12 August 2015

Your insurance broker is here to help but how far will they go?

On any commercial property transaction that requires financing or refinancing, a secured lender will usually require a letter from the borrower's insurance broker as a condition to drawdown. The broker's letter is addressed to the lender and confirms that the insurance affecting the property complies with the requirements of the facility agreement and contains various statements required by the lender.

The broker's letter establishes a duty of care owed by the insurance broker to the lender. Understandably brokers can be reluctant to incur any potential liability to their client's lender. Consequently the wording of the confirmations and undertakings is subject to a high degree of negotiation and often can include limitations on liability or monetary caps. The lender's preferred form of broker letter should be sent to the broker as soon as possible together with the relevant extracts of the facility agreement. This allows the negotiation process to start early and sufficient time to agree the appropriate insurance related provisions. Any amendment to the policies may increase the premium.

1. Lenders usually request that any insurance policy affecting property must:

(a) insure the property and all fixtures and fittings contained therein for their full replacement value and cover must be provided on an "all risks" basis including cover for site clearance, terrorism, loss of rent, property owners' public liability and 3rd party liability insurance

(b) name the lender as co-insured (excluding public liability and 3rd party liability insurances), but without liability on the part of the lender for any premium. It is important to note that this is not composite insurance. The effect of co-insurance is that the rights of each co-insured are separate so the lender has its own composite policy existing alongside the borrower's policy. Therefore, if one co-insured does something which vitiates (invalidates) its cover under the policy; it should not vitiate the other co-insured’s cover as well

(c) contain a non-invalidation and non-vitiation clause whereby the insurances will not be vitiated or avoided against any insured party as a result of circumstances beyond the control of that insured party or any misrepresentation, non-disclosure, or breach of any policy term or condition. As co-insured the lender will be under a duty to disclose any material information to the insurer, the lender will require that their duty of disclosure is waived. These directly conflict with the terms of most insurance contracts. Nevertheless it may be possible for the insurer to issue an endorsement reflecting these modifications of the policy

(d) contain a waiver of rights of subrogation against the insured (borrower), the tenants and the lender (as composite insured). The right of subrogation enables the insurer to step into the shoes of the insured. The insurer can bring a claim, acting in the insured’s name, against the 3rd party who has caused or contributed to the loss, in order to recover monies paid out by the insurer to the insured. Insurers cannot recover their outlay from those responsible for the loss if they waive their rights of subrogation; nonetheless most insurers are content to agree to waive this right with certain qualifications

(e) contain a loss payee clause. This requires an insurer to pay any proceeds to the person named in the first loss payee clause, as opposed to the insured themselves. Often a minimum threshold can be agreed so that the lender is named as first loss payee for claims over and above a certain amount e.g. £50,000.

2. The insurers must give at least 30 days' notice to the lender if the insurance policy is going to be cancelled due to non-payment of any premium or if a valid claim is to be denied and give the lender the opportunity to rectify any such non-payment of premium within the notice period.

3. The borrower must be free to assign all amounts payable to it under each of its insurances in favour of the lender.

It is advisable for any borrower to liaise with their insurance broker at the outset of any transaction to ensure the requirements of the facility agreement can be met and the broker is willing to provide a broker's letter in the specified form.

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