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Form IM 7200 - Accounts Receivable Coverage Form

The IM 7200 Accounts Receivable Coverage Form is a commercial inland marine policy component designed to protect a business from financial loss due to the inability to collect outstanding customer debts because of direct physical loss or damage to its accounts receivable records. This "consequential coverage" means it's not the physical records themselves that are the primary subject of insurance (though costs to reconstruct them are covered), but rather the money that cannot be collected because those records are gone or damaged. The form typically covers the actual sums due from customers that are uncollectible, interest charges on loans taken by the insured to offset these uncollectible amounts while the claim is processed, excess collection expenses incurred due to the loss, and reasonable expenses to re-establish the lost records.

Classes of Business It Applies To

This coverage is crucial for businesses that extend credit to their customers and therefore maintain accounts receivable records. If these records are destroyed, the business might be unable to prove who owes them money and how much. Examples of businesses that would benefit from this coverage include:

• Wholesalers and Distributors: These businesses often have many credit-based transactions with numerous retailers.
• Manufacturing Companies: Manufacturers frequently sell to other businesses on credit terms.
• Service-Based Businesses: Companies providing professional services (e.g., consulting firms, marketing agencies, repair services) that bill clients after services are rendered. For instance, a content agency with multiple unpaid invoices would have a significant accounts receivable exposure.
• Medical and Dental Practices: These entities often have substantial receivables from patients and insurance companies.
• Retailers with In-House Credit: Businesses that offer their own credit accounts to customers.

Essentially, any business that doesn't receive payment upfront for all its goods or services and relies on records to collect future payments should consider this coverage. It's particularly important for businesses that rely on a few key customers for a significant portion of their revenue or those operating on thin profit margins.

Special Considerations

There are several important points to consider when utilizing the IM 7200:

• Covered Causes of Loss: The form typically covers direct physical loss or damage to accounts receivable records from perils not specifically excluded. For example, if a fire destroys paper records or a burst pipe causes water damage to electronic records, the resulting inability to collect debts could be covered.
• Exclusions: Common exclusions might include loss due to bookkeeping, accounting, or billing errors; alteration or destruction of records to conceal wrongful acts; and certain types of electrical or magnetic damage to electronic records. It's also important to note that coverage generally doesn't apply to records stored away from the premises described in the declarations unless specified.
• Reporting vs. Non-Reporting: The coverage can be written on a non-reporting basis with a fixed limit or on a reporting basis where the insured periodically reports their outstanding accounts receivable values. The reporting option is beneficial for businesses with fluctuating receivable amounts.
• Record Duplication: Insurers may offer premium credits if the insured maintains duplicate records and stores them separately (e.g., off-site or in a separate fire division). This significantly reduces the risk of being unable to reconstruct receivables.
• Valuation: The policy will specify how losses are calculated. Typically, deductions are made for accounts where there is no loss, amounts that can be re-established or collected, an allowance for normal uncollectible accounts (often based on the prior 12 months' experience), and unearned interest and service charges.
• Requirement for Physical Loss: It's crucial to remember that the inability to collect must stem from direct physical loss or damage to the records. Simply being unable to collect due to a customer's bankruptcy, without damage to the records, is generally covered by a different type of insurance known as credit insurance or trade credit insurance.

Key Information for Agents and Underwriters

Agents and underwriters should focus on the following when dealing with Accounts Receivable coverage:

• Risk Assessment:
  • Nature of the Business: Understand the client's credit practices, customer base, and typical payment terms. Businesses with a high concentration of receivables with a few large customers may pose a different risk than those with a diverse customer base.
  • Record Keeping Practices: Evaluate how the insured maintains their accounts receivable records. Are they paper-based, electronic, or a hybrid? How often are backups made, and where are they stored? Stronger controls and off-site backup can lead to more favorable terms or pricing.
  • Fire and Water Damage Exposures: Assess the physical location where records are kept. What are the fire protection measures (e.g., fire-resistant safes or cabinets)? What is the exposure to water damage (e.g., from burst pipes or flooding)?
  • Historical Bad Debt: Review the insured's history of uncollectible accounts to establish a baseline for the "normal" level of bad debt.
• Pricing and Limits:
  • The premium for non-reporting forms is typically based on the limit of coverage selected for each premises. For reporting forms, it's often based on the average of reported accounts receivable values.
  • The limit of insurance should be adequate to cover the maximum potential uncollectible amount, plus expenses for record reconstruction and excess collection costs.
  • Deductibles are generally not applicable to Accounts Receivable coverage under some forms.
• Coverage Gaps:
  • Be aware that standard property forms (like the Building and Personal Property Coverage Form) may offer limited coverage for accounts receivable, often restricted to the cost of blank media and transcribing from duplicates. The IM 7200 provides much broader consequential loss coverage.
  • This form does not cover customer insolvency or unwillingness to pay if the records are intact. For that, trade credit insurance is needed.
  • Losses due to cyber events like hacking or viruses that damage electronic records may be covered, but specific policy language should be reviewed, especially concerning exclusions for electrical or magnetic injury to electronic recordings unless certain conditions are met.
• Underwriting Guidelines:
  • Insurers will typically require a completed application detailing the amounts of receivables, how records are stored, and any protective measures in place.
  • The Commercial Inland Marine Conditions Form (e.g., CM 00 01) and Common Policy Conditions (e.g., IL 00 17) are usually issued in conjunction with the IM 7200.
  • Consider the quality of the storage containers for records if specified in the declarations.

The IM 7200, when properly underwritten and explained, provides vital protection for a business's cash flow by safeguarding against the potentially catastrophic impact of losing its ability to collect on outstanding debts due to physical damage to its financial records.