Accounts Receivable Coverage: Protects Cash Flow When Your Customers Can't Pay
When disaster strikes and your records are lost in a fire, flood, or theft, your business could lose valuable income from unpaid customer invoices. Accounts receivable coverage protects your cash flow when you can’t collect what’s owed—so your operations continue without disruption.
When Accounts Receivable Coverage Makes the Difference
Real scenarios that show exactly how accounts receivable coverage protects your business when the unexpected happens.
Damaged by a Burst Pipe
Chloe, who owns a graphic design studio, arrived at work to discover a burst pipe had soaked her office—including her customer billing files. Her accounts receivable coverage reimbursed the $12,000 in outstanding invoices she could no longer collect, helping her avoid a major cash flow crunch. Instead of chasing down lost payments, Chloe only paid her $500 deductible and was able to focus on running her business as usual.
After a Fire, Records Gone
Javier's custom cabinetry business was impacted by a fire—his computer and paper records of client accounts were completely destroyed. His accounts receivable coverage paid out the $53,000 in receivables that clients still owed, so he could cover payroll and keep projects moving. Instead of weeks of lost revenue and uncertainty, Javier only paid his $1,000 deductible and his business stayed afloat during recovery.
Theft Leaves Vital Records Missing
When thieves broke into an accounting firm and stole client files, the loss was more than just equipment—it meant months of potential income from unrecoverable client invoices. With accounts receivable coverage, $120,000 in lost billings was reimbursed, keeping the business solvent. Instead of facing layoffs or closure, the owner paid a $2,500 deductible and employees kept working with confidence.
Everything You Need to Know About Accounts Receivable Coverage
The complete picture: what's covered, what's not, and how to decide if you need it.
Accounts Receivable Coverage (Plain English)
Accounts receivable coverage pays your business when you are unable to collect money owed by customers because your financial records were lost or destroyed in a covered event, like fire, water damage, or theft. When disaster strikes and you can't prove who owes you, this coverage reimburses your lost receivables up to your policy limit. The key thing to understand is that it protects your cash flow after record loss.
Fine Print That Matters
Deductible: You'll pay a deductible for each claim, typically $500–$2,500.
Limits: You set your coverage limit based on the highest amount of accounts receivable you could lose at once.
Payout Method: Most policies pay the actual value of proven receivables you lost, minus any amounts you recover later.
Conditions: You must prove the loss was caused by a covered peril and make every reasonable effort to reconstruct your records and collect what you can. Coverage applies only to losses due to physical damage or theft, not customer insolvency or disputes.
Accounts Receivable Coverage vs. Other Coverages
Accounts receivable coverage is NOT the same as general business interruption coverage. Accounts receivable coverage reimburses you for proven losses when you can't collect customer payments due to lost records, while business interruption coverage helps with lost profits if you can’t operate after a disaster. You typically need both to be fully protected.
Who Needs Accounts Receivable Coverage?
You typically need this coverage if:
- You extend credit to customers and rely on regular payments to maintain cash flow
- Your business keeps financial records (digital or paper) that could be damaged or lost in a disaster
You might skip this coverage if:
- Your business does not invoice clients or sell on credit—for example, you are strictly cash-based
How Limits and Options Work
Limits should match the total value of outstanding receivables you could lose at once. Deductibles usually range from $500 to $2,500 and affect your monthly premium. Some policies offer extra protection, like coverage for temporary record reconstruction, so review options with your agent.
What's NOT Covered by Accounts Receivable Coverage
This coverage does NOT cover:
- Customer bankruptcy/insolvency: If your customer refuses or is unable to pay, even if you have perfect records, this is not covered.
- Normal bad debts: Uncollected receivables due to slow-paying clients or disputes.
- Non-physical loss: Loss of data or records not caused by a covered peril such as hacking or administrative error.
For these situations, you'd need credit insurance, cyber coverage, or specialized financial products.
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How Accounts Receivable Coverage Actually Works
Understanding exactly what happens when you file an accounts receivable claim—start to finish.
The Claims Process
- Report the Loss: Contact your insurance broker as soon as you discover records have been lost or destroyed due to a covered event. Provide details on the event and the estimated receivable loss.
- Documentation and Assessment: Work with your adjuster to gather any surviving invoices, backup data, or electronic records. The insurer will help estimate the actual amount of accounts receivable lost.
- Efforts to Recover: Attempt to reconstruct your records and collect any payments you can. Your insurer may require documentation of your efforts.
- Settlement: After reviewing your losses, subtracting amounts you recover, and applying your deductible, you’ll receive payment up to your coverage limit—usually within a few weeks.
What You Pay
Your deductible—typically $500 to $2,500 per claim—applies before coverage activates. Your premium covers all approved risks in your tailored policy. The deductible you choose impacts how much you pay each month: higher deductibles mean lower monthly costs, but make sure you can afford your chosen deductible in an emergency.
Timeline
Straightforward claims often resolve in 2–3 weeks, while complex cases involving major record reconstruction may take 30–60 days. Most businesses find the process manageable with support from their broker. The key is prompt, thorough reporting—the sooner you file and provide what the insurer needs, the faster you’ll receive payment.
The Real Cost of Going Without Accounts Receivable Coverage
Understanding the real financial impact: what you pay for coverage vs. what you risk without it.
Office Water Damage
Annual Coverage Cost: $350
Scenario: A burst pipe destroys client invoices worth $11,000.
Without Coverage: $11,000 out-of-pocket
With Coverage: $500 deductible (plus your annual premium)
Protection Value: $10,500 saved in this scenario alone
Post-Fire Record Loss
Annual Coverage Cost: $640
Scenario: Fire destroys your entire billing system and all outstanding invoices total $55,000.
Without Coverage: $55,000 out-of-pocket
With Coverage: $1,000 deductible (plus annual premium)
Protection Value: $54,000 insured—avoids catastrophic business loss
Theft of Important Files
Annual Coverage Cost: $475
Scenario: Office break-in results in stolen digital and paper billing records. $49,000 at risk.
Without Coverage: $49,000 cash flow loss
With Coverage: $2,500 deductible (plus annual premium)
Protection Value: $46,500 protected so your business stays open
The Economic Reality
For most small businesses, accounts receivable coverage costs $35–$55 per month—less than your internet or phone bill. One record-loss incident could cost $10,000–$120,000 or more, setting your business back months or even threatening survival. The math is simple: this coverage pays for itself the first time you use it, and safeguards your business’s financial future in the face of disaster.
4 Costly Accounts Receivable Coverage Mistakes to Avoid
Learn from others' mistakes—avoid these common errors that can leave your business unprotected when you need coverage most.
Underestimating Your Receivables
Many businesses choose a low coverage limit to save a few dollars. If you lose more than your selected limit, insurance won't pay the difference. Instead, regularly review your accounts receivable totals and adjust your coverage as your business grows.
Thinking Digital Records Are Immune
It’s easy to believe cloud backups are always safe, but fire, theft, or accidental deletion can still destroy billing records. Losing digital files in a covered event means your revenue is at risk. Make sure your policy covers both paper and digital records.
Assuming All Unpaid Invoices Are Covered
This coverage only pays when lost records prevent you from collecting, NOT if a client refuses to pay or goes bankrupt. Normal bad debts and insolvencies aren’t covered. Use credit insurance for protection against nonpayment due to client financial trouble.
Waiting Until After a Loss to Add Coverage
Some business owners only consider accounts receivable coverage after disaster strikes. Insurance must be in place beforehand to help you recover. Proactively add it while your records are intact to ensure your business is always protected.
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