Bad debt insurance, more usually sold as trade credit insurance, pays when a customer does not. It is unlike most business cover because the insurer takes an active view of who you are allowed to sell to on credit, and that view changes during the year.
Cover is per buyer, not per invoice
The insurer sets a credit limit for each customer, based on its own assessment of that company's finances, and covers sales up to that limit. Sales beyond it are uninsured, and limits can be reduced or withdrawn during the policy year if the insurer's view of a buyer deteriorates. That is the mechanism that surprises businesses: the cover is dynamic, and a customer who was covered last quarter can be uncovered this one, usually with notice that arrives by email and is easy to miss.
What triggers a claim
Two events do. Insolvency of the buyer, proved by a formal process, and protracted default, where the debt is simply unpaid for a stated period beyond its due date. Policies set a waiting period before a protracted default claim can be made, and there is normally a first loss retention the insured carries. The cover is therefore not a guarantee of payment; it is a transfer of the large and unexpected losses while leaving the ordinary friction of collections with the business.
The conditions that decide the claim
Credit insurance carries more procedural conditions than most covers. Reporting overdue accounts within a stated number of days, stopping further deliveries to a buyer once a debt is overdue, following the agreed collections process, and not varying payment terms without consent are all typical. A business that keeps supplying a struggling customer out of loyalty has usually stepped outside the policy at exactly the moment it needs it.
Whole turnover, key accounts or a single buyer
The market offers whole turnover policies covering the ledger, key account policies covering the largest buyers, and single buyer or single contract cover for one concentrated exposure. Whole turnover is cheapest per pound of cover and requires declaring the whole book; single buyer cover suits a business whose risk is one customer representing most of its sales. The right shape follows from where the concentration actually is, which most businesses can see from their own aged debtors report.
Questions people ask about bad debt insurance
Does bad debt insurance cover any unpaid invoice?
Only sales within the credit limit the insurer has set for that buyer. Sales above the limit, or after it was withdrawn, are uninsured.
What triggers a claim?
Proven insolvency of the buyer, or protracted default where the debt stays unpaid for a stated period. A waiting period and a first loss retention normally apply.
Can the insurer withdraw cover mid year?
Yes. Credit limits are reviewed continuously and can be reduced or withdrawn, usually with notice, which is why the notifications matter.