on another job. Insurers usually treat amounts in genuine contention as disputed, so they are not paid until they are resolved. Retentions held under a building contract need specific cover and are often excluded.
If your customers can set off, your insured figure may be smaller than your ledger suggests.
Credit insurance pays when a real, approved buyer fails to pay a real debt. It does not pay when someone pretends to be that buyer.
One of our clients, a commodity trader, received an order that appeared to come from an existing customer. The details looked right, and the goods were delivered as instructed to a third-party warehouse. The real customer had never placed the order. Our client lost £650,000 of product.
The insured customer owed nothing, so there was no bad debt to claim. Most policies also make it a condition that you check the identity of the company you are dealing with. Losses like this fall to crime cover, or to the social engineering section some cyber policies include, usually with a much lower limit. We cover how these impersonation losses happen in your customer's cyber attack is your credit risk.
A claim that is paid is usually a claim that was well documented from day one. Expect to provide:
The insurer pays the insured share of the agreed loss, typically around 90%. Anything recovered later is shared in the same proportions.
It is the most common thing people say about the product, and it is mostly wrong. Insurers pay most claims, because most claims are straightforward: a covered customer, within its limit, reported on time, became insolvent. The claims that fail tend to fail on the five points above, and every one of them is visible in the wording before you buy.
The real risk is a policy that nobody in the business has read. Ask your broker to walk your credit controller through the conditions in plain English, and to tell you which of your customers come closest to the edges. A good broker also argues your case when a claim is queried. That is part of the job.
Credit insurance pays when a covered customer cannot pay a genuine debt. It does not pay for disputes until they are settled, for sales above the limit, for debts reported late, for sums the customer sets off, or for orders placed by impostors. Almost every failed claim starts with a missed obligation months before the loss. Know your deadlines, watch your limits, keep your paperwork, and check who you are shipping to.
If you would like a second pair of eyes on your current policy wording, or on a claim that is being queried, get in touch. You can also read more about how we arrange credit insurance.
This article is a general explanation. Every policy wording differs, so check yours.
