What is 'Accounts Receivable Insurance'

Accounts receivable insurance protects a company against financial losses caused by damage to its accounts receivable records. This type of coverage is important because the loss of accounts receivable records may render a firm unable to collect money it is owed by customers. 

BREAKING DOWN 'Accounts Receivable Insurance'

Accounts receivable insurance provides protection for a variety of situations involving a company's accounts receivable records. First, it will cover a firm for sums that can't be collected from customers due to records being damaged or destroyed by a covered peril. Accounts receivable coverage will also cover a policyholder for interest charges on a loan obtained to offset uncollected sums.

The coverage also provides reimbursement for collection costs in excess of your normal collection costs. Most businesses incurs regular costs for collecting money owed by customers, such as a book keeper spending a few hours each month reminding customers that payments are due. Accounts receivable insurance covers expenses over and above these normal costs, which come as a direct result of a loss. One example of such a cost is the hiring a temporary worker to assist with collection activities.

Accounts receivable insurance will also cover the costs of reestablishing your accounts receivable records, such as the costs of hiring an information technology consultant that specializes in data loss recovery.

Insurers may include accounts receivable insurance as part of an "extended coverage" endorsement attached to a property policy. However, this insurance may not be the same as a separate accounts receivable endorsement because it may be subject to exclusions that apply to buildings and personal property.

Calculating Accounts Receivable Insurance Losses

The precise manner in which losses are calculated may vary between insurers, but most follow the same general principles. First, an insurer calculates total accounts receivable for the twelve-month period prior to the loss. Next, it divides this sum by twelve, which gives an average monthly receivable. For example, suppose a firm's accounts receivable records are destroyed by a fire on January 1, 2017. The insurer will add up receivables for the period December 31, 2015 to December 31, 2016, and then divides that number by 12. If your annual receivables are $1 million, the monthly average is $83,333.

Since sales can be cyclical throughout a given year, the insurer will then consider whether normal fluctuations in a business caused receivables be to be higher or lower than the monthly average on the date of loss. Considering the timing of the loss, the insurer will then increase or decrease the monthly average. 

  1. Accounts Receivable Aging

    A periodic report that categorizes a company's accounts receivable ...
  2. Loss Development

    Loss development is the difference between the final losses recorded ...
  3. Extra Expense Insurance

    Insurance coverage that provides funds for reasonable and necessary ...
  4. Average Collection Period

    The approximate amount of time that it takes for a business to ...
  5. Insurable Interest

    An economic stake in an event for which an insurance policy is ...
  6. Insurance

    Insurance is a contract (policy) in which an insurer indemnifies ...
Related Articles
  1. Insurance

    Do You Need Casualty Insurance?

    Find out how different types of coverages can protect you and which policy is right for you.
  2. Insurance

    5 Tips For Getting The Right Contents Insurance

    There are many options when it comes to insuring the contents of your home.
  3. Insurance

    What Happens If Your Insurance Company Goes Bankrupt?

    When insurance companies go bankrupt or face financial difficulty, it's bad news for policy holders.
  4. Insurance

    12 Insurance Questions for High Net Worth Families

    High net worth families should ask themselves these 12 questions regarding comprehensive insurance.
  5. Managing Wealth

    6 Insurance Policies That Protect the Wealthy

    Here are six types of insurance that the wealthy use to protect their assets.
  6. Insurance

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
  7. Insurance

    What Is and Isn't Covered by Homeowner's Insurance

    Understanding what your insurance covers can be confusing. Learn what almost all insurance policies have in common so you're prepared if disaster strikes.
  8. Insurance

    4 Types Of Insurance Everyone Needs

    Here are four forms of insurance that are vital to have.
  9. Insurance

    How to Protect Your Income No Matter What

    What does it mean to insure your income? Here are a variety of ways to do it and some insights into when it might make sense to invest in income insurance.
  1. Can companies insure their accounts receivable?

    Understand what credit insurance is and how it protects companies against payment problems they may encounter in trying to ... Read Answer >>
  2. How should investors interpret accounts receivable information on a company's balance ...

    Analyze accounts receivable information on a company's balance sheet carefully. Receivables offer confidence of future cash ... Read Answer >>
  3. What is the formula for calculating the receivables turnover ratio?

    Find out how to calculate the accounts receivable turnover ratio for a business, which should highlight how efficiently the ... Read Answer >>
  4. What are some examples of industries that practice price discrimination?

    Understand the various types of insurance coverage offered in the insurance marketplace, and learn why each policy should ... Read Answer >>
Hot Definitions
  1. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  3. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  4. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
Trading Center