The trade credit boundary, and the gap between two policies

The dividing rule is well known and it is correct: on an unpaid receivable, the cause of the default separates political risk from trade credit, never the nature of the debtor. It is enough to sort textbook examples and it is not enough to handle a file, because it answers a question nobody actually asks at the counter. The real question is not which family the event belongs to, but which policy responds. Those are two different questions, and a file can have an unquestionably political cause while falling under no political risk cover the insured actually bought.

To see this, one has to look at the object of each cover, meaning the loss it describes, rather than the event that causes it. A non-transfer cover in an investment policy protects the insured's own funds, held by it, blocked inside the country. A trade credit policy protects a receivable owed by a buyer. An unpaid exporter has no blocked funds: it has a receivable that was not paid. If exchange controls hit the buyer, it is the buyer's funds that are immobilized, not the exporter's, and an investment non-transfer cover does not respond for all that. The right question is therefore not what the cause is, but whose funds the state has immobilized.

Then comes the most expensive structural defect in the arrangement, and it stems from the fact that two contracts written by two different insurers never fit together perfectly. The credit policy excludes default of political origin. The political risk policy excludes the debtor's commercial insolvency. Those two exclusions are drafted separately, with definitions that do not answer each other, and they leave a gap between them. A buyer made insolvent by a state measure falls into it: the credit insurer objects that the cause is political, the political risk insurer objects that the buyer is insolvent, each points to the other, and the insured who paid two premiums discovers it is covered by neither. That gap never shows up at placement, because the two contracts are reviewed one after the other and never one against the other.

Chronology is what settles the question, and it is proved with documents the insured does not hold. If the buyer had already stopped paying before the state measure, the measure caused nothing at all and the file stays commercial. If its position was sound and the measure deprived it of the ability to pay, the cause is political. Insurers will therefore look for the buyer's financial statements from before the event, its balances with other suppliers, its payment incidents. The decisive document in the file belongs to a third party, in a country where financial information is often late and rarely public, and that cannot be repaired once the loss has occurred.

There is nonetheless a route that bypasses this entire discussion, and it is taken too rarely. Many credit policies indemnify protracted default, meaning plain non-payment beyond a given delay after the due date, with no need to establish insolvency and indeed no need to establish any cause. Where the wording allows it, that is the shortest path, because it requires proving neither the debtor's condition nor the origin of its default. One must simply not have closed off that route, which happens as soon as a claim has been notified elsewhere asserting a political cause: a notification is a position taken, and it is later produced against whoever wrote it.

It is also worth knowing that the boundary does not always run between two contracts. Export credit policies frequently distinguish the private buyer from the public or sovereign buyer, and handle the latter in a separate section, with its own terms, its own insured percentage and its own deadlines. The boundary is then internal to a single contract, and the debate concerns which section applies rather than which insurer is on risk. That is good news for the insured, because a single insurer cannot pass the ball to itself, and it is a reason to read the structure of the contract before reading its exclusions.

That leaves the mistake that costs the most, and it is not a classification mistake. The notification deadlines of the two policies do not coincide: in credit, the deadline is often counted in tens of days from the unpaid due date; in political risk, it is built around a much longer waiting period. Pursuing one while letting the other run out is common, apparently logical, and irreversible. A wrong classification can still be argued, before the insurer and then before a judge, and a badly classified file is not a lost file. A notification that was not made within its deadline is never recovered. The operational rule follows, and it admits no nuance: notify both insurers, each within its own deadline, and let them argue between themselves about which one pays.