Commercial Risk Credit Insurance
Michael C. Dennis, MBA, CBF

Purchasing business credit insurance can substantially reduce the risk of exposure to non-payment, and the accompanying bad debt loss. Commercial credit risk coverage can be written to include all customers, or it may be targeted to cover only certain buyers. Domestic credit insurance policies typically only cover "commercial risks." Commercial risks can be thought of as events generally within the control of buyers including:

• Its insolvency or bankruptcy

• Inability to pay for financial reasons

• Protracted default: failure or refusal to pay for goods received

• Contract cancellation by the buyer, and

• Repudiation of the shipment when the buyer fails or refuses to take delivery of goods.

• Pre-credit risk; which is the risk related to losses caused by a buyer's insolvency during the manufacturing period and before delivery of goods or completion of contract

Characteristics of a commercial risk credit insurance policy typically include:

• A specific credit limit established for each of the buyer's customers by the insurer based on the buyer's customer's financial strength and payment habits.

• Discretionary credit limits. An insurer may authorize the insured's credit department to set credit limits for certain customers.

• Annual deductibles.

• Per loss deductibles

• Exclusion and limitations on coverage,

The cost of credit insurance varies based on a number of factors including:

• The buyer's [the client's] historical loss experience,

• The perceived risk in the portfolio,

• The types of coverage being requested and the "spread" of risk being offered to the insurer

• Risk sharing accepted by the buyer including annual deductibles, specific account exclusions, per loss deductibles, the annual dollar cap on total paid losses, and a low dollar loss exclusions.

• The buyer/client will not be able to insure every account it wants or needs coverage for.

• Disputes must be resolved before an insolvent account will be paid by the insurance carrier. For example, a disputed balance must be found to be a legally sustainable debt for the amount to be covered under the terms of a credit insurance policy.

• The buyer/client must document their credit decisions properly, and the buyer/client may still have to argue over whether claims should be paid.