Trade credit claims are expected to rise in the UK following an escalation in insolvencies as government support schemes wind down and companies overstretch themselves in a recovering economy.
As claims increase, so will insurer scrutiny
Government interventions during the COVID-19 pandemic have included loans, grants, the furlough scheme, new legislation to delay the prosecution of companies not paying their debts, and state support for trade credit insurers. The withdrawal of this funding, that began at the beginning of July, is likely to precipitate insolvencies that were previously delayed.
With a projected GDP growth in excess of 6% over the next 12 months, the UK is moving out of recession. However, in periods of rapid growth, some businesses typically expand too rapidly, leading to cash flow problems, and sometimes failure.
As trade credit claims increase in such times, insurers generally scrutinise them more closely for any failures from clients to comply with policy terms and conditions. This can lead to insurers rejecting or reducing claims settlements.
Examples highlight potential claims issues
Insurers may offer reduced settlement, or reject claims entirely, due to breaches in policy terms. Following are examples of the types of claims that insurers recently have denied, or partly denied.
Documentation is critical
A claim was submitted as a collection/claim case, under the protracted default cause of loss clause, but subsequently the buyer became insolvent. The claim was reported late; however, the insurer agreed to waive the breach as the claim was minimally late and the reporting date was at the time the UK entered the first lockdown. More damaging were documentation issues, including that the insured was unable to provide proof of delivery. The insurer needed to establish that goods were delivered and that invoices were raised within the policy time frame, but without evidence of delivery, was unable to do so. The insurer rejected the claim.
Agree credit limits in advance
An organisation was owed approximately £30,000 when a buyer became insolvent. The buyer had a credit limit of £25,000, which was only agreed upon after a significant debt had built up; however the policy did not cover credit limits agreed retrospectively. The claim settlement was limited to the deliveries made after the credit limit was arranged.
Maximum extension period breaches
A claim for a debt was submitted to insurers after the required submission date. The trading history showed maximum extension period (MEP) breaches a year prior to the claim, none of which had been reported to insurers. The insured appeared to have handed the delinquent account to collections — another adverse notifiable event — and failed to report that to the insurer. The organisation also agreed a repayment plan with their counterparty, which had failed, and neglected to inform the insurer of the arrangement and that it was unsuccessful. The claim was rejected.
An organisation was the victim of fraud. The insurer rejected a claim relating to the incident, and the organisation accepted that decision. They took the view that it was their own lack of due diligence that opened them up to the fraud, and noted the following failures:
Common reasons for rejection of claims
By carefully adhering to policy terms, clients can ensure claims are paid in full. To view the most common grounds for rejection, or part payment of claims, complete the form on this page.
Beware of fraud
As the UK economy recovers, we anticipate an increase in fraudulent activity, which is not covered by a trade credit insurance policy. To protect against fraud, it is important to conduct appropriate due diligence on companies you are trading with.
While there can be many types of fraud, the most common are buyer impersonations and long or short firm fraud. In the second example, a trading company is run as an apparently legitimate business, buying goods and paying suppliers promptly to secure a good credit record. Once the company is well-established, the perpetrators purchase the next round of goods on credit, then decamp with the goods and profits from the previous sales.
The many warning flags for a fraud include:
To both combat fraud and make sure you are following the terms of your insurance coverage, it is critical that you are familiar with your responsibilities under your specific policy.
If you have questions about trade credit issues, please reach out to your Marsh representative.
For an overview of the most common reasons that claims are rejected, please enter your details on the right.