Discretionary credit limit
The amount up to which a trade credit policyholder sets cover on a buyer itself, without a named limit from the insurer, provided it meets the criteria written into the policy.
An electrical wholesaler has 1,200 customers, eight hundred of them tradesmen who buy 3,000 euros a quarter. It is not going to request a named limit for each. Its whole turnover policy grants it a discretionary credit limit: up to 20,000 euros per buyer, an amount set in the schedule, it covers itself, with no approval, as long as it meets the policy's criteria on the day of shipment. The two most common are payment experience, the buyer having already paid a comparable amount without incident in the past twelve months, and a favorable report from a credit agency no more than a few months old. Many policies tier them: a first band on a report alone, a higher band with payment experience. The French market says limite discrétionnaire. The mechanism is delegated judgment, and the insurer takes it back quickly. The discretionary limit falls away as soon as the insurer has refused, reduced or canceled a named limit on the same buyer, as soon as an overdue has been notified on it, and generally for buyers related to the insured. It does not stack with an approved limit: the day the insurer grants one, that is the limit that applies. Proof is the weak spot. At claim time the insurer checks that the condition was met on the date of each shipment, not afterwards, and a credit file with no payment record or dated report cannot be defended. Hence the receivables management audits some insurers carry out before granting a high discretionary ceiling, or raising it at renewal.
Textbook case: the policy grants a 7,500 euro discretionary limit on a favorable report less than six months old, raised to 20,000 euros if the buyer has paid at least 10,000 euros with no delay over 30 days in the past twelve months; 90% insured percentage. Three buyers fail. A had paid 14,000 euros during the year, with 18,000 euros outstanding: an indemnity of 0.9 x 18,000 = 16,200 euros. B, a new customer, has only a favorable report, with 12,000 euros outstanding: cover capped at 7,500, an indemnity of 6,750 euros. C had been refused a named limit three months earlier: nothing. On 18,000 + 12,000 + 9,000 = 39,000 euros outstanding, the insured collects 22,950 euros.
discretionary credit limit, DCL, discretionary limit, unnamed buyer cover
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