Common elements of agreements to provide insurance

What constitutes an agreement to provide insurance

An Agreement to Provide Insurance is a contract between a party who agrees to make available an insurance policy to a named insured or beneficiary. Often, the party agreeing to provide the insurance is a third party who is not the insurer. For example, a business may agree to provide a specified amount of insurance for a stakeholder in the merger or acquisition of other interests, or may agree to provide an amount of insurance that is reasonable for another party to pay to retain its services. An Agreement to Provide Insurance is used in a variety of circumstances and is typically accompanied by a separate contract that details the terms and conditions of the insurance, including the scope of coverage, policy term, and premiums.
Under an agreement to provide insurance, it is the duty of the party agreeing to provide insurance to purchase a specified amount of insurance and have it issued by an insurer that meets agreed upon criteria . In order to be enforceable, an agreement to provide insurance must contain all necessary and vital particulars for purchase of insurance on the party’s behalf. The underlying risk covered by the contract must also be legal.
Once the insurance is purchased, the purchase is made on behalf of, and for the benefit of, the named purchaser or beneficiary. Depending on the terms of the contract, the purchaser may be able to pursue the provider for further indemnity if the insurance obtained is not sufficient to cover its losses. Alternatively, if the insurance was intended for the benefit of a third party (e.g., a named executive in a business merger), the third party may have the ability to pursue the provider for additional payment or further insurance.
An Agreement to Provide Insurance may be made in connection with a merger, acquisition, investment, employment, termination, or other situation where insurance would be obtained to prevent financial loss to a person or entity.

Elements of agreements to provide insurance

An agreement to provide insurance (as opposed to one which directs an insurer to pay for occurrences or expenditures under an insurance policy) should contain certain essential terms. For example, the parties should be identified; the policy or policies at issue should be listed; the coverage that is the subject of the agreement should be defined, including conditions, exclusions and endorsements; the date or dates of the carrier’s prior acts coverage period should be set forth; the risk (or loss that will not be covered by any of the policies in the schedule of insurance) that the carrier will cover should be described; and the obligations of the parties should be expressed.
The parties to an agreement to provide insurance may be a policyholder and a carrier, or they may be policyholders only. In the latter case, the agreement would compare the insurance programs of the policyholders and would allocate the risk of uninsured loss among them. It could then cancel or rescind the policies that the policyholders bought, as well as eliminate any potential exposure that the insurance brokers or agents faced for those policies. The agreement might be between all of the policyholders or only a subset of them. An endorsement covering the insurance agents or brokers might be added to the agreement.
If the agreement is between a policyholder and a carrier, it often will contain a preamble reciting that the carrier has agreed to provide insurance to the policyholder for one or more years in order to induce the carrier to agree to assume the risk that is the subject of the agreement. The end of the preamble will state that, in consideration of that recitation, the parties desire to enter into an agreement to provide that insurance on the terms provided in the agreement.
An agreement to provide insurance should state the date or dates of the carrier’s prior acts coverage period. The agreement should reserve the right to toll the statutes of limitation, and it should give the policyholder the right to assert claims after the occurrence of the effective date until the claims are resolved.

Types of agreements to provide insurance

A variety of insurance products are sold by licensed agents and brokers. The most common types of insurance include business insurance, health insurance, liability insurance, and property insurance.
Business insurance or commercial insurance is generally sold to corporations, limited liability companies and partnerships. Unlike personal insurance, business insurance can be significantly more complicated. Businesses have various assets that need to be insured, including vehicles, buildings, equipment, machinery and inventory. The types of policies covering those assets may need to be different. A policy covering an office building owned by a business will be quite different from a policy covering a convenience store owned by a business. Policies covering machinery in a factory will need to be designed differently than policies covering the computers at a doctor’s office. And insurance for a fleet of taxis will differ from insurance for a car rental agency. Within the category of business insurance are additional categories. Workers compensation insurance is required for all businesses with employees. Commercial auto insurance is required for all businesses owning or leasing motor vehicles. Errors and omissions and malpractice insurance (sometimes referred to as professional liability insurance) is needed by professionals, including accountants, lawyers, architects and engineers. Directors and officers insurance is needed by boards of directors and officers of corporations. (See D&O Blog) Health insurance is generally offered to employees through their employer’s benefits program. However, self-employed persons can purchase individual health insurance. General liability insurance protects a business from causing injury to another person or property. It usually covers bodily injury (as opposed to intentional harm), property damage, medical payments, and personal injury claims (i.e. reputational harm). Environmental impairment liability insurance is sometimes obtained by businesses whose operations could possibly pollute the environment and cause injury to persons or property. Property insurance protects physical property, like an office building, from fire, theft, smoke and vandalism. Property insurance is purchased by businesses as well as homeowners. Specific policies, like earthquake insurance or flood insurance, are available, but are unnecessarily expensive if purchased as stand-alone policies.

Legislated requirements for agreements to provide insurance

Contracts to Provide Insurance must satisfy the requirements of civil law, including general contract law. Additional statutory and regulatory requirements apply to insurance arrangements. These provisions vary among states.
Applicable insurance regulations typically require a party seeking to offer an insurance product to have reserve assets that back the coverage obligations, whether insurance or a guarantee. The requirements vary among regulatory authorities with respect to the types of assets that qualify as reserve assets and with respect to how their value is to be determined. Certain regulations may require the registration of guarantees (as guarantees, for example, are not regarded as insurance). Some regulations may also require the filing of company financial statements . Some state insurance regulators only consider reserve assets if the guarantee or arrangement is limited to certain insureds (e.g., the parent and subsidiaries of the issuer of the guarantee). Other regulators do not have such a limitation. And still, other regulators may require the establishment of a specific reserve (for example, a "trusteed asset and interest bearing reserve") for such guarantees. There are also differences between how reserve requirements are applied to reinsurance, indemnity letters, and other agreements.
Parties that are considering entering into a Contract to Provide Insurance with a counterparty must be aware of these compliance issues with respect to reporting obligations, maintain its own records, and be able to demonstrate the qualities and characteristics of the reserve assets.

Common issues in agreements to provide insurance

One of the most common challenges with agreements to provide insurance is the failure to accurately describe the risk. This may occur, for example, where a worker is jointly employed by several entities. No matter how much an entity may wish to provide all its employees or partners with insurance, it cannot obligate an insurer to insure a risk that it denies exists or opposes when requested in a particular case. Claims made against an entity that is not covered under an agreement to provide insurance and that are based on acts of a purportedly insured entity arising out of a joint employer/employee relationship are often denied. As the endorsement will be read against the party seeking coverage, some courts will not enforce the agreement if the insured entity is not the actual employer. Careful drafting can avoid such problems. For example, the proposed endorsement can be limited to employee conduct within the scope of employment by the named insured.
Another common issue is whether "new" risks may be insured. An insurer will not cover a risk it denies or opposes. Therefore, an agreement to provide insurance must be clear that the insurer is not obligated to insure risks it does not wish to insure or that potentially involve new risks. Otherwise, an insurer may be required to provide coverage for such risks without its consent. Again, careful drafting can avoid this result. A common solution is to include a restriction in the agreement that clearly absolves the insurer from providing coverage for risks that differ from, or that exceed, any existing insurance obtained or that involve new risks the insurer had not agreed to insure if the insured parties have informed the insurer of such circumstances.

Impact of technology on agreements to provide insurance

One of the most recent developments in insurance agreements is their migration to the cloud. No longer are these agreements set to paper but can now be stored and accessed via digital platforms. Another positive impact of technology in this industry is that agreements are now electronically signed. This digital transformation allows for the documents to be drafted, executed, and performed on a digital platform , eliminating the need for everything to happen physically. One of the areas where technology has proved most helpful is when it comes to tracking and ensuring compliance with these agreements. A recent development in the world of technology has been the emergence of digitally tracked insurance agreements. Companies such as Everledger, who have partnered with insure.io, offer a tracking service for jewelry across its supply chain, from the origin of the diamond to the end customer. This database creates a immutable ledger of information visible for all participants along the way.