Accounts receivable insurance could play an important part in your business insurance and risk management program. Employing the professional services and advice of a trusted independent insurance agent can make the buying process smooth and efficient and can ensure that your business has the exact coverage that you need.
What Is Accounts Receivable Insurance Coverage?
Accounts receivable (A/R) insurance covers your business when a covered loss causes physical damage to your accounts receivable records (e.g., physical destruction of your records due to a fire). Specifically, accounts receivable coverage helps you recover some of the costs you'd incur if you have to prove what your customers owe you.
Accounts receivable coverage is typically available as part of a business owners policy (BOP). Unlike a similar product, called trade credit insurance, accounts receivable insurance does not cover customer nonpayment.
An independent insurance agent can help you assess your need for accounts receivable insurance and make sure you select the coverage limits that best protect your business.
How Does Accounts Receivable Insurance Work?
Accounts receivable coverage can help when you experience direct physical damage to your company’s accounts receivable records. After a covered loss (e.g., a fire), A/R coverage helps with the financial impact of re-establishing amounts owed to your business.
Accounts receivable coverage is usually a part of a business owners policy (BOP) or a commercial property insurance policy.
Here's how accounts receivable insurance works if you have to file a claim:
- File a claim with your insurance company after a covered loss. Your insurance company will evaluate whether the covered loss caused direct physical damage to your accounts receivable records, per your policy language.
- The claims process focuses on the physical loss or damage to your accounts receivable records and the financial impact of establishing what you're owed. The accounts receivable coverage may help you pay for things like:
- Hiring help to recover your records from damaged hard drives
- Hiring temporary accounting employees to solicit payments
- Extra expenses related to restoring your records
Your independent insurance agent can help you file an accounts receivable claim, or any type of business insurance claim, so you don't have to go it alone.
What Accounts Receivable Insurance Does Not Cover
Accounts receivable insurance typically won't cover claims related to:
- Faulty or incorrect bookkeeping
- Customers refusing to pay for defective or unsatisfactory goods
- Illegal activity, like falsifying records
- Miscommunications or misunderstandings with clients
- Customer nonpayment because you gave them bad advice or broke your contract (these types of claims are sometimes covered by professional liability insurance)
- Customer nonpayment while records still exist
An independent insurance agent can help you further understand the types of incidents that are excluded from accounts receivable coverage.
Accounts Receivable Insurance Examples
What are some examples of accounts receivable insurance in practice? Here are a few quick examples:
- A serious fire on your premises destroys everything, including your paper and electronic accounts receivable records. Your income is threatened because you can no longer prove who owes you how much or when their payments are due. In this case, your A/R coverage would help cover the costs of recreating your records and proving what you're owed and by whom.
- Similarly, if a burst pipe destroyed your records, your A/R coverage would help you recover and collect the payments due to you.
For more information about accounts receivable insurance and how it can help you, talk to a local independent insurance agent.
Accounts Receivable Insurance Cost Factors
Accounts receivable coverage is typically part of a business owners policy (BOP), so it isn't priced as a standalone product. The cost is determined by how much coverage you need.
To determine how much coverage you’ll need for each customer, you’ll need to do some calculations. Would your business actually need 100% of a client's payment to stay afloat?
You likely won’t need to insure all of your clients for 100% of their payment amount. You could insure your largest clients for 60% or 80% of their accounts receivable and not worry about your smaller clients.
Several other factors determine how the cost of accounts receivable coverage is calculated, including:
- Industry
- Location
- History of losses
- Coverage limits
- Size of your company
- Customer payment history
Accounts receivable insurance isn't a one-size-fits-all product. An independent insurance agent can help you customize a policy with the right coverages and limits for your business.
The Benefits of Accounts Receivable Insurance
Accounts receivable insurance may be critically important for certain businesses that rely on a few key customers for most of their revenue. It helps protect your cash flow when a covered loss interrupts your revenue stream.
Businesses that typically benefit from accounts receivable coverage:
- Have 40% or more of their cash flow coming from accounts receivable
- Have a small number of clients who owe large sums of money
- Deal with many international clients
For these businesses, their accounts receivable are too valuable to lose and should be insured. Accounts receivable insurance can also help businesses expand into new markets and take on more risks than they might otherwise be willing to take, for example, due to geopolitical situations.
Some A/R coverage may be included in basic business insurance policies, like a business owners policy or a commercial property insurance policy. Your independent insurance agent can help you decide if enhanced accounts receivable coverage is necessary to protect your business.
The Best Way to Find Accounts Receivable Insurance
Accounts receivable coverage can be complicated, and deciding how it applies to your business requires the help of an insurance expert and a good insurance company. Accounts receivable insurance is typically part of a business owners policy or a commercial property insurance policy. When discussing these policies with an independent insurance agent, be sure to carefully weigh the amount of accounts receivable coverage provided and whether you need to add more.
By working with an independent insurance agent in your area, you’re ensuring that you’ll receive the professional advice and help that your business needs to secure appropriate accounts receivable coverage. Your agent can also recommend the best insurance companies to work with in your area.
FAQs About Accounts Receivable Insurance
What is accounts receivable insurance?
Accounts receivable (A/R) insurance covers your business when a covered loss causes physical damage to your accounts receivable records (e.g., physical destruction of your records due to a fire). Specifially, accounts receivable coverage helps you recover some of the costs you'd incur if you have to prove what is owed to you by your customers.
Does accounts receivable insurance cover customer nonpayment?
Typically, accounts receivable insurance covers the costs related to re-establishing your receivables records after covered physical damage to them. It does not cover customer nonpayment while records still exist. In most cases, you'll need specific trade credit insurance to cover customer nonpayment.
How much does accounts receivable insurance cost?
Accounts receivable coverage amounts are set as a percentage of insured sales or receivables. The cost is based on the amount of coverage you need, as well as your industry, customer payment history, and company size.
Is accounts receivable insurance worth it for a small business?
Accounts receivable insurance can definitely be worth it for a small business, especially if it relies on a few key customers for most of its revenue. Any business can benefit from this coverage, but it's especially important for those who have 40% or more of their cash flow coming from accounts receivable, have a small number of clients who owe large sums of money, or deal with many international clients.
How does accounts receivable insurance work?
Here's how accounts receivable insurance works if you have to file a claim. First you file a claim with your insurance company after a covered loss. Your insurance company will evaluate whether the covered loss caused direct physical damage to your accounts receivable records. If the claim is valid, it will be approved and paid according to your policy language.
Who needs accounts receivable insurance?
Any business can benefit from this coverage, but it's especially important for those who have 40% or more of their cash flow coming from accounts receivable, have a small number of clients who owe large sums of money, or deal with many international clients.
What is the difference between accounts receivable insurance and professional liability insurance?
Accounts receivable insurance covers your business when a covered loss causes physical damage to your accounts receivable records (e.g., physical destruction of your records due to a fire). Specifically, accounts receivable coverage helps you recover some of the costs you'd incur if you have to prove what your customers owe you.
It does not cover customer nonpayment because you gave them bad advice or broke your contract. These types of claims are sometimes covered by professional liability insurance.
What is an example of an accounts receivable insurance claim?
Let's say that a fire destroys your paper and digital accounts receivable records. How would you know which clients owe you how much? And how could you prove it? Accounts receivable coverage would support your data recovery efforts, such as hiring IT professionals, hiring additional accounting staff, and other expenses related to recreating your records and collecting the payments owed to you.
Sources
https://www.thehartford.com/commercial-property-insurance/accounts-receivable-insurance
https://www.progressivecommercial.com/business-insurance/business-owners-policy/accounts-receivable-insurance/