Sales Make it Happen
Insurance: Part of Sales Presentation
by Terry Winders, CLP
One of the aspects to explain to a prospect is insurance of what is being leased. It often gives the impression that you are explaining as much as you can and being forthright in your presentation about leasing. It may help you close the sale.
Certainly it will help speed up the funding on the lease transaction.
A Lessor is the owner of the equipment, and as such, he must make sure that the property under lease is safe and secure. However, the Lessee is in control of the asset so the Lessor is considered an absentee owner. Protection of the investment in the leased asset, as well as minimization of user risk, can best be accomplished through the use of insurance.
Insurance is a contractual relationship created when one party, for a stated fee, agrees to reimburse another party for losses caused by certain conditions, which are fully outlined in the policy and any endorsements it contains. Insurance can be a highly complex subject. But it can also be a blessing, and it is an absolute necessity to protect the interests of all parties involved in an equipment lease.
In leasing, two basic types of insurance coverage are needed. The first is property insurance, which provides protection for the leased asset. The second, liability insurance, involves protection against contingent liabilities stemming from the location, use, and maintenance of the equipment.
In conventional lending, or leases that are disguised loans ($1 purchase option) need not be concerned with liability insurance. After all, the lender or the Lessor is not the owner of the asset, and therefore not liable for any damages it may cause, However, as the registered owner during the lease term, an injured party make try to make a claim against the Lessor; so having the Lessee provide liability with an additional insured endorsement to cover court cost is a wise procedure.
A Capital Lease is only an accounting classification and not a legal term.
Also a $1 purchase option fails the article 2A test and is therefore an
Article 9 loan...that does not mean that the injured party does not sue the lessor but there has been no recorded successful litigation against the lessor... but that is why I said to get an additional insured endorsement anyway so the insurance company pays for the defense.
In True Leasing, however, the Lessor does own the asset under lease. Therefore, the Lessor needs to make sure the asset is protected from loss through fire, theft, flood, accident or any other potential threat. Also, as owner, the Lessor may be liable for any damage caused to property or persons by the asset. To protect the Lessor you must make certain that proper and adequate insurance is taken out at the beginning of the lease and is carried throughout the entire lease term. It is the Lessee's responsibility, as the user of the asset, to carry the insurance; but it is the Lessor's responsibility, as the asset owner to make sure the right insurance, with the right endorsements, goes into effect at the proper time and is maintained throughout the lease term.
Suppose that you as Lessor fail to assure that the Lessee carries proper insurance endorsements, and your leased asset is involved in a property or personal injury accident. As the asset owner, the Lessor would most certainly be named in any resulting lawsuits. Even in those instances in which your potential liability might be minor, attorneys' fees and court costs could easily exceed the profit from the entire lease transaction.
The Lease (Master) document should require the Lessee to obtain, maintain and pay for sufficient insurance throughout the entire lease term. It also will be necessary to supplement the master lease with specific liability limits and special requirements for any given asset. It is imperative that no lease be funded until written evidence of proper insurance coverage is provided by the lessee regardless of the asset cost. All assets under lease must be insured even if the cost is under $10.00.
It is important that your customer understand the value of the policy insuring the equipment and that the lease cannot be funded until the insurance certificate is not only properly executed, but received, usually a faxed copy with the original to follow is sufficient.
Terry Winders, CLP
Lease training and Consulting