An Agreement to Provide an Insurance Policy
An Agreement to Furnish an Insurance Policy is precisely that: an agreement between two or more parties concerning the provision of insurance coverage. Its purpose is to ensure that an insurance policy is issued for the benefit of named parties in a contract. The existence of such an agreement is important as it may establish contractual obligations between the parties with respect to the procurement and maintenance of an insurance policy .
Agreements to furnish an insurance policy are common in many different areas of the law; some examples include corporate mergers, shareholder matters, lending agreements, as well as real estate purchases. However, agreements between franchisors and franchisees, as well as agreements between lessors and lessees for the provision of insurance policies, are some of the more prominent uses for agreements to furnish insurance policies in the franchise and real estate industries.
Essential Aspects of the Agreement
An agreement to furnish an insurance policy typically need not be in writing and may be enforceable even though its terms are not clearly established. However, it will generally include the following terms:
- Coverage- The insurance policy must provide coverage to the insured. While a party may agree to "furnish" the policy, the policy must actually be in place before enforcing the agreement-to-furnish agreement.
- Sufficient Coverage- The policy must provide sufficient coverage to cover the contractual obligation that is being provided to the third party.
- Policy Limits- The policy must contain at least sufficient policy limits to cover the anticipated liability arising from the underlying contract.
- Compliance with Final Deadline – The agreement to furnish the policy must set a final deadline by which the policy must be obtained.
Importance of the Agreement for Businesses
Businesses may require an agreement to furnish an insurance policy for several reasons. The most common is risk management. When a business wishes to protect certain interests but does not want to purchase a policy for a whole host of reasons (the cost may be prohibitive, the coverage needed may be minimal, etc.), it may still want to require that a party has a policy in place and the the carrier be notified at some point.
Sometimes businesses are involved in a series of ongoing contracts that each require similar agreements. Even when a new contract is signed, the terms might be exactly the same as the last. To save time, it may be easiest just to require that the insurer be notified of the contract and provide it with the details from that point on (or at least at the end of the contract term).
Additionally, some businesses only want to be alerted to changes in their agreements. They may already have a policy in place and just want to make sure that if anything happens, they will know whether or not someone is covered in the event of a lawsuit. Finally, in some cases the obligations to consider are so slight that having a rider cover the policy is simply easier.
While such an agreement is not essential, it can be a useful tool for maintaining order in a complex series of agreements. Even once some policies have been issued, a business may need to review them from time to time and to determine which policies should remain in force and which should be discontinued.
Legal Consequences and Compliance Issues
Failure to comply with an agreement to furnish insurance policy could present a number of problems. If the insured is the beneficiary, he or she may not be able to pursue the insurance company if the policy is never furnished. The liability policy ordinarily would not be a third-party beneficiary contract. Although the agent promises that the liability policy will be issued and that the premium will be deducted from the annuity or other bank account, if the insurance policy is never issued, the purchaser would be forced to pursue a complaint against the insurance agent or solicitor.
Moreover, there may be some commercial context in which the insurance policy could arguably be converted but whether the averment of a policy of insurance could stand alone without any other averment that the policy of insurance was covered by some agreement to furnish becomes a debatable legal question.
If the insurance company has issued the policy but the insurance company does not provide the policy to the insured, the problem may be more easily resolved by a request for the policy in writing pursuant to 73 P.S. §183 as there would then be a claim against the insurance company for failure to meet its contractual duty under Statute. The insured would also have a claim for breach of contract but might have to demonstrate that the terms of the policy were in fact different than the insured’s expectation in light of the terms of the contract.
The general rule for the failure of an insurer to provide a copy of a contract of insurance is as follows:
The insured is entitled to have a copy of the insurance policy upon taking out insurance. A request for a copy of the policy from the insurer shall be made in writing. The insurer shall forward a copy of the policy or evidence of the policy to the insured within 30 days of receipt of the request. Mailed notices shall be deemed received on the date received at the agent’s office. Written requests sent to the insurer by other than registered mail shall be deemed received as of the date of actual receipt.
In the context of an annuity, the insurance company may argue that it fully performed the contract with the insured purchaser at the time that it paid the first premium and issued the policy. Whether the insured could avoid arbitration by arguing that the failure to furnish the copy of the policy constituted a waiver of the arbitration clause is an open question that has not yet been addressed by the Pennsylvania courts.
Creating and Notarizing the Agreement
Even though much of this agreement is one-sided in favor of the lender/owner — at least in its initial form — it can be used to negotiate mutual protections:
- When lender/owner is obtaining flood insurance, any deductible and/or limit should be set high enough to avoid every loss suffered below such amount so the policy will not be burdensome for the borrower.
- Lender/owner should consider waiving through its agent an audit of the premium expense and/or limiting of the cost of the appraisal in recognition of these parties’ long standing relationship.
