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CALIFORNIA CORPORATE & SECURITIES LAW

Do Indemnity Agreements Constitute Unlicensed And Unlawful Insurance?

Parties to all sorts of agreement negotiate over the allocation of risk.  A seller, for example, might sell goods at a higher price with a full warranty and at a lower price with no warranty. A corporate officer may insist on higher compensation in the absence of an indemnification agreement.  Do these risk shifting bargains constitute unlicensed and unlawful policies of insurance?

The California Insurance Code defines “insurance” as “a contract whereby one undertakes to indemnify another against, loss, damage, or liability arising from a contingent or unknown event”.  Cal. Ins. Code § 22.  Under this definition, almost any contractual indemnification provision or risk allocation arguably constitutes insurance.  However, the First Appellate District of the California Court of Appeal has held that courts must look to the “principal object and purpose of the transaction” in determining whether a contract constitutes insurance.  Truta v. Avis Rent A Car System, Inc., 193 Cal. App. 3d 802 (1987).  In Truta, the Court found that a collision damage waiver in a rental car agreement did not constitute insurance.

The Fourth Appellate District of the California Court of Appeal’s recently followed Truta finding that a protection plan provision in a storage agreement did not constitute insurance:

We find Truta on point and persuasive.  The Protection Plan in this case was an addendum to and dependent upon the Rental Agreement.  Without the Rental Agreement, the Protection Plan would not exist and would have no purpose.  Thus, we must look at the Rental Agreement and Protection Plan as a whole.  Looking at the entire transaction between the parties, the principal object or “distinctive character” was the rental of storage space.

Heckart v. A-1 Self Storage, Inc., Cal. Ct. of Appeal Case. No. D066831 (Dec. 30, 2015).

The same reasoning should apply to corporate indemnity agreements.  The purpose and object of these agreements is to secure the services of a director or officer.  They do not exist and would have no purpose if the relationship of director or officer is not established.

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