What Is Accounts Receivable Insurance? What Is Trade Credit Coverage?
Accounts receivable insurance and trade credit insurance are two terms that are frequently confused in commercial insurance. However, depending on the policy and how the terminology is being used, they can refer to very different types of protection.
For Canadian businesses, this distinction is particularly important.
A business may have millions of dollars in outstanding invoices on its balance sheet. Those receivables represent money that customers owe for products or services already provided. But simply having Accounts Receivable Coverage shown on a commercial property insurance policy does not necessarily mean that the insurer will pay you when a customer refuses to pay an invoice, becomes insolvent or goes bankrupt.
This is one of the most common misunderstandings surrounding commercial insurance.
In many commercial property policies, Accounts Receivable Coverage is designed to respond when a covered physical loss damages or destroys the records of your accounts receivable and, as a result, you are unable to collect money owed to your business.
Trade Credit Insurance, on the other hand, is specifically designed to protect businesses against the risk of customer non-payment.
That difference can be extremely important.
What Is Accounts Receivable Coverage?
Accounts Receivable Coverage is commonly found as an extension or endorsement under a Commercial Property Insurance policy.
The purpose of this coverage is to protect your business when a covered loss damages or destroys the records you use to establish and collect money owed by customers.
For example, imagine that your business has $2 million in outstanding customer invoices.
Your accounting records, customer ledgers and other accounts receivable records are stored at your premises. A major fire causes significant physical damage to your office and destroys those records.
You know customers owe your business money, but because your records have been destroyed, you may have difficulty establishing:
- Who owes you money
- How much each customer owes
- Which invoices are outstanding
- When invoices were issued
- Whether payments have already been made
- What amounts are collectible
This is where Accounts Receivable Coverage under a commercial property policy may respond, subject to the policy wording, limits, conditions and applicable exclusions.
A commercial property accounts receivable extension can potentially cover amounts that the business cannot collect because of physical damage to its accounts receivable records, as well as certain additional expenses such as increased collection costs, interest charges and reasonable expenses to recreate records.
The key point
Accounts Receivable Coverage is not automatically insurance against customer credit risk.
If your customer still has the invoice, your accounting system is intact and your records are available, but the customer simply refuses to pay or becomes insolvent, the standard commercial property Accounts Receivable extension generally is not designed to pay that bad debt.
That is where Trade Credit Insurance comes into the discussion.
What Is Trade Credit Insurance?
Trade Credit Insurance is a specialized commercial insurance product designed to protect businesses against losses resulting from the non-payment of commercial debts.
It is particularly relevant to businesses that sell goods or services to other businesses on credit terms such as:
- Net 30
- Net 45
- Net 60
- Net 90
- Extended payment terms
- Open-account sales
Instead of requiring customers to pay immediately, the business provides the goods or services and allows the customer to pay later.
That creates credit risk.
If the customer does not pay, the business can suffer a significant financial loss.
Trade Credit Insurance is designed to transfer some of that risk to an insurer.
According to the Business Development Bank of Canada (BDC), trade credit insurance protects businesses against the risk of non-payment when selling goods and services to customers on credit terms.
Trade credit insurance can generally respond to covered situations such as:
- Customer insolvency
- Bankruptcy
- Protracted default
- Certain political risks
- Certain country risks
- Other covered causes of non-payment specified by the policy
The exact coverage depends on the insurer, policy wording, approved credit limits, customer and country risk, payment terms and other underwriting conditions.
Accounts Receivable Coverage vs. Trade Credit Insurance
The easiest way to understand the difference is to look at what caused the loss.
| Situation | Accounts Receivable Coverage | Trade Credit Insurance |
|---|---|---|
| Fire destroys accounting records | Potentially covered | Not necessarily the purpose |
| Covered physical damage destroys A/R records | Potentially covered | Not the primary purpose |
| Cost to recreate A/R records | Potentially covered | Not the primary purpose |
| Customer refuses to pay | Generally no | Potentially covered |
| Customer becomes insolvent | Generally no | Potentially covered |
| Customer becomes bankrupt | Generally no | Potentially covered |
| Customer has a prolonged payment default | Generally no | Potentially covered |
| Political risk affecting an international buyer | Generally no | Potentially covered where purchased |
| Credit monitoring of customers | No | Often available |
| Insurer-approved buyer credit limits | No | Common feature |
| Protection against bad debt | No | Yes, subject to policy terms |
The critical difference is therefore:
Accounts Receivable Coverage protects against certain losses involving the records of accounts receivable following a covered loss. Trade Credit Insurance protects against the financial risk that a customer will not pay.