- Borrower should avoid giving up waiver of a lender’s or owner’s obligations to carry insurance on real property.
- Borrower should avoid making representations regarding doing anything "at is expense," especially if the payment of premiums is to come from escrow funds, which are not necessarily the borrower’s money but that of another party.
- Some lenders/owners wish to negotiate less than a one-year commitment because of the difficulty arising from audits and/or premiums too costly for the rates due in a year.
- Privacy laws with respect to confidentiality of the account should be used to prevent the insurer from sharing information about the account .
Regardless of negotiating power, borrowers and lenders/owners should avoid the following pitfalls:
- A mutual provision should be inserted to clarify that the agreement has been negotiated and is binding.
- Provisions should specify that only the policies approved by the lender/owner should be issued. A lender/owner should avoid a blanket acceptance provision, such as "or its then-current replacement," wherever possible. Such provisions require the borrower to provide the lender/owner with any insurance required under the principal loan documentation without regard to whether the other party agreed to it. This has the potential to create disagreements about what is "required."
- The borrower should not agree to a policy that is already in effect as this may allow the lender/owner to maintain control over all future insurance matters, such as increasing or decreasing the deductible and/or limits throughout the term of the loan, and should be avoided.
- A lender should avoid liability for fire, theft and/or natural disaster during any period that the borrower has foregone the purchase of insurance.
Common Problems and Solutions
An unexpected consequence of executing an Agreement to Furnish Insurance Policy is that it may place additional contractual liability on the property owner, i.e., somewhere in the agreement there may be a requirement that the property owner indemnifies the supplier for certain claims and expenses.
This might not seem like a big issue, unless one of those claims is successfully brought against the property owner because one of the megawatt transformers explodes and costs $10 million to replace. The supplier has fulfilled its agreement and therefore has no further obligations under the contract. The agreement now serves as the basis for a claim for indemnification against the property owner.
It is essential to understand that indemnification is not insurance. An indemnification agreement means the supplier will not be out the $10 million directly; however, it does not mean that the property owner won’t be held responsible for those extra costs when it tries to pass them on to the supplier. So it is always better to know what else could be in the agreement that might make you responsible for something that seems outside the normal scope of liability.
Another common issue is that the form of the Agreement to Furnish Insurance Policy can make a huge difference down the road. It is essential to use the correct version of the agreement, with the appropriate information filled in. A little attention to detail, at the very beginning of the project, could very well save you tens of thousands of dollars later.
One last common issue concerns notice of cancellation and non-renewal. When purchasing insurance, the issue of whether suppliers and contractors are named on the policy should not be overlooked. In the case of liabilities occurring before the policy period, it is essential to make sure that everyone involved is covered, if possible. If the notice of cancellation or non-renewal requirement is not appropriately followed, it will jeopardize your coverage.
The above are just starting points for consideration. There are many other issues, which could vary from contract to contract or business to business. It is worth repeating that, for any issues involving agreements to furnish insurance policies, you should seek the advice of counsel.
Practical Examples and Scenarios
To appreciate the myriad of real-world scenarios involving agreements to furnish insurance policies, it is worthwhile to review the following examples:
Auto Dealership Fraud: An auto dealer not only went out of business while owing millions to dozens of lenders, but also had an agency agreement with an insurance agent. The recruiter of the agent had, unbeknownst to either the agent or the dealership, created a fake dealership in the name of the auto dealer in order to obtain unauthorized insurance coverage for the dealer’s vehicles. Apparently "too good to be true" really is an apt cliché. The borrower was left without coverage for millions of dollars’ worth of its cars, trucks and vans. Many of the victims were small lenders who were left holding the bag.
Undisclosed Insurance Fraud: Several life insurance policies obtained by insureds from the same agent were later determined to have been obtained through fraud. The insureds were not permitted to see the applications for insurance even though the bank that issued the loan required it as a condition of the loan . In reviewing the fact patterns, however, a suspicious pattern of data on the applications gave rise to additional discovery. A common trait of the insurance policies was that the loans were paid off under conditions that were favorable to the lenders or debtors.
Fraudulent Property Claims: Major structures in the downtown areas of Baltimore, Maryland, and Washington, D.C., suffered water damage consisting of damaged carpets, damage to ceilings and walls, mold, mildew, and damage to water heaters. It was later discovered that the damage occurred not because of a sudden accidental break or leak in the plumbing, but simply because of the age of the buildings. Even though a catastrophic loss was avoided, the damage was extensive. Forensically speaking, the cause was not too difficult to discover. The difficult part was apportioning fault among the various subcontractors hired to perform renovation work in question. The facts turned out to be quite complicated, with a significant amount of discovery required of all of the parties. Ultimately, the Class Action lawsuit that had been filed was settled before trial.