Contact Insurance - Consideration, Fronting - A Working Example

The "Tomboy Toy Company Inc." wished to purchase ARPI from "Calamity Insurance" to cover worldwide locations. Unfortunately, Calamity Insurance was not authorised throughout South America and was obliged to use the services of Only Front Insurance, a locally authorised company in Peru. Tomboy and Only Front entered into a typical ARPI policy based on the Calamity Insurance wording with the proviso that Tomboy agreed to seek payment from Calamity Insurance prior to requiring Only Front to pay.

Only Front and Calamity entered into a fronting arrangement whereby Calamity agreed to pay 100 per cent of all claims arising out of the Tomboy policy in exchange for Calamity receiving a 5 per cent overrider.

Further, the parties entered into a side agreement whereby Tomboy agreed not to pursue a claim from Only Front in the event that Calamity Insurance became insolvent.

First of all, it is difficult to identify the consideration passing from Only Front to Tomboy other than allowing it to use Only Front's name. It is also difficult to see how Only Front has any loss capable of supporting a contract of indemnity in that Tomboy has already agreed not to seek payment from Only Front and, further, Only Front is in possession of an undertaking that it will never be called upon to pay in the event of Calamity's insolvency. There are possible local problems concerning the illegality of the arrangement and real doubts as to enforceability if the side agreement and the insurance arrangements are read together.

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