Accounts Receivable Insurance
Accounts receivable insurance covers amounts owed to your business by customers that you are unable to collect because your accounts receivable records were damaged or destroyed in a covered loss. When records are lost in a fire, flood, or other covered event, collecting outstanding balances becomes difficult or impossible — and standard commercial property policies do not cover the value of the lost receivables, only the physical cost of blank ledger paper or digital storage media.
What Accounts Receivable Coverage Pays
An accounts receivable policy is designed to protect the income stream that depends on your ability to bill and collect from customers. Coverage typically includes:
- Uncollectible amounts — the outstanding balances owed to your business that you cannot collect because the records were destroyed
- Collection costs — the additional cost of collecting receivables that is greater than normal because of the loss
- Interest charges — interest on any loan you take to offset the impaired cash flow while receivables are being reconstructed
- Reconstruction costs — the cost of attempting to reconstruct accounts receivable records from other sources
The Risk of Lost Records
Many businesses underestimate their accounts receivable exposure because they assume their digital systems provide adequate protection. In practice, physical records are frequently the primary or only complete source of billing information, and even businesses with digital systems may face situations where backups are unavailable, corrupted, or incomplete after a loss. The longer the billing cycle and the larger the outstanding balances a business carries at any given time, the greater the potential accounts receivable loss.
Industry Considerations
Accounts receivable exposure is most significant for businesses that carry large outstanding balances and that bill on extended payment terms — professional service firms, healthcare providers, wholesale distributors, manufacturers, and contractors are examples of businesses where outstanding receivables can represent a substantial portion of current assets at any point in time. The appropriate coverage limit should reflect the maximum balance of outstanding receivables your business might carry, not just an average. Etowah Insurance Group can help you evaluate your receivables exposure and determine whether the coverage in your existing program is sufficient for your business.
