Agreed Bank Clause in Insurance Policies

 

                                       

                                                 

It is an accepted fact that money is required to run a business and to start a new business/venture. Banks and other financial institutions supply the required amount of funds for the successful conduct /opening of a business.

But how does the bank /financial institution stand to benefit in this exercise more so if the business runs into a loss.? Let us examine the interest of banks and financial institution:

Banks offer loans to the business with a facility of repayment in instalments. Appropriate interest is charged for the loan offered and so on.

Banks also insist on obtaining an insurance policy for the property to safeguard their interest. If the business suffers a loss due to unforeseen events the repayment capacity of the business owner shrinks and the bank loses its chances of loan recovery due this unexpected loss. In such cases insurance policies cover unforeseen losses for a premium and the loss amount is paid by the policy.  

Since the loan repayment of the bank is interrupted and chances of loan recovery diminish, an agreed bank clause is attached to the insurance policy, which covers the mortgaged assets.

The agreed bank clause safeguards the interest of the bank, as any claim proceeds of the policy are first paid to the bank for loan adjustment.

 

What does the Agreed Bank Clause state?

The agreed bank clause in an insurance policy states:

That upon any monies becoming payable under this policy the same shall be paid by the Company to the Bank and such part of any monies so paid as may relate to the interests of other parties insured hereunder shall be received by the Bank as Agents for such other parties.

Once a loan is sanctioned by the bank or financial institution (FI), the bank/FI   insists on an insurance policy with an agreed bank clause attached to it. The name of the bank/FI is added in the clause and the property/business is mortgaged to the bank. Proper hypothecation is made and the interest of the bank is protected when the unforeseen happens.

With hypothecation to bank through agreed bank clause, any sums received by the policyholder from the insurance companies is first adjusted with the bank loan and balance amount is paid to the policyholder.

 AGREED BANK CLAUSE

 It is hereby declared and agreed:

a) That upon any monies becoming payable under this policy the same shall be paid by the Company to the Bank and such part of any monies so paid as may relate to the interests of other parties insured hereunder shall be received by the Bank as Agents for such other parties.

 b) That the receipts of the Bank shall be complete discharge of the Company therefor and shall be binding on all the parties insured hereunder

 c) That if and whenever any notice shall be required to be given or other communication shall be required to be made by the Company to the insured or any of them in any manner arising under or in connection with this policy such notice or other communication shall be deemed to have been sufficiently given or made if given or made to the Bank.

d) That any adjustment, settlement, compromise or reference to arbitration in connection with any dispute between the Company and the insured or any of them arising under or in connection with this policy if made by the Bank shall be valid and binding on all parties insured hereunder but not so as to impair rights of the Bank to recover the full amount of any claim it may have on other parties insured hereunder.

e) That this insurance so far only as it relates to the interest of the Bank therein shall not cease to attach to any of the insured property by reason of operation of condition 3 of the Policy except where a breach of the condition has been committed by the Bank or its duly authorised agents or servants and this insurance shall not be invalidated by any act or omission on the part of any other party insured hereunder whereby the risk is increased or by anything being done to upon or any building hereby insured or any building in which the goods insured under the policy are stored without the knowledge of the Bank provided always that the Bank shall notify the Company of any change of ownership or alterations or increase of hazards not permitted by this insurance as soon as the same shall come to its knowledge and shall on demand pay to the Company necessary additional premium from the time when such increase of risks first took place.

f) It is further agreed that whenever the Company shall pay the Bank any sum in respect of loss or damage under this policy and shall claim that as to the Mortgagor or owner no liability therefore existed, the Company shall become legally subrogated to all the rights of the Bank to the extent of such payments but not so as to impair the right of the Bank to recover the full amount of any claim it may have on such Mortgagor or Owner or any other party or parties insured hereunder or from any securities or funds available.

 

Important points of the clause

Bank will act as an agent where interests of more parties are involved

Banks will receive the monies and issue a full and final discharge to the insurance company and this is legally binding on all parties concerned

Any information regarding the mortgaged property, if given to the bank is sufficient

Banks also means financial institutions and where loan is obtained from financial institutions the name of such financial institution shall appear in the agreed bank clause, in the place of the bank

 

The interdependence of the financial institutions is evident in any business activity. Banking and insurance are the strong pillars for a business and act as a neat blanket for innovation and protection.

 

We at Zen Insurance assist in a complete understanding of the various insurance terms and conditions. Please contact us for assistance.

Disclaimer:   

Zen Insurance is an IRDAI registered broker which facilitates quick & accurate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products.