Banks Should NOT be Asking for Additional Insured Status

We welcome back to the Academy Journal Christopher Boggs, Chief Consultant with Boggs Risk & Insurance Consulting.

Banks (well, their attorneys or risk managers) are making improper requests of commercial borrowers. I’ve said what I’ve said, and I stand by what I said – unless someone can provide evidence to the contrary.

What leads me to this accusation? Simple, a question from agents that is becoming increasingly common, which reads something similar to this:

“One of our insureds has taken out a business loan, and the bank is requiring our client to name the bank as an additional insured on the general liability policy. How do we do this?”

Why is this request being made by the bank at all? What possible exposure does the bank have as a result of the operations or activities of the borrower?

A loan is an arms-length transaction between two totally unrelated entities, each working for its own self-interest.

There is no contractual relationship between the parties where the borrower has agreed to do anything on behalf of or for the benefit of the lender. And there is certainly no symbiotic relationship between the parties where each requires the existence of the other party in order to exist themselves.

Additional insured status is necessary only when there is either a contractual or symbiotic relationship between the parties. A lender/borrower relationship is neither contractual nor symbiotic.

So, if neither type of necessary relationship exists, why is additional insured status being required? There may be a couple of possibilities:

• The lender is investigating and approving the processes and procedures of the borrowers; or
• The lender is guaranteeing the safety and merchantability of the borrower’s product.

It is doubtful that the lender has the expertise or even authority to investigate and approve business methods, processes and procedures, or the safety of the borrower. There are other entities much better suited and created for these purposes.

Thus, the bank has NO liability exposure from the products, services or operations of the borrower. When there is NO liability exposure, there is no need for additional insured status.

Ultimately, there is no relationship or exposure between a lender and borrower that requires additional insured status. This requirement is wholly improper and unnecessarily problematic.

If you disagree, please give me viable reasons or applicable case law. But even using case law is problematic. Case law is case specific, and creating a broad stroke requirement based on a very specific set of circumstances is wrong! If case law is used to support this requirement, cite the case so it can be reviewed.

Until readers provide reasonable proof otherwise, I stand behind my contention that bank attorneys and/or risk managers are unreasonable, incorrect and hardheaded in their requirement that a borrower name them as an additional insured to qualify for a bank loan. However, if reasonable proof is provided, I will reevaluate my stance.

I look forward to hearing from you.