Alert: Supply chain finance and trade credit insurance in the spotlight | Cooley LLP

As struggling businesses continue to seek liquidity amid the COVID-19 pandemic, many have turned to supply chain finance (SCF) solutions to strengthen their balance sheets and mitigate risk. SCF is a financial transaction in which a bank or a third party provides financing to pay the supplier of goods and services to a business. This type of transaction can benefit all parties: the supplier is paid earlier – but less – than he would otherwise be; the company benefits from extended payment terms and reduced working capital requirements; and the bank or a third party pockets the difference.

However, SCF is not without significant risks for different parties, including the risk that the company will not meet its extended payment deadlines. Commercial credit insurance (TCI) seeks to solve this problem by protecting these parties against losses due to non-payment, and the demand for this type of insurance has continued to increase in recent years. In recent months, there has been significant media coverage regarding both SCF and TCI regarding the non-renewal of a leading firm’s insurance policies and its subsequent insolvency. In view of these developments, it is more essential than ever for policyholders to review their TCI policies to understand – and have the opportunity to improve – any risk of cancellation or early termination, non-renewal provisions (including including the timing of any notice required.) and other potential coverage gaps.

Trade credit insurance

In its most basic form, TCI is insurance against the risk of non-payment. This is an important risk management tool for all types of businesses with accounts receivable, and banks, lenders or investors often require this type of hedging in SCF transactions. Although coverage under a TCI policy generally applies after a customer has been in default for a certain number of days or has filed for insolvency, TCI policies vary widely in terms of policy and l exact extent of the coverage they provide. This includes, inter alia, any coverage for losses resulting from political risks (eg government actions or political unrest); how policies can define “default” or “insolvency”; the number of exclusions of coverage (including the extent of any coverage offered for disputed debts); and any obligation to cooperate and report. Thus, policyholders must be proactive in understanding their coverage and ensuring that it meets the actual needs, structure and capabilities of their business.

Early cancellation, termination and non-renewal provisions

If you were relying on an insured credit limit for a major customer and that insured credit limit was reduced to zero effective tomorrow, how would that impact your business? What if your insurance policies were unexpectedly canceled or not renewed with little notice?

Recent media coverage has highlighted the potential impact that an unexpectedly canceled or non-renewed policy can have on a business, especially one that relies on money from lenders or investors who need money. TCI coverage as a condition of financing. Many policyholders might be surprised to learn that their TCI policy may allow the insurer or insurers to change, reduce or withdraw a customer’s credit limit at any time and for any reason. Considering the significant impact that TCI can have on a business, it may be prudent for a policyholder to take a fresh look at the main provisions of the policy and try to negotiate some limits, such as not being able to change. the credit limit only on an annual basis or after a certain defined notice period. Likewise, policyholders can benefit from negotiating narrow termination clauses and carefully examining the scope of these provisions, especially with regard to false insurance claims or other misconduct. Finally, it is imperative to negotiate provisions relating to the timing of any notice of non-renewal, allowing the policyholder sufficient time to attempt to find alternative coverage.

Conclusion

TCI can be a valuable risk management tool in relation to SCF. However, TCI is not like most insurance policies that a policyholder buys, classifies and only subsequently reviews in the event of a claim. Instead, policyholders should pay close attention to the terms of coverage upfront and continue to act diligently in ensuring that the exact extent of coverage is understood and periodically updated to deal with any. change in credit risk and preserve long-term viability. of the company.

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