What Is Accounts Receivable Insurance Coverage?

Accounts receivable insurance is designed to protect your business from uncollectable balances if your financial records are lost or damaged. Some insurance companies refer to this coverage as trade credit insurance.

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Actualizado: 08/23/2024

Read Time: 3 minutes

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Key Takeaways

Accounts receivable insurance can help companies in industries with extended payment terms or high customer default risks.
Investing in accounts receivable insurance can help secure cash flow and protect your business’ balance sheet from financial uncertainty and losses due to non-paying customers or clients.
Accounts receivable insurance can be beneficial for small businesses operating on thin profit margins.
Some insurance companies refer to accounts receivable insurance as “trade credit insurance.

How Does Accounts Receivable Coverage Work?

Accounts receivable coverage can help protect against two types of claims:

Property damage caused by fires, theft or flooding that result in physical damage to your company’s financial records.
A customer or client defaulting on a payment they owe due to a covered loss like bankruptcy or contractual issues.

This coverage is available through our Business Owner’s Policy (BOP) as a part of commercial property insurance protection. With accounts receivable insurance, you have the option to increase coverage limits to give you more protection if needed.

Accounts receivable insurance protection involves these simple steps:

Coverage Assessment

After you purchase your insurance coverage, your insurance provider will assess if there is direct physical loss or damage to your records from a covered cause of loss.

Claims Processing

Once you file a claim with your insurance provider, they’ll start to investigate it. If your claim is approved, you’ll receive payment for the covered amount, helping minimize the financial impact on your business and balance sheet.

Key Benefits of Accounts Receivable Insurance Coverage

Accounts receivable insurance is beneficial for many types of business, but especially small businesses who operate on thin profit margins. Other benefits include:

Business Growth: This coverage allows a small business to withstand a covered loss by ensuring uncollectable amounts due from customers are paid.
Improved Cash Flow: By safeguarding your accounts receivable, it’s easier to maintain and predict a steady cash flow.
Risk Mitigation: Accounts receivable insurance helps protects your business from potential financial losses due to customer insolvency, bankruptcy or default.

Key Point:

Accounts receivable (AR) insurance is included in a BOP as part of commercial property coverage.

Frequently Asked Questions About Accounts Receivable Insurance

What Does Accounts Receivable Insurance Not Cover?

Accounts receivable insurance doesn’t pay for your lost income or operating expenses incurred from a covered property damage claim. Accounts receivable insurance also doesn't cover incidents resulting from bookkeeping or accounting errors, losses that require any audit of records, or loss or damage caused or resulting from the falsification of accounts receivable records.

Accounts receivable insurance also doesn’t cover every type of default by a client. It doesn’t protect against customer defaults due to defective products, erroneous advice or contractual misunderstandings. Defaults resulting from political risks like government or military action, or dishonesty are also excluded from this coverage.

What Is an Example of an Accounts Receivable Claim?

If your outstanding balances cannot be collected due to a covered loss, here's a few examples where account receivable insurance can help:

A fire at your place of business results in the destruction of hard copy and electronic accounts receivable records. As a result, your business is unable to establish proof of receivables owed by customers.
If your accounts receivable records are damaged by water damage that a burst pipe caused, your accounts receivable insurance can help.

Do I Need Accounts Receivable Insurance?

It’s a good idea to have this coverage if your business relies on a few key customers for a significant portion of their revenue each year. It’s a key coverage to have if you want to protect your cash flow and increase financial stability during times of economic uncertainty.