专业文章内容
Financial leasing insurance and risk control

Author: Hurry Wu

Financial leasing contract refers to the contract under which the lessor, based on the selection of the seller and the leased property by the lessee, purchases the leased property from the seller for the lessee to use, and the lessee pays the rent. Different risk control methods of the projects shall be applied to different leased property involved in financial leasing. Vessel, aircraft and other property financial leasing projects mainly focus on the safety of the leased property itself, so the projects often involve property all risks, machinery damage insurance, operational interruption insurance, theft insurance etc.

While financial lease projects involving movable property mainly focus on the liability for breach of contract of the transaction subjects since the movable property is easy to loss and difficult to control, and the risk is generally avoided by property guarantee, enterprise or personal guarantee. Commercial credit insurance and lessee liability insurance may take as financial instruments of such projects to increase credit and substitute traditional ways of security to some extent.

Business Model

Framework agreement +multiple implementation agreement: In practice, the lessor (the financing party), the seller of the product and the insurance company always enter into a tripartite framework agreement before the launch of financial leasing project, and specify overall objectives of the project and its implementation methods. Then each party will execute purchase and sale contract, financial leasing contract and insurance contract etc. respectively. It’s common that the lessor purchases products from the seller, and finance and lease the products to the lessee; sometimes, it’s permissible for the seller to sell products to the lessor and finance the products and lease back, and then the seller will sublet to the actual lessee.

The effect of the lessor as beneficiary: The “insurance liability” insured by the lessee's liability insurance is the late payment of rent by the insurant, and the actual lessee is entitled to insurance claims as the insurant. To protect the interests of the lessor ultimately, it is usually in trading patterns to make the lessor as the “beneficiary” or “the owner of insurance claims” under the insurance contract. According to the doctrine of privity of insurance contract, insurance claims rights are the exclusive rights of the insured, and cannot be transferred without authorization. Even if it is agreed in tripartite agreement that the lessor can be considered as “beneficiary” or “the owner of insurance claims”, the insurant cannot be exempt from the obligations to prove the occurrence of insurance accident in accordance with the insurance terms and submit the appropriate claim documents. If the lessor fails to submit appropriate documents to prove the insurance accident, the claims may be rejected.

Lease contract relationship fraud: In practice, financial leasing companies tend to be more concerned about the "financing" process, while ignoring the audit of the authenticity of purchase and sale of the products and the lease, and they always believe that as long as they actually make loans, they can claim successfully. In the several disputes over claims of lessors’ liability insurance and commercial credit insurance that handled by the lawyers in our law firm on behalf of the insurance companies, through field investigation and access to official information and other evidences etc., it is found in many cases that the seller and the lessee conspired to deceive the lessor, and defraud the lessor to gain the funds of the lessor with inexistent lease relationship but of complete written formalities. False lease contract belongs to exclusions of insurance claims. The insurance company will not be liable for compensation according to law if the contract is proved to be false.

Key points in risk control

Choosing the right insurance: If the lessor chooses right insurance at the initial stage of the project negotiations, it will offer greater protection to their financial security. We believe that commercial credit insurance offers more direct guarantee to the lessor. Because the insurant of commercial liability insurance is the lessor, and the “insurance liability” guaranteed is the rent loss arising from failure by the lessee to keep the promise. Unless the financial leasing relationship itself is flawed, such as fictitious lease relationship, the insurance company shall settle the claim in accordance with insurance contract. Insurance company shall guide the insurant to choose the right insurance, thus avoiding the occurrence of dispute over insurance claim.

Improve the terms of the cooperation agreement: The parties of the transaction shall respect the characteristics of the insurance product itself during negotiation process of the framework agreement, and make legitimate cooperation agreement based on the characteristics of the leased property, for the purpose of ensuring the safety of project funds and avoiding moral hazard. For example, the insurance company may request the lessor to obtain a judgment against the lessee as a condition of the claim after the occurrence of insurance accidents. Thus it can not only reduce the risk of insurance accident, but also urge the lessor be more prudent to choose projects and better fulfill its contractual obligations. Meanwhile, it shall avoid terms that require insurance company to assume guarantee obligations under the framework agreement of the parties. Finally, the parties need to expressly specify that the insurance company shall assume relevant responsibilities subject to the terms of insurance contract, and no party is entitled to directly request the insurance company to assume responsibilities according to the cooperation framework agreement.

Strength the review of credit and supervision of lease contracts: Credit investigation, review of business authenticity and supervision procedures during the performance of contract should not be ignored by the funding parties as well as insurance companies. Before performance of a contract, the lessor and the insurance company should cooperate to investigate the credit and performance capabilities of the lessee and the seller, and review relevant certificates, credit records, financial statements, capital verification report and other materials that reflect their operations and credit status. In case of any possibility of material breach of contract, the insurance company may refuse the insurance application. During the course of fulfilling the contract, the delivery of the leased property shall be strictly supervised to prevent the lessee and the seller collude with each other to invent leased property and deliver falsely. In the course of using the leased property, the lessor and the insurer shall follow up with the usage of the leased property and performance of the contract, and timely discover and handle with sublet behaviors of the lessee or deterioration of its operation.