As per Investopedia, “A certificate of insurance is a document provided by an insurance company, agent, or broker to prove the existence of an insurance contract between the insurer and the insured. It includes such information as the name of the insurer and insured, the effective date of the policy, and the type of coverage. It can be used as documentary evidence of the insurance contract, but it should not be regarded as the contract itself.” A certificate or insurance is also known as “proof of insurance.”
So why would a credit manager want to know if their customer has sufficient insurance? Simply put, in view of all the recent tornadoes all over the U.S., it wouldn’t take much to put a company out of business should their structure or facility become damaged, in part or full, by a natural disaster, an internal explosion, fire or other calamity.
In other words, say your company shipped its products to the customer last week under normal 30-day terms, and these goods are supposed to be used in its manufacturing process next week. Then if suddenly your customer’s manufacturing facility is severely damaged by a fire causing their operation to come to a completely halt for a considerable period of time, you might not get paid for several months, if at all.
One of the most important insurance coverages to confirm is if your customer has Business Interruption Insurance (BII).
BII is insurance coverage that basically replaces business income lost in a disaster. The event could be, for example, a fire, hurricane, tornado, or other natural disaster. Generally, floods, mudslides and earthquakes are not covered.
BII is not sold as a separate policy but is usually added to the existing property/casualty policy as another line of coverage.
The lost income that is paid by BII is a way for a company to cover operating expenses, move to a temporary location, payroll, taxes, vendor invoices, and loan payments.
If your customer is in an area of the country where tornadoes, hurricanes, and other related natural disasters are becoming a problem, requesting a certificate of insurance that includes BII at a substantial limit, might be a prudent credit due diligence move.
Your comments are most welcome.
Nancy Seiverd, President, CMI Credit Mediators, Inc. (firstname.lastname@example.org)