Commercial property accounts receivable wording commonly ties coverage to direct physical loss or damage to accounts receivable records.
Example 1: A Fire Destroys Your Accounting Records
Imagine ABC Manufacturing has $1 million in outstanding accounts receivable.
A fire severely damages its office and destroys paper files and other records containing information needed to collect the outstanding debts.
ABC Manufacturing subsequently discovers that it cannot substantiate portions of its accounts receivable.
This is the type of situation where Accounts Receivable Coverage under a commercial property policy may be relevant.
Depending on the wording, the coverage may address:
- Amounts that cannot be collected because records were damaged
- Additional collection expenses
- Costs associated with reconstructing records
- Certain interest charges associated with financing the impaired collections
The exact coverage depends on the policy.
This is fundamentally a property-loss problem affecting receivable records.
Example 2: Your Customer Goes Bankrupt
Now consider a completely different situation.
ABC Manufacturing sells $500,000 of products to XYZ Distribution on 60-day payment terms.
ABC Manufacturing properly maintains all invoices, contracts, delivery documents and accounting records.
Everything is documented.
But XYZ Distribution suddenly becomes insolvent and files for bankruptcy.
The invoices still exist.
The accounting records are intact.
The problem is that the customer cannot pay.
This is not primarily an accounts receivable record problem.
It is a credit risk problem.
This is where Trade Credit Insurance may provide protection, subject to the policy terms, approved credit limits, waiting periods, deductibles or co-insurance and other conditions.
Trade credit insurers specifically describe this coverage as protection against losses resulting from buyer insolvency, default or other covered non-payment events.
Example 3: A Customer Simply Refuses to Pay
Consider another situation.
Your company sells $250,000 of equipment to a commercial customer.
The customer receives the equipment.
The invoice is valid.
Your accounting records are perfect.
However, the customer stops paying and the receivable becomes seriously overdue.
Your commercial property policy may have an Accounts Receivable extension.
But that does not automatically mean the insurer will pay the $250,000 outstanding invoice.
The question is not whether you have an accounts receivable balance.
The question is:
Why can’t you collect it?
If the answer is simply customer default or insolvency, you need to examine Trade Credit Insurance, not assume that a property-policy Accounts Receivable extension provides bad-debt protection.
Why Businesses Need to Understand This Difference
Accounts receivable can represent a substantial percentage of a company’s assets.
Manufacturers, wholesalers, distributors, contractors and service companies can carry significant receivables because customers frequently receive products or services before payment is due.
For example:
Annual sales: $20 million
Average payment terms: 60 days
Approximate receivables exposure: potentially several million dollars
If one major customer represents $1 million of that receivable and suddenly becomes insolvent, the impact on cash flow can be significant.
The business may still have to pay:
- Employees
- Suppliers
- Rent
- Taxes
- Bank loans
- Equipment financing
- Insurance premiums
- Utilities
- Operating expenses
The customer may have disappeared from the balance sheet, but the company’s expenses have not.
This is why Trade Credit Insurance can be an important risk-management tool for businesses that extend substantial credit.
What Does Trade Credit Insurance Cover?
Trade Credit Insurance is generally designed to protect against covered customer non-payment.
Depending on the policy, it may cover:
1. Insolvency
A customer becomes legally insolvent or enters bankruptcy or another qualifying insolvency proceeding.
2. Protracted Default
A customer does not pay within the period specified by the policy, even though the customer has not necessarily entered formal bankruptcy.
3. Political Risk
For international transactions, certain policies can cover political events that prevent a buyer from making payment.
Examples may include certain currency-transfer restrictions, political events or other defined country risks.
4. Domestic and International Customers
Trade credit insurance can be structured for domestic customers, export customers or both.
Export Development Canada, for example, offers credit insurance solutions for Canadian exporters, including coverage for individual buyers or portfolios of export receivables.
How Does Trade Credit Insurance Work?
Trade credit insurance is different from simply purchasing a property endorsement and forgetting about it.
The insurer may evaluate the creditworthiness of your customers and establish credit limits.
For example:
| Customer | Outstanding Exposure | Approved Credit Limit |
|---|---|---|
| Customer A | $500,000 | $500,000 |
| Customer B | $300,000 | $250,000 |
| Customer C | $150,000 | $150,000 |
| Customer D | $75,000 | $50,000 |
The approved limits are important.
