Credit insurance is a crucial safety net for businesses, providing protection against customer non-payment and ensuring cash flow stability. However, not all claims are approved, leaving policyholders frustrated and uncertain about what went wrong. Understanding the common reasons behind claim denials can help you avoid these pitfalls and maximise the benefits of your policy.
1. Failure to Follow Policy Conditions
Credit insurance policies come with specific terms and conditions that must be adhered to for claims to be valid. Common oversights include:
- Late Reporting of Overdue Accounts: Policies often require you to report overdue payments within a specified timeframe. Failing to do so can invalidate your claim.
- Not placing the debtor on stop: Most policies have an on stop period, where you will be expected to stop supply/leave site etc. This varies but is usually from 30-60 days beyond due date. Failure to adhere to this, can jeopardise a claim.
- Incomplete Documentation: Missing or insufficient documentation, such as proof of invoices, delivery, or correspondence with the debtor, can lead to a claim rejection.
- Unapproved Credit Limits: If you extended credit beyond the limit approved by your insurer for a particular customer, any losses exceeding this limit may not be covered.
- Incorrect principal to contract: You think you are dealing with ABC Ltd, but your contract actually stipulates that you are dealing with ABC (Southwest) Ltd. They both have very different risk ratings. It is your responsibility as a client to ensure that you cover on the correct entity or else your claim will likely be declined, Be particularly wary of this with JV’s or SPV’s in the construction sector. Always use the company registration number, where applicable and double check with your client if not clear in the contract.
Tip: Regularly review your policy’s terms and set up internal processes to ensure compliance, speak to your broker regularly and don’t forget – no question is a stupid question!
2. Exclusions in the Policy
Credit insurance policies include specific exclusions—circumstances under which the insurer will not pay claims. These might include:
- Disputes with the Debtor: If your customer disputes the quality, quantity, or delivery of goods or services, the insurer may withhold payment until the issue is resolved.
- Pre-Existing Conditions: Losses resulting from events that occurred before the policy start date are typically excluded.
- Uninsured Transactions: Certain types of sales, such as cash transactions or sales to countries with high political risk, may not be covered unless explicitly included in the policy.
3. Debtor Insolvency Criteria Not Met
A common trigger for credit insurance claims is debtor insolvency, but claims can be denied if:
- Insolvency is Not Legally Declared: The insurer may require formal evidence, such as administration filings or confirmation of debt from an insolvency practitioner, to process the claim.
- Pre-Claim Collection Steps Not Taken: Many policies require you to take reasonable steps to recover the debt, such as engaging a debt collection agency or issuing formal notices, before filing a claim.
- Notification Delays: Failure to notify the insurer promptly when you suspect a debtor is in financial trouble can lead to claim denial.
Tip: Stay proactive in monitoring customer creditworthiness and communicate promptly with your broker about any concerns. They should be able to advise you on next steps and how to remain compliant.
Final Thoughts
Understanding why credit insurance claims are denied is essential for minimising risks and ensuring you’re adequately protected. By carefully managing your policy, maintaining thorough documentation, and promptly addressing potential issues, you can reduce the likelihood of claim rejection.
If you’re unsure about your policy terms or want to ensure your business is fully protected, consider working with an experienced credit insurance broker. They can help you navigate the complexities and ensure you’re maximising the value of your policy.
Have questions about credit insurance? Contact us today to learn more and protect your business from unnecessary financial risks.