Trade credit insurance (TCI) is an important financial instrument that provides coverage to minimize the risk of non-collection of receivables arising from forward sales. It ensures financial stability by protecting companies’ cash flows when they are unable to collect receivables on time for various reasons, such as debtor bankruptcy, insolvency or political risks.
Having a significant place in both Turkish and global markets, trade credit insurance should also be addressed carefully from a legal perspective. Legal risks may arise when insurance policies are not issued properly or the parties do not fulfill their obligations.
Trade credit insurance covers businesses against the possibility of non-collection of their receivables, while providing a secure trading environment with the wider financing options offered by banks.
State-backed trade credit insurance is an insurance product that covers the trade receivables of SMEs arising from their domestic forward sales. It aims to cover buyers’ losses in legal situations such as bankruptcy, creditor composition, liquidation or default. The coverage may include cash, credit card and bank-guaranteed sales, open account sales, sales made against checks or promissory notes. This type of insurance prevents financial losses that may arise from non-collection of receivables. It mitigates the financial risks of businesses and increases their creditworthiness before banks and financial institutions. Thus, the insurance promotes the sales and stable growth of SMEs with new customers thanks to secure trade opportunities.
Trade credit insurance is an insurance policy regulated under Turkish Commercial Code No. 6102 and Insurance Law No. 5684. In this context, policies are binding contracts to identify the rights and obligations of the insurer and the insured.
The trade credit insurance process starts with a risk analysis and policy issuance. Then, the policy takes its final form with the determination of the premium and the insured’s first premium payment. If a covered risk materializes, the process consists of damage notification and payment or rejection of compensation by the insurer.
The insured’s obligations are to specify their risks accurately, to pay the premium and to notify the damages within the relevant legal periods. The insurer’s obligations are to assess the existence of a covered risk and to pay compensation to the insured within the relevant legal periods for the uncollected receivables covered by the policy.
The key considerations for the issuance and management of an insurance policy are as follows:
- Risks included in and excluded from the coverage,
- Detailed analysis of the coverage and exclusions in the policy,
- Coverage limits specified in the policy,
- Declaration obligations of the insured,
- The insured’s compliance with the damage notification periods to claim compensation,
- Attention to the terms of compensation payment.
The most common legal risk in trade credit insurance is the situation where the insured makes incomplete or false statements about its financial status. In case of incomplete information, the insurer may refuse to cover the risk since the insured is obliged to provide all necessary information. Any breach of the insured’s obligations will result in the insurer’s refusal to pay compensation. It is also important that the policy is issued under the guidance of a professional legal advisor. Since some sectors are excluded from policies, the coverage should be carefully reviewed when agreeing to a policy.
Subrogation, a significant concept in insurance law, refers to the insurer’s right of recourse against third parties by acting in place of the insured following the payment of the insurance indemnity. Under Article 1472 of the Turkish Commercial Code, the insurer is subrogated to the rights of the insured in proportion to the compensation paid. In trade credit insurance, the process is as follows: After paying compensation to the insured, the insurer uses its right of recourse against the debtor to recover its uncollected receivables. If the insured collects the same claim from the debtor after receiving an insurance indemnity, they are obliged to reimburse the insurer. Subrogation transfers the insured’s right to sue the debtor to the insurer.
In line with the legal implications of subrogation, the insurer replaces the insured for the amount to be collected from the debtor and takes the necessary legal actions for the collection of the receivable. The insured can no longer claim from the debtor the amount of compensation received from the insurer. However, if the right of subrogation is restricted or canceled in the insurance policy, the insurer may lose its right of subrogation. To exercise its right of subrogation, the insurer must take legal action against the debtor in due time.
In conclusion, trade credit insurance is a critical assurance to minimize the collection risks of businesses. However, it is crucial to pay attention to legal risks and to manage the policy meticulously. State-backed trade credit insurance provides a significant assurance for SMEs in particular, facilitating their access to loans and contributing to their financial stability.
Subrogation of the insurer is an important mechanism in insurance law, which entitles the insurer to the rights of the insured up to the amount of the insurance indemnity. Companies should obtain legal advice during the issuance of insurance policies, know their subrogation obligations and carefully review the coverage to prevent potential disputes.
Ümmühan Sun, Legal Intern
