Credit insurers generally take a broad approach to defining “insolvency” to maximize protection. However, the specific definition of insolvency might vary between insurers and individual policies. Here’s how it’s typically interpreted:
Core Elements:
- Legal Insolvency: Formal insolvency proceedings initiated under the bankruptcy laws of the buyer’s country are included. This covers events like bankruptcy filings, liquidations, or receiverships.
- Inability to Pay Debts: Situations where the buyer demonstrably cannot meet their financial obligations, even if they haven’t entered formal bankruptcy proceedings. Evidence for this might include:
- Extended missed payments
- Dishonored checks or other payment failures
- Seizure of assets by creditors
- Publicly known financial distress
- Cessation of Operations: If the buyer permanently closes their business, rendering them unable to pay.
Additional Considerations:
- Policy-Specific Definitions: The precise language used in your credit insurance policy is crucial. It will outline specific events or circumstances that qualify as insolvency.
- Protracted Default: Some policies include a concept of “protracted default”, where severe delinquency of payment (beyond a certain period as defined in the policy) triggers coverage, even without a formal insolvency declaration.
- Variations Based on Jurisdiction: The legal definitions and proceedings surrounding insolvency can differ across countries. Your insurer will factor that into their coverage for international customers.
Why a Broad Definition is Important:
Credit insurers aim to protect you from the financial consequences of a buyer being unable to pay, regardless of the precise legal term used to describe their situation.
Key Takeaway: Carefully review your credit insurance policy’s terms for its specific definition of insolvency, and consult with the insurer if you have any questions about specific scenarios.