COVID-19 is causing widespread disruption to businesses in all sectors. In particular, we are seeing temporary closures in the retail and leisure sectors and shutdowns of factories by manufacturing business.

As flows of trade are disturbed, and in some instances, dry up, it seems inevitable that companies and their banks will be looking to their trade credit insurance policies to see where loss can be recovered and what steps they need to take to comply with the terms and conditions of these policies. Here, we review some of the considerations for insurers and policyholders during the current pandemic.

We expect to see a large number of businesses in financial distress over the coming weeks and months. Trade credit insurance issues will most likely arise for companies that have purchased raw materials and components, but who now cannot sell finished product and, therefore, do not have the cashflow to meet their obligations to suppliers. Defaults driven by a collapse in consumer demand may therefore result.

As a first point, insureds must take care that they continue to comply with their obligations under their policies to provide information to their insurers about their buyers. Whilst the specific requirements will vary, broadly, an insured should expect that it is required to disclose to its insurers information that it might have about the solvency of its buyers. Now would be an opportune moment for a careful review of those obligations, particularly to note the exact point at which notification obligations are triggered.

Secondly, there has been much media discussion about whether business interruption insurance will be triggered for UK businesses for periods where government has “advised” closures, rather than mandated them. We do not expect any similar issues to arise in the content of trade credit insurance, which typically has broad insuring clauses that are not concerned with the reason for default by a buyer. Instead, cover under trade credit policies is circumscribed by the use of exclusions. However, trade credit policies do not typically exclude losses arising from pandemics, save where they result from biological warfare, which would bring a pandemic within the scope of a biological weapon exclusion. We expect therefore that companies facing losses from COVID-19 should, therefore, be able to rely on their trade credit insurance.

Finally, specialist trade credit insurers have experience of mass defaults from the time of the global financial crisis, with the lessons learned feeding into changes to policy wordings and practical changes to how insurers deal with defaults, insolvencies and claims. The ability to provide extensions for payment is embedded into policies, providing for a grace period whilst the global economy is put “on ice”. Policyholders should review their policies to see what extensions can be granted and in what circumstances, and what input insurers require at each stage. Policyholders would also be advised to speak with their brokers; in addition to the contractual flexibility already provided, Insurers may be able to waive obligations and/or extend protective terms in individual cases.