Factoring

Use of credit insurance

 

Increasingly more and more factors are using credit insurance as a risk mitigation tool. This could be done by taking a master insurance or assignment of client's credit insurance policy.

 However, it is pertinent to note that insurance will not pay in the event that the factor or client breaches  any terms of the credit insurance policy.

Key areas to watch out:

1. Cease shipment or equivalent wordings

Factor or client must stop shipment when debtor is overdue in payment as defined by the credit insurer or if the factor or client is aware of any adverse information pertaining to debtor.. As informing the insurer may cause the debtor limit to be withdrawn some clients may avoid reporting so that they can continue to ship to the debtor. This is breached of the insurance policy and insurer may not pay the claim.

Due to the unpopularity of cease shipment with the insured , such clause is not so apparent now and it may appear in other clauses with similar meaning and effect. For example insured self withdrawal of debtor limit upon occurance of certain events is tantamount to cease shipment. Cancelation of debtor limit due to occurance of certain events is also another example of cease shipment.

2. Conditions imposed by the credit insurance when granting the limit

3. Policy limit

Although credit insurance may establish limit for a few debtors, it will only pay up to the policy limit.

For example:

Policy limit  is $ 1 million with  5 debtors of $ 1 million each. Total debtor limit is $5 million. In the event of multiple debtors failure, the insurance company will pay only up to policy limit of $1 million.

Policy limit may also be subject to the premium paid. For example , the policy limit could be 40 times of premium paid.

Client could have a policy limit of $5 million and subject to the premium paid. If the client paid premium of $50,000, the policy limit will be $ 2million.

4. Protracted default or insolvency

If overseas debtor is covered, protracted default policy is preferred as it may be quite difficult to make a  debtor insolvent in some countries and the act of  insolvency may differ from the insurer's definition.

5. Shipment policy

Factor/client should ensure that the credit insurance is a shipment policy. In shipment policy loss arising from the invoice is covered even when the loss occurs after the expiry of policy so long as the goods are shipped during the policy period

6. Policy assign to other factor

Some client may use the same insurance policy and assign different debtor to different factor. Unless the policy limit is attached to the debtor assigned, the payment will be subject to the policy limit. Assuming client has a policy limit of $1 million and has 5 debtors with a debtor limit of $1 million each.  Each debtor is assigned to five different factors. One of the debtors fails and the claim is $1 million, the other four factors will not be able to claim should any of the other debtors fail as the claim has reached the policy limit.

7. Loss payee endorsement or assignment of insurance policy, co  insured

In loss payee endorsement, the factor cannot take action against the insurance company if it fails to pay a claim. On the other hand under assignment or co insured the factor can pursue against the insurance company. This is important in the event the client is uncooperative or insolvent.

8. Trade Dispute

Credit insurance does not cover trade dispute. If there is a trade dispute, the credit insurance will not pay the claim.

9. Overdue notification

Insured has to notify the credit insurance of non payment based on the overdue as stipulate by the credit insurance. Failure to do so may result in the claim being rejected by the credit insurance company. 

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