A Policyholder's Guide to Trade Credit Insurance
As the COVID-19 pandemic has roiled markets around the world and devastated many businesses, companies of all stripes are increasingly seeking out trade credit insurance — a form of coverage that shields a business against the risk of its customers failing to pay for shipments.
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John Gibbons, a partner in Blank Rome LLP's insurance recovery practice, pointed out that a policyholder may be hesitant to immediately place a customer into default for failing to pay for a shipment, especially if the two businesses have had a longstanding relationship.
“When there is nonpayment or late payment, pressure arises," he said. "A company does not usually want to immediately place a counterparty into default.”
Depending on the terms of a trade credit policy, a policyholder may have an opportunity — or in some cases, an obligation — to work with a customer to try to avert a default.
“There may be technical terms in these policies that do two things,” Gibbons explained. “One, they may expect you to minimize your loss, which may involve working with the counterparty. Also, they do not want you extending the payment terms without notice or acceptance by the insurer.”
As a result, it is critical for a policyholder to communicate early and often with the insurer once a buyer is late on a payment, Gibbons continued.
“One of the ways to protect yourself is to make sure you have leeway in terms of providing notice to the insurer before you put the entity into formal default or nonpayment after their obligation has come due,” he said.
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“A Policyholder's Guide to Trade Credit Insurance,” by Jeff Sistrunk was published in Law360 on October 16, 2020.