A business should not assume that because it has a trade credit policy, every dollar owed by every customer is automatically insured.
Coverage can be subject to:
- Approved credit limits
- Policy deductibles
- Co-insurance
- Waiting periods
- Reporting requirements
- Payment terms
- Customer eligibility
- Country limits
- Exclusions
- Claims procedures
AIG Canada, for example, describes trade credit solutions that can include domestic, export and multinational receivables protection, including protection against insolvency, protracted default and certain political risks.
Trade Credit Insurance Can Also Help With Credit Management
One of the less obvious benefits of Trade Credit Insurance is that it is not necessarily just about paying claims.
Specialist credit insurers can provide information and analysis about the financial condition of buyers.
This can help a business answer questions such as:
Should we increase this customer’s credit limit?
Should we continue offering Net 60 terms?
Should we require a deposit?
Should we reduce our exposure?
Is this customer showing signs of financial deterioration?
This can turn insurance into a broader credit-risk management strategy.
Aon, for example, describes trade credit insurance as providing buyer and country risk information and supporting credit management processes.
Can Trade Credit Insurance Improve Cash Flow?
Yes.
Trade Credit Insurance can help protect cash flow by reducing the financial impact of a major customer default.
It can also potentially support borrowing arrangements because insured receivables may be viewed more favourably by lenders.
BDC notes that businesses may use trade credit insurance to protect cash flow, offer deferred payment terms and potentially use insured receivables in connection with financing.
This can be particularly important for businesses experiencing rapid growth.
A company may be profitable on paper but still experience a cash-flow problem because customers are paying slowly.
Now imagine one of the company’s largest customers becomes insolvent.
That can turn a profitable business into a serious cash-flow problem very quickly.
Is Accounts Receivable Coverage the Same as Trade Credit Insurance?
Not necessarily.
This is where businesses and even insurance professionals need to be careful.
The terminology varies throughout the insurance industry.
Some specialist insurers use “Accounts Receivable Insurance” as another name for Trade Credit Insurance. Atradius, for example, explicitly states that Trade Credit Insurance is also known as debtor insurance, export credit insurance and accounts receivable insurance.
At the same time, commercial property policies may contain an “Accounts Receivable” coverage extension specifically dealing with physical loss or damage to accounts receivable records. The Hartford describes this form of coverage as protection when billing records are damaged or destroyed by a covered event and specifically states that it does not cover ordinary customer non-payment when the records remain intact.
Therefore, never rely solely on the name of the coverage.
Read the policy wording.
That is the safest approach.
The Important Insurance Question: What Risk Are You Trying to Insure?
Before purchasing coverage, ask:
Is my concern that my accounting records could be destroyed?
If yes, review your Commercial Property Accounts Receivable Coverage.
Is my concern that a customer may not pay me?
If yes, investigate Trade Credit Insurance.
Is my concern that a major customer may go bankrupt?
Trade Credit Insurance may be appropriate.
Is my concern that a foreign customer may not be able to pay because of political or country risks?
Ask about Export Credit Insurance and Political Risk Coverage.
Is my concern that my business will lose income following a covered property loss?
You may also need to review Business Interruption Insurance.
These are different risks and potentially different insurance solutions.
Who Should Consider Trade Credit Insurance?
Trade Credit Insurance can be particularly valuable for businesses with significant B2B receivables.
Potential candidates include:
- Manufacturers
- Wholesalers
- Distributors
- Importers
- Exporters
- Construction suppliers
- Building material suppliers
- Equipment dealers
- Technology companies
- Professional service companies
- Staffing companies
- Transportation companies
- Agricultural businesses
- Food distributors
- Pharmaceutical and medical suppliers
- Businesses selling products on Net 30, Net 60 or Net 90 terms
The more dependent a company is on a small number of large customers, the more important credit concentration risk can become.
What Does Accounts Receivable Coverage Usually Protect?
A commercial property Accounts Receivable extension may respond to financial losses resulting from physical loss or damage to the records needed to establish receivables.
Depending on the wording, it may include:
Amounts due from customers that cannot be collected because of the covered loss
Additional collection expenses
Interest charges associated with financing impaired collections
Reasonable expenses required to reconstruct accounts receivable records
The precise coverage varies by insurer and policy.
A Canadian commercial insurance policy example expressly describes Accounts Receivable coverage as applying to direct physical loss or damage to accounts receivable records and provides for certain uncollectible amounts, additional collection costs, interest and record reconstruction expenses.
What Accounts Receivable Coverage Does NOT Mean
Having a $1 million Accounts Receivable limit on your commercial property policy does not necessarily mean you have $1 million of protection against customer bankruptcy.
This is a critical distinction.
For example:
Your business has $1 million of accounts receivable.
Your commercial property policy has a $1 million Accounts Receivable limit.
Your largest customer becomes bankrupt and owes you $400,000.
You should not automatically assume the $400,000 is insured.
The policy may be designed to respond only where a covered physical loss damages or destroys your accounts receivable records.
If your records remain intact, the problem may be customer credit risk, not record loss.
For customer credit risk, you should discuss Trade Credit Insurance with a qualified commercial insurance broker.
Accounts Receivable Insurance vs. Trade Credit: A Simple Way to Remember
Think about the two coverages this way:
Accounts Receivable Coverage
“I cannot collect because my records were damaged or destroyed by a covered loss.”
Trade Credit Insurance
“I cannot collect because my customer has failed to pay.”
That simple distinction can help business owners understand why the two coverages should not automatically be treated as interchangeable.
Why a Commercial Insurance Review Matters
Every business is different.
The appropriate solution depends on:
- Annual sales
- Accounts receivable balance
- Customer concentration
- Industry
- Average payment terms
- Domestic versus international sales
- Largest customer exposures
- Credit history
- Loss history
- Contract terms
- Financial strength of customers
- Financing arrangements
- Commercial property policy wording
A business with $10 million in annual sales and $2 million in receivables may have a very different risk profile from a business with $10 million in sales but customers who pay immediately.
Likewise, a business with 500 customers owing $10,000 each has a different concentration risk from a business with two customers owing $1 million each.
Frequently Asked Questions
Is Accounts Receivable Insurance the same as Trade Credit Insurance?
It depends on the terminology being used.
Some specialist insurers use “Accounts Receivable Insurance” to describe Trade Credit Insurance. However, an Accounts Receivable extension under a Commercial Property policy can have a completely different purpose—protecting against certain losses caused by physical damage to accounts receivable records.
Always review the actual policy wording.
Does Accounts Receivable Coverage protect me if my customer goes bankrupt?
Generally, a standard commercial property Accounts Receivable extension is not designed for ordinary customer bankruptcy or bad debt.
Customer insolvency is generally a Trade Credit Insurance issue, subject to the policy terms and approved credit limits.
Does Trade Credit Insurance protect all my invoices?
Not necessarily.
Coverage can be subject to approved credit limits, policy conditions, deductibles, co-insurance, waiting periods and other requirements.
Can small businesses buy Trade Credit Insurance?
Yes. Trade credit solutions are available to businesses of different sizes, although suitability depends on the company’s sales, customer concentration, payment terms and risk profile.
Is Trade Credit Insurance only for exporters?
No.
Trade Credit Insurance can be used for domestic B2B transactions as well as international sales. EDC specifically offers export credit insurance, while private insurers offer domestic and multinational solutions.
Does Trade Credit Insurance cover slow-paying customers?
Potentially, depending on the definition of protracted default, waiting period and other policy conditions.
The policy wording should always be reviewed before assuming that an overdue invoice is automatically covered.
Protecting Your Business Starts With Understanding the Risk
Your accounts receivable may be one of the largest assets on your balance sheet.
But there is an important difference between protecting the records that document your receivables and protecting the receivables themselves against customer credit risk.
A Commercial Property Accounts Receivable Coverage extension may help when a covered physical loss damages or destroys the records required to collect money owed to your business.
Trade Credit Insurance, meanwhile, is designed to address the risk that customers fail to pay their commercial debts because of covered insolvency, default or other insured events.
Neither coverage should be purchased simply because the name sounds appropriate.
The right question is:
“What event could cause my business to lose this money?”
If the answer is a fire, theft or other covered physical loss that destroys your accounts receivable records, your commercial property Accounts Receivable Coverage should be reviewed.
If the answer is customer bankruptcy, insolvency or non-payment, you should explore Trade Credit Insurance.
If your company has significant accounts receivable exposure, particularly from a small number of large customers, a review with a knowledgeable commercial insurance broker can help determine whether your existing program addresses the actual risk.
At Aaxel Insurance Brokers, we help Canadian businesses review their commercial insurance programs and identify potential gaps between their property, business interruption, liability and specialized insurance coverages.
If your business extends credit to customers, don’t assume that an Accounts Receivable limit on your commercial property policy automatically protects you against bad debt.
