Nonpayment Insurance and Fraud Prevention: What to Watch For

What Is Nonpayment Insurance? 

Nonpayment insurance protects businesses when legitimate customers fail to pay invoices. Coverage typically applies to insolvency, bankruptcy, or protracted default. 

But fraud is different. If a transaction was never legitimate, most insurers will not cover the loss. That’s why fraud prevention must work hand in hand with nonpayment insurance. 

Why Fraud Matters 

Fraud in trade is widespread. Fake purchase orders, fictitious companies, or collusion inside a buyer’s organization can all create losses that no insurance claim will cover. 

What’s Covered vs. Not Covered 

Covered by Nonpayment Insurance 

• Insolvency or bankruptcy of a customer 
• Protracted default (long overdue invoices) 
• Political risk (in export cases, e.g., currency restrictions) 

Not Covered 

• Fraudulent buyers or fictitious transactions 
• False documentation in trade deals 
• Employee collusion or internal fraud 
• Cyber-enabled invoice scams 

Insurers typically require proof of a genuine buyer relationship and completed shipment before approving claims. 

Fraud Prevention Best Practices 

To ensure losses are insurable, and avoid fraud outright, businesses should build safeguards into their credit processes: 

• Verify new buyers independently through credit checks and references. 
• Use secure payment terms (letters of credit, partial upfront payment) for first transactions. 
• Watch for red flags such as unusually large or urgent orders. 
• Secure documentation with proper bills of lading, invoices, and shipping confirmations. 
• Train staff to identify fraudulent tactics, including phishing or altered invoices. 
• Coordinate with insurers to understand due diligence requirements for claims. 

Why Both Are Needed 

Nonpayment insurance provides stability when a legitimate customer can’t pay. Fraud prevention ensures those losses remain valid and covered under the policy. 

Together they: 

• Protect liquidity against real defaults 
• Keep coverage effective and claims valid 
• Strengthen lender confidence in receivables (see our trade credit insurance overview) 
• Support exporters where both political risk and fraud are rising (our guide to export credit insurance explains more) 

FAQs 

1. Does nonpayment insurance cover fraud?
   No. Policies generally exclude fraud, focusing instead on legitimate customer defaults.
2. What if a fraudulent order goes unpaid?
   Insurers usually deny the claim. That’s why verifying counterparties and transaction details is critical.
3. How can companies reduce fraud risk?
   Implement stronger credit checks, monitor for red flags, and align fraud prevention practices with insurer requirements.

Summary 

Nonpayment insurance covers real credit risk—not fraud. Businesses that combine coverage with strong fraud prevention protect both their receivables and their ability to recover when customers fail. 

Contact us today to learn how we can help protect your business. 

Disclaimer:

This blog post is meant to be informative and provide helpful tips and insights into credit insurance policies.  It is not meant to supersede any policy requirements.  Please consult your credit insurance policy for all requirements including claim filing deadlines and required documentation.

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provide value on numerous levels. As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring a complete understanding of policy wording and delivering excellent responsive service.