How Are the Claim Limits in Trades Insurance Determined?

Trades insurance is a way to protect your company from the problems that can come along with extending credit. It's only natural that you want to offer your customers some type of credit, and it's quite common for businesses of all sizes to allow their customers as much as a year to pay their invoices. However, if you have a client that doesn't pay their invoice and the amount owed is quite large, it could be enough to seriously impact or even destroy your business. The goal of trades insurance is to prevent that type of disaster from happening. When you have trades insurance, you can claim only a certain amount of loss for each of your customers. But how is that amount determined? Find out below. 

The Customer Risk Assessment

When you have trades insurance, your trades insurance provider will perform a risk assessment on all customers. This risk assessment will typically be in the form of a grade, and it's determined based on several factors, including: 

  • How long the customer been in business
  • The financial health of the customer's own business
  • The customer's past business dealings, especially those involving your own company

This grade is then translated into a credit limit for the purposes of claims. Whatever this limit is, it's the maximum amount that you would be able to claim as a loss if the customer were to default on their invoice. Most of the time, businesses who hold trades insurance decide to use that same amount as their customer's credit limit to avoid potential risk. 

What if You Want to Extend More Credit to Your Customer?

If you want to extend more credit to your customer, you are certainly allowed to do so -- it's your business, after all! However, the added risk is also yours. Any amount of credit above and beyond the limit approved by your trades insurance provider will not be compensated in the event of a loss (if the customer were to default on their invoice.) 

If your customer needs more credit but you're reluctant to extend it to them due to their existing trades insurance limit, speak to your trades insurance provider. It's possible that a new risk assessment can be performed, especially if the customer has paid invoices promptly in the past and hasn't had a risk assessment in a long time. This may allow you to get the higher trades insurance limit, which will keep your customer happy. 

Contact a local trades insurance agent, such as those at Northwest Insurance, today to learn more about this type of insurance.