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Credit insurance: an effective shield against commercial non-payment

By Yasmine EDDAM5 April 2025

Unpaid invoices are a constant threat to the financial health of any business. An unpaid invoice can weaken your cash flow, compromise your investments and, in the most serious cases, threaten the very survival of your business. In the face of this risk, credit insurance is a particularly suitable protection tool. This article introduces you to this often little-known mechanism, which can prove decisive in securing your company's development.

Understanding credit insurance

Credit insurance is where a creditor takes out insurance against the risks arising from granting credit to its customers. In more concrete terms, it enables your company to protect you against non-payment of trade receivables.

The different forms of credit insurance

There are three main categories of credit insurance:

Insolvency credit insuranceThis is the most common form, and guarantees the creditor against the insolvency of the debtor, either established by the court or presumed after the expiry of a waiting period.

Downstream insuranceThis is the insurer's undertaking to a creditor to pay the amount due immediately if the debtor fails to pay on the due date.

Bond insurance is a system whereby a debtor, unable to provide a guarantee to his creditor, substitutes a "surety insurance" to guarantee his own commitments.

Credit insurance should not be confused with other mechanisms such as factoring or bank guarantees. Its specificity lies in the pooling of risks and the prior assessment of customer creditworthiness.

A special legal regime

An important point to note is that article L. 111-1 of the Insurance Code expressly states that credit insurance is excluded from the scope of terrestrial insurance law. It is therefore governed mainly by the ordinary law of obligations, which leaves the parties considerable contractual freedom.

How credit insurance works

Credit insurance is based on a number of fundamental principles that determine its effectiveness and limitations.

The principle of globality

The insurance must cover the entire commercial activity of the insured, who cannot select risks as he sees fit. This essential principle enables the insurer to avoid anti-selection of risks, where only doubtful debts are offered.

The cover therefore relates to the policyholder's entire turnover or to a homogeneous fraction of it (for example, a sector of activity). This global approach allows risks to be effectively pooled and a reasonable premium rate to be applied.

Customer approval

According to this central principle, you must obtain the insurer's approval for customers with whom you wish to do business on credit above a certain amount.

Contracts generally make a distinction:

Unnamed customers, for whom the policyholder is not required to apply for approval before granting them credit below a certain threshold (e.g. €4,600).
Named customers, for whom an application for approval is required, with the insurer analysing the customer's financial situation before granting cover.

The insurer retains the prerogative to refuse, reduce or withdraw its approval depending on changes in customer solvency. This clause is not considered potestative by case law, as it depends on objective circumstances subject to judicial review (Civ. 1re, 22 Nov. 1989, no. 87-19.149).

Percentage cover and excesses

The insurer guarantees the loss resulting from the debtor's insolvency, but the insured party always bears the final cost of the claim.

The amount of the indemnity corresponds to the product of the loss and the percentage of cover. This percentage varies according to the type of customer:

For named customers: between 75% and 85% of the receivable
For unnamed customers: between 50% and 70%

In addition to this indemnity, there is usually a compulsory overdraft, which the policyholder is not allowed to cover with another insurer. This mechanism encourages the policyholder to take responsibility and not grant credit too easily.

Concrete benefits for your company

Credit insurance offers much more than just compensation in the event of non-payment.

Securing cash flow

The first advantage, and by no means the least, is financial predictability. If a major customer defaults, your cash flow will not suffer the sudden shock of non-payment, preserving your capacity for investment and development.

For many companies, trade receivables represent up to 30% of their assets. The default of a major customer can therefore lead to serious financial difficulties, or even bankruptcy. Credit insurance is an effective defence against this risk.

Prevention services and commercial intelligence

Credit insurers have extensive databases on the financial health of companies. They closely monitor general and sectoral economic activity, know the financial situation of their policyholders and keep abreast of the latter's operating characteristics and accounting position.

This information represents a considerable advantage for the insured company, which benefits from a professional analysis of customer risk that it would not necessarily have the resources to carry out in-house.

Collection assistance

In the event of non-payment, the credit insurer generally has a mandate to recover the debt. This intervention, which can be amicable or contentious, saves you from having to mobilise your internal resources for this often time-consuming and delicate task.

Tax optimisation

Credit insurance premiums are deductible as an operating expense when calculating taxable profits. This deductibility is a significant tax advantage compared with other customer risk management methods.

When and how to take out credit insurance

Not all businesses have the same interest in taking out credit insurance. Your decision will depend on a number of factors.

Assessing the opportunity for your organisation

Credit insurance is particularly relevant in the following situations:

Your company grants long payment terms
Your customers are concentrated and represent significant volumes
You operate in a sector with a high default rate
You want to develop your business in complete safety

Conversely, it may be less useful if your sales are widely dispersed over many customers with low amounts, or if your business is mainly settled in cash.

The underwriting process

To take out credit insurance, you will need to provide the insurer with detailed information about your business in a document called a "confidential insurance proposal":

The nature of your customer base
The breakdown of your sales
The number of customers granted credit
An estimate of the main loans
Your balance sheets and sales figures for the last few years
The amount of disputed or recently lost receivables

This information will enable the insurer to assess your risk and determine the contractual conditions best suited to your situation.

Contractual points of vigilance

When negotiating the contract, pay particular attention to the following points:

The definition of insolvency (judicially established or presumed after delay)
Waiting periods before compensation
Exclusions from cover
Reporting obligations during the term of the contract
Conditions for revising or terminating cover

Cost and return on investment

The premium rate depends on a number of factors: your sector of activity, the size and nature of your customer base, the breakdown of your turnover according to the terms of credit granted, your history of losses, the economic climate, etc.

The cost must be put into perspective with the real risk level of your customer portfolio and the potential financial consequences of a significant non-payment.

Claims management and compensation

If a customer defaults, there are a number of steps involved in obtaining compensation.

The concept of insolvency

A simple non-payment is not enough to trigger the guarantee. Credit insurance covers the insolvency of the debtor, which may be:

Judicially established (judgment adopting the recovery plan, judicial liquidation judgment, out-of-court settlement agreement)
Presumed after the expiry of a waiting period stipulated in the contract

Waiting period and compensation conditions

Contracts generally provide for a waiting period before compensation is paid:

Six to nine months for customers known as
Three months for unnamed customers

The "small claim" clause can reduce these periods to fifteen days and one month respectively.

As soon as the insolvency provided for in the contract is established, the credit insurer pays the contractual indemnity. In the event of insolvency proceedings, the credit insurer will often make an advance payment in the month following the admission of the claim.

Subrogation and recourse

After compensation, the credit insurer is subrogated to the rights and actions of the insured against the defaulting debtor. This subrogation, provided for in article 22 of law no. 72-650 of 11 July 1972, enables the insurer to attempt to recover all or part of the debt.

The effect of this subrogation relates to all rights and actions transferred to the insurer, including actions in tort or warranties such as the retention of title clause.

Packages tailored to the specific needs of businesses

In addition to traditional credit insurance, special formulas have been developed to meet specific needs.

For large companies: excess insurance

This option is for companies whose equity capital allows them to be their own insurer up to a certain amount. Only an exceptional portion of unpaid invoices is covered by the insurer.

Excess insurance provides for a significant overall annual excess (e.g. €150,000) and an indemnity ceiling (e.g. €900,000). Between these two limits, the insurer undertakes to indemnify claims to 100%.

Simplified offerings for SMEs

Adapted policies have been created for small businesses, with simplified risk declaration, a guaranteed quota of around 70% and a flat-rate premium calculated on turnover according to the claims rate in the business sector.

Our firm has in-depth expertise in credit insurance and can support you at every stage: analysing your needs, negotiating contractual terms and conditions, managing claims and any disputes with the insurer. Do not hesitate to contact us for a personalised study of your situation and the solutions best suited to protecting your business against the risk of non-payment.