Recovering £420k by debt insurance
Debt insurance helps with one of the greatest challenges for FDs – the risk that a major customer defaults on a debt. Our client supplies major retailers with shoes, a difficult market, but which can provide a good return if handled correctly. A problem has been the insolvency of retailers as product has gone to supermarkets and away from bespoke High Street shoe stores.
Getting debt insurance
There are broadly two forms of debt insurance, one provided by the invoice discounter, and one provided by a bespoke supplier.
Most insurance for an invoice discounting package is straightforward, easy to operate and paid out easier than on bespoke packages. However, premiums are higher, and is based on gross (not net) sales, so beware. An issue is whether to have PCR (pre-credit risk) cover. If you make stock to order (as our client did), then to cover the full risk, PCR cover is needed. Take care: some insurers cover existing debts, some start at the policy date, typically insurers covering existing debts stop cover when you’re no longer insured, whereas others cover debts that occurred during the period of cover.
Beware withdrawal of cover
Insurers can withdraw cover at any time, so in this instance, where one buyer was critical, it came as a shock that within two weeks, the insurer began to withdraw cover. First to go was the PCR, then cover was steadily withdrawn, but the PCR that was established in this fortnight was substantial.
Retention of title
Insurers insist on ROT in any contract. Retailers tend to borrow against stock and because banks order it, conditions detail that the stock is their property regardless of your ROT clauses. Trying to alter terms is difficult and has to be negotiated carefully; large retailers are not used to making exceptions to their terms. However, we successfully negotiated acceptable ROT clauses. Insurance may be invalid without a valid ROT clause, even if the buyer had sold all your stock, so beware!
Stroke of luck
If you have debts that should have been declared to the insurer as overdue, but weren’t, then the insurer has the right to deny the entire claim. Our client had one debt for less than £1,000 that was only three days from being declarable. Luck was on our side!
In the case of the buyer, cover had been withdrawn a month before insolvency. Any credits in this period, for whatever reason, were taken against the debt that was covered. So if you had sent in £10,000 of stock, and it was returned, the credit note would go against your insured balance. When a retailer is near insolvency, they increase the number of credits and this dents any claim. When giving a statement, net off any such credits or you will lose money!
The final outcome
The client recovered £420,000 from a debt of £500,000. Without guidance from FD Solutions the recovery would have been a fraction of this.