Little things mean a lot – due diligence on credit insurance policies allows for effective claims

By Ron Doyle

When everything is going well small Credit Insurance Policy violations are either identified in time to be rectified, or when a claim is filed, violations are waived by the insurer. No problem. However, when the economy goes into the tank and the underwriters are inundated with claims that will push their loss ratios out of sight…Houston, we do indeed have a problem.

A Credit Insurance Policy is a legal contract drafted by the insurers setting out the rights and obligations of both parties. It is critical that policyholders understand their rights under the policy, but more importantly, what their obligations are. This understanding is often difficult as the policy is a “Contract of Adhesion”, that is, it is drafted by the insurer and sold to the policyholder. The policyholder must either carefully review the policy wording or depend on the person selling it to fully explain it.

When claims problems do occur, it’s for two main reasons. First, the claims adjusters in the underwriters’ offices don’t have the time to try and remedy policyholder oversights. Second, they are required to enforce the terms and conditions of the policy more rigorously – as in an economic contraction like the current one. Thus the title of this blog post, “Little things mean a lot.”

At Millennium, we go to great lengths to explain the policy conditions, to monitor the policyholders’ compliance and to review claims before they are submitted to ensure they are complete, but we still see small omissions that could prejudice the payment of a claim. Here are the things we look for to ensure credit insurance works as it’s intended:

• The sale must be to exactly the same legal entity approved under the policy. Sales to affiliates or subsidiaries of approved buyers must have separate credit approvals.

• If you are selling under your Discretionary Credit Limit, the credit information or the experience on which you are basing the credit decision must pertain to the entity to which you are selling, not to a related company.

• If you are part of a group of companies, only sales by the company or companies named on the insurance policy are covered.

• Notwithstanding that the buyer is covered under the policy and the credit limit is still in place, you must always act in a prudent manner to avoid losses or to mitigate any losses.

• If you take orders by phone, always attempt to get a written confirmation signed by the buyer. The policyholder must always be able to show the buyer has an obligation to pay.

• Document all efforts to collect overdue accounts.

• If a buyer has an overdue account and requires further shipments, ensure that you get paid for the overdue account before you release the next shipment.

• Cash On Delivery means exactly that – you receive cash or a certified cheque before you release the goods. Regular or post-dated cheques are not cash.

• Remember, in business relationships there are no friends, only clients. Too often, we see cases where the bad debt is either caused by lack of proper credit procedures or by lack of follow-up, because the customer was a friend. With some friends, you don’t need enemies.

Credit insurance needs understanding and close monitoring. Don’t assume anything. If you have questions contact your local ICBA broker, who specializes in this field and is there to help you before you lose money because of a little oversight or omission.

(Ron Doyle is a founder of Millennium CreditRisk Management – credit and political risk insurance specialists – www.mcm.ca.ICBA is the world’s largest team of independently-owned, specialist trade credit insurance brokerages. Partners combine local service with global coordination to provide credit and political risk insurance solutions for multinational companies.)