Accounts Receivable Insurance: What it is, How it Works
Accounts receivable insurance protects a corporation from financial losses caused by damage to its AR data. This type of coverage is critical since the loss of accounts receivable data may prevent a company from collecting money owed to customers.
How Accounts Receivable Insurance Works
Accounts receivable insurance covers a wide range of events regarding a company's receivable records. For starters, it will reimburse a company for monies that cannot be collected from clients as a result of records being damaged or destroyed by a covered risk. Accounts receivable coverage will also cover the interest charges on a loan acquired to offset uncollected sums.
In addition, the coverage reimburses you for collection expenditures in excess of your typical collection costs. Most firms incur ongoing fees in order to recover money owed by clients, such as a bookkeeper spending a few hours each month reminding customers that payments are due. Accounts receivable insurance covers expenses that occur in addition to these usual costs as a direct or indirect result of a loss. Hiring a temporary worker to assist with collection efforts is one example of such a cost.
Accounts receivable insurance will also cover the price of restoring your receivable records, such as employing an information technology (IT) specialist that specializes in data loss recovery.
Accounts receivable insurance may be included as part of a "extended coverage" endorsement appended to a property policy by insurers. However, because it may be subject to exclusions that relate to structures and personal property, this insurance may not be the same as a separate accounts receivable endorsement.
Calculating Accounts Receivable Insurance Losses
The precise manner in which losses are calculated may vary between insurers, but most follow the same general principles. To begin, an insurer computes total accounts receivable for the twelve months before the loss. The sum is then divided by twelve to yield the average monthly receivable.
Assume a company's accounts receivable records are lost in a fire on January 1, 2022. The insurer will total receivables from December 31, 2020 to December 31, 2021 and divide the total by 12. If you have $1 million in annual receivables, the monthly average is $83,333.
Because sales can be cyclical over the course of a year, the insurer will assess whether regular fluctuations in the business led receivables to be higher or lower than the monthly average on the date of loss. The insurer will then adjust the monthly average based on the timing of the loss.