The partial loss, and the application of sums received

After a partial indemnification, a receivable goes on living and sums often end up coming in: a liquidation dividend, an amicable recovery, a successful attachment, a rescheduling instalment. What those sums are applied to looks technical and in fact decides who really bore the loss. Two parties share the same receivable, the insurer up to what it paid, the insured up to what it retained, and nothing in the nature of things says who must be served first. The contract says so, in a clause one never reads before needing it.

Three families of wording exist and they produce very different results on the same facts. The first shares any recovery pro rata to the shares, which is the most intuitive and the rarest. The second applies recoveries first to reimbursing the insurer up to what it paid, the insured being served only afterwards: that is the commonest wording in credit insurance, and it defers the return of the retained share for a very long time. The third, known as insured's first recovery, serves the uncovered share first, on the ground that the insured did not choose to retain it and that it is the worst placed: it exists and can be negotiated.

The arithmetic is always done the same way and should be written out rather than reasoned. Start from the receivable, deduct the indemnity paid, obtain the retained share, then apply the application clause to the amount recovered. On a receivable of one hundred indemnified at ninety percent of a coverage share, the insurer has paid ninety and the insured retains ten. A recovery of thirty splits twenty-seven to three pro rata, or thirty to nil under insurer-first application, or ten to twenty under insured's first recovery. The same receivable, the same recovery, and a twenty point gap in what the insured receives.

One must then know what is deducted before sharing, because that is where the surprises sit. Recovery costs, legal fees, local correspondent charges, translation, are ordinarily taken from the sums received before any allocation, and the insured that did not watch for it discovers a net recovery far below the gross announced. Default interest obtained from the debtor sometimes follows a different regime from principal. And where several receivables on the same debtor are involved, some covered and others not, application between receivables precedes application between parties, which adds a further layer of argument.

One particular case deserves attention because it traps exporters acting in good faith: a direct payment received from the debtor after indemnification. A sum paid by the buyer into the exporter's account no longer belongs to it once the insurer is subrogated, and keeping it, even believing it settles another invoice, is a fault that is sanctioned. The practical rule is to report any receipt from a debtor in claim, without applying it oneself: the insurer says what it is applied to, because it alone knows the file's complete position.

The time factor is added to all this and always works against the insured. Recoveries arrive late, sometimes in fractions, and a retained share served last depreciates by the mere fact of waiting, with no interest compensating it most of the time. That is what makes the application clause heavier than it looks: on a liquidation distributing three dividends over five years, a wording serving the insurer first can mean the insured sees nothing before the last, and therefore in practice never.

The practical conclusion is short. The application clause is read at the same time as the coverage share, because the two together say what the insured will really bear, and a high coverage share with insurer-first application can be worth less than a lower share with pro rata sharing. It is negotiated at placement, never after the loss, when everyone already knows what will come in. And once the loss has occurred, every receipt is reported rather than applied, because subrogation removes from the insured the free disposal of a receivable it still believes it holds.