COVERED RISKS AND CAUSES OF LOSS

Insolvency can be defined as the institution of a judicial or administrative procedure whereby the assets and affairs of a legal entity (the buyer) are made subject to control or supervision by the court or a person or body appointed by the court or by law, for the purpose of reorganization or liquidation of the buyer or of the rescheduling, settlement or suspension of payment of its debts. The precise forms, names and terms of these insolvency procedures vary per country and jurisdiction. Insolvency may in shorter terms be described as the buyer's officially recognized inability to pay its creditors.

Terms and conditions of insolvency cover may vary somewhat from insurer to insurer. For example, it is sometimes required that the debt is lodged in the insolvent estate and acknowledged, before the insurer proceeds to indemnify the insured's loss.

Also, the policy's insolvency cover definition may include events that the trade credit insurer deems comparable to insolvency, for example, an extrajudicial settlement with all or the majority of the buyer's creditors or the execution of a court judgement that fails to satisfy the amount owing or the situation that starting an insolvency procedure against the buyer will have no cost effective result due to the buyer's weak financial position.

The typical character of this cause of loss is that the loss for the insured is definite as soon as the buyer's insolvency has materialized, although the eventual amount of the loss may not be fully known and is depending on the chances of distribution of funds from the insolvent estate. As a consequence, normally all outstanding amounts on the buyer, whether they are already due or not at the date of insolvency, are indemnified under the trade credit insurance policy at once.