Trade credit insurance
Trade credit insurance is insurance of the payment risk resulting from the delivery of goods and services. It is purchased by businesses, to protect themselves from non-payment due to a customer’s insolvency.
The risk is located in the country in which the insured corporate body is located. This is usually the address of the insured shown on the contract documentation.
Example
A UK bank enters into a financial arrangement with an overseas customer. To protect itself from the overseas customer’s default, the bank takes out a trade credit insurance contract. The peril is the default by the overseas customer and the risk is the loss to the bank. The risk is located in the UK, as this is where the bank is located.
Credit life insurance
Credit life insurance is insurance of the balance of a loan, to be paid off in the event of the borrower’s death or disability. It is purchased by individuals, usually in connection with a large purchase on credit.
The risk is located in the country in which the insured is domiciled. This is usually the address of the insured shown on the contract documentation.
Surety bonds
A surety bond is a guarantee to pay a loss sustained as a result of a breach of contractual or legal obligations. Strictly speaking, a surety bond is a contract of guarantee, not of insurance and involves three persons: the contractor, who puts the bond in place, the employer, who is contracting with the contractor and requires the surety bond to be provided, and the guarantor, who may be an insurer. In the event of the contractor’s default, the guarantor compensates the employer for any losses incurred.
The risk is located in the country in which the contractor is located.
Global contracts
A global contract is an insurance contract insuring risks located in more than one country.
A trade credit insurance contract is a global contract if:
- It covers more than one corporate body, and those corporate bodies are located in more than one country. The insurance contract may define the “insured” as specific named entities or it may state that “insured” includes a named entity’s subsidiaries and associated companies, and those subsidiaries and associated companies are located in different countries.
- It covers a single corporate body and specifically includes that entity’s branches and establishments in different countries.
Premium apportionment
A global contract may give rise to regulatory and tax exposures in different jurisdictions. Compliance with these requirements requires the overall premium to be apportioned between the countries in which risks are located. Guidance on premium apportionment is provided here.
