Do You Want a Side Agreement to Go With That Insurance Policy?

In obtaining basic workers compensation and general or auto liability coverage, policyholders may be required to sign separate additional contracts referred to as “deductible security agreements,” “payment agreements for insurance and risk management services,” or “cross-collateralization agreements.” Often, these “agreements” (side agreements) are presented as part of creative premium programs that transfer risk (and eventual claims costs) back onto policyholders. Call them what you will, but side agreements can lead to large additional costs for policyholders and tie up their credit. Side agreements also generally are subject only to limited, if any, state insurance regulation.

For multiple-claim liabilities such as workers compensation or auto-fleet fender benders, insurance companies may offer, in conjunction with side agreements, third-party administrative services with limited risk transfer that may involve significant collateral requirements. For insurance companies, the claim-service element of the business arrangement may be more important economically than the provision of coverage. In other words, the type of coverage at issue can be considered by insurance companies to be excess over the initial (primary) effort to manage claims.

Programs such as “retrospective” or “earned” premium programs may be marketed as money savers, but they generally contain tough provisions in the event of a dispute or nonrenewal. Side agreements are not part of the insurance policy and may not be approved by state insurance authorities or subject to standard legal protections for policyholder consumers.

Insurance consumers would be well advised to make sure all necessary documents are presented and signed before entering into a coverage program. This includes side agreements.