riSk foCuS REAL ESTATE BULLETIN September 2014
Don’t let insurance become the final hurdle…. Composite insured and loss payee status in favour of the banks were historically reserved for transactions of significant size but these are now seemingly demanded for much smaller loan deals. the insurance requirements set out in loan agreements are constantly evolving. in this bulletin we discuss the common issues faced by lenders and the insurance industry in meeting these requirements.
whole deal! Far too much time is spent
The Loan Market Association (LMA), in an
we have seen a significant increase in
trying to accommodate ever evolving
endeavour to ensure that lenders are
financing/refinancing activity in the UK in
lending requirements that vary from one
afforded adequate protection under a
the past eighteen months.
deal to the next.
borrower’s insurance policy, goes some
The problem is that it can take weeks, if
Unlike some European countries, there
not months, of toing and froing between
are no statutory provisions to ensure that
lenders, solicitors, brokers and insurers,
a lenders interest is automatically noted.
all negotiating the intricacies of that one
What is needed therefore is a clear
final insurance clause – maybe even a
protocol, agreed by banks and insurers,
single word or phrase holding up the
upon which everyone can rely.
It is good to see banks’ lending again –
way to creating standardised requirements - requirements however that have never been sanctioned or totally understood by the insurance industry.
2 REAL ESTATE BULLETIN | Don’t let Insurance become the final hurdle…. | September 2014
RECURRING THEMES AND PRACTICAL SOLUTIONS Having reviewed numerous transactions,
•
either acting in our capacity as the borrowers’ brokers or as insurance
•
insurance provisions are provided, this may contain defined words or phrases. Understanding how these are defined in the loan agreement is imperative in ensuring that insurance covers are compliant – e.g. Requisite Rating. •
insurers may insist on a revised
Co-insured can be incorrectly
wording which brings greater clarity
construed as a joint or additional
around their obligations to provide
insured. Where the intention is to
the bank with notice of cancellation. •
There have been many debates around the requirement for a
insured status, this should be spelt
recurring themes that cause contention: Where only an extract of the
of the loan agreement provisions –
claim is the Financial Strength Rating.
provide the lender with composite
advisors to lenders, we see a number of
•
measuring an insurers’ ability to pay a
out to avoid any misunderstanding.
subrogation waiver in favour of the
A non-vitiation clause is intended to
lender and indeed the borrower.
distinguish the rights of each insured
It is hard to envisage how a claim
party and will provide that the insurer
under the policy could conceivably
will only implement any rights that
arise following the actions of a lender.
they may have against the vitiating
It is even harder to conceive how
insured. The LMA template,
an insurer, having indemnified its own
inadvertently perhaps, implies that
insured (or the lender as a composite
insurers should not impose any such
insured) can then seek to recover
A requirement to maintain security
rights against ‘any insured’
monies from those very same parties
ratings with three specified rating
regardless of whether that insured
who have benefited from the policies
agencies (as defined Requisite
has committed a vitiating act or not.
existence in the first place. The
Rating) – this limits the insurers
The loan agreement provision should
precise intention of the clause
available to the borrower and with
be amended to conform with the
remains unclear, although as most
most insurers subscribing to only one
non-vitiation language present in the
insurers do not perceive there being
or perhaps two agencies, it is not a
policy wording. Some insurers will
any risk the clause is usually agreed,
feasible or sustainable requirement. It
also exclude non-vitiation for any
if only to ensure compliance with the
should also be remembered that the
insured parties where Damage arises
lenders requirements.
most appropriate barometer for
following a criminal act. •
“there have been many debates around the requirement for a subrogation waiver in favour of the lender and indeed the borrower.”
•
It is a fundamental principal of
The LMA wording requiring the
insurance that an insured has an
insurer to give the lender notice of
obligation to pass on to insurers all
cancellation is onerous as it is
material information, which prudent
unclear as to whether or not the
insurers would wish to take account
cancellation is predicated purely on
of when considering whether or not
non-payment of premium or for any
to accept the risk and, if so, upon
other reason (failure to observe
what terms and at what price. And
reasonable risk requirements, for
yet many lenders, despite all the
instance). It is advisable to ensure
privileges of a composite insured,
that both lender and insurer have a
wish not to have any duty of
mutual understanding as to the intent
disclosure. As a lenders interest in
www.jltgroup.com | Don’t let Insurance become the final hurdle…. 3
“if an insurer agrees a lender’s clause for a particular property owner, it should not be taken for granted that the same insurer will agree the same clause for another property owner.”
the charged asset(s) is purely financial
Commercial property insurance should not
with nothing to do with the actual
be considered a commoditised product.
placement of the insurance or indeed
There are many factors in selecting an
the physical management of the
insurer, including price, policy coverage,
insured property(s), it is easy to have
claims handling, risk management and
some empathy with lenders on this
longevity of the relationship.
disclosure issue. There are however occasions where a lender may have commissioned their own survey report for instance, which flags information not otherwise known to the borrower that would be deemed material by insurers. In this situation understandably, insurers expect to be made aware of this information. It is unlikely that any insurer will agree to an outright disclosure waiver, but compromise solutions are usually agreed upon, eventually.
INSURERS WILL LOOK AT EACH AGREEMENT SEPARATELY If an insurer agrees a lender’s clause for a particular property owner, it should not be taken for granted that the same insurer will agree the same clause for another property owner. Each risk is underwritten on its own merits and a small property owner seeking finance on a portfolio of vacant warehouses for instance, is not going to have the same leverage with insurers as a large client with occupied office and retail space, with sophisticated risk management capabilities paying substantial premiums in to the market.
WILL THE BROKER ACCEPT A LENDERS LETTER TEMPLATE? Then there is the matter of broker letters – in an ideal world a broker could simply populate the lender’s preferred letter
Whilst an insurers’ attitude towards
template onto company headed paper,
covering a lenders interest under the
sign and be done with it. But in reality,
policy is also a factor, it should not be the
most global brokers are governed by
sole factor or indeed the most important
protocols laid down by their internal legal
one. It is down to the skill and experience
departments who prefer to use their own
of the broker to negotiate a compromise
carefully drafted broker letter templates,
position where both the lender and
with of course the insertion of the much
insurer are comfortable.
negotiated liability disclaimer or cap.
DOES THE BORROWER ARRANGE THE INSURANCE?
Many banks have forgone the requirement
Situations where the borrower is not the
insurances. Insurers are also increasingly
party responsible for insuring, presents an
being asked to issue letters directly.
even greater challenge. A superior landlord or tenant with insuring responsibility may be reluctant to allow the borrower’s mortgagee to control claim proceeds (loss payee) or equal rights (composite insured) under their own insurance programme. This situation needs to be identified early in the process. Separate negotiation with the superior landlord or tenant and their insurers will be required and consideration given to either modifying the requirements or requiring the borrower to arrange additional cover.
of a broker letter, given its limitations, and instead rely upon an independent insurance review of the borrowers
4 REAL ESTATE BULLETIN | Don’t let Insurance become the final hurdle…. | September 2014
JLT Specialty Limited provides insurance broking, risk management and claims consulting services to large and international companies. Our success comes from focusing on sectors where we know we can make the greatest difference – using insight, intelligence and imagination to provide expert advice and robust often unique - solutions. We build partner teams to work side-by-side with you, our network and the market to deliver responses which are carefully considered from all angles. Our Real Estate division has a wealth of experience, recognised within both the insurance market and real estate sector. The team specialises in the placement and management of real estate focused solutions utilising market leading IT platforms that are web based and allow control of the programme and access to real time information anywhere in the world.
ContaCtS Ben Thompson Partner, European Real Estate JLT Specialty +44 20 7528 4027
[email protected] Kevin Luckett Associate, European Real Estate JLT Specialty +44 20 7558 3612
[email protected]
WHAT HAPPENS WHEN THE INSURANCE POLICY COMES UP FOR RENEWAL? Most policies are renewable annually and
rise. Some insurers are already resisting some loan agreement requirements and this could become more common. The same insurer might then object to provisions accepted in a previous period of insurance.
the contract finishes at the end of the period of cover. In the drive to obtain
Over the past two years, our Due
value for money, it is not surprising that
Diligence team has developed strong
property owner’s change insurers
relationships with real estate lenders and
regularly. And, during this process, it is
solicitors. With our active involvement in
easy to forget to include the bank’s
the market as Real Estate specialists, we
interests. So whilst the specific insurance
appreciate prevailing market attitudes to
obligations included in most commercial
the evolving loan agreement requirements
property loan agreements are subject to
and can highlight potential issues from
much debate before closing a deal, how
the outset thereby removing potential last
often are they looked at afterwards? Many