There’s more than one way to mitigate risk and more than one reason to buy—or strongly resist buying into—credit insurance. Exactly what is an early warning flag really worth?

The benefits of credit insurance are straightforward: It can provide inside credit information on buyers, a cushion in the event of nonpayment and serve as a tool to secure loans. But credit insurance is hardly a free ride and, when the going gets tough, insurers can slow or halt coverage just when a user needs it most. Even its defenders admit credit insurance is just one tool a savvy recycler can use to mitigate the effects of uncertainty.

Exactly what credit insurance provides, or doesn't, is open to interpretation, according to U.S. scrap dealers who spoke with AMM.

Credit insurance is not mostly about getting checks covering unpaid invoices, according to Don Denbo, head of Tennessee Valley Recycling LLC, a Decatur, Ala.-based family scrap company. "The main reason why people should buy this stuff is to serve as a credit department," said Denbo, who also wears the hat of an insurance executive through his position as president of Commercial Insurance Associates, Brentwood, Tenn. "You buy it as a way to help you stay out of trouble in the first place."

It is especially important for smaller companies or those that don't have a credit department, because underwriters can provide crucial information. Simply put: If an underwriter cuts or eliminates coverage for a particular company's receivables, that flags a potentially risky situation.

Once flagged, of course, the extent of future coverage can be expected to shrink. "All the invoices that were shipped prior to the reduction are still insured up to the original amount. They don't limit coverage retroactively," Denbo said. "And you can pick up the phone and call your underwriter and say, 'OK, sport, why is it that you reduced my coverage on Xyz from $1 million to $500,000?' And he's going to have, in most cases, really current, really accurate information on why the credit coverage was reduced."

Furthermore, if a company...