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What is Accounts Receivable Insurance?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 August 2016
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    2003-2016
    Conjecture Corporation
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Accounts receivable insurance is insurance protection against the possibility of events taking place that render it impossible to collect on payments owed to the business. Most forms of this type of insurance coverage are structured to provide protection in a number of specified situations, including damage to the accounts receivable records, bankruptcy, or default on the part of a client who owes the business a significant amount of money. While the coverage may be extended to a wide range of events, it is important to note that the insurance provider will not honor a claim submitted for any event that is not covered in the terms and conditions of the accounts receivable insurance policy.

It is possible for a business to secure accounts receivable insurance that covers either the receivables of the business, or the receivables of a parent company and any subsidiaries. Insuring the entire pool of receivables is sometimes known as multi-buyer insurance, since the coverage is extended to several businesses under the control of the client. When the coverage is extended to a single business entity, it is sometimes referred to as key buyer insurance.

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The terms and provisions of most accounts receivable insurance plans cover what is considered reasonable types of risks. For example, most policies of this type will provide protection in the event that the receivables records are destroyed in a fire. In some cases, the insurance will cover not only the declared value of the outstanding receivables, but also for any expenses incurred as the business took steps to recreate the accounting records. As a result, the business can continue functioning with a reasonable amount of efficiency, post payments received as the records are being reconstructed, and in general overcome the disaster.

Should a client declare bankruptcy, and the outstanding debt is no longer collectible, there is a good chance that the accounts receivable insurance will cover that amount. Often, the claim must be delayed until the bankruptcy court has determined if any of the assets of the client can be sold to settle the debt, completely or in part. Once the court has rendered its verdict, and the business knows how much of the debt remains outstanding, a claim for that amount can be filed with the provider. Assuming that the claim is approved, the business receives a check for the amount due within a short period of time.

Accounts receivable insurance is usually fairly affordable, and can cover a wide range of events. Typically, the premium for the coverage will increase incrementally if the client wishes to include other possible events that would affect the ability to collect on part of all of the receivables. Since there is some variance between the levels of coverage provided under different contracts, it is important to read the terms and conditions of a policy before making a commitment.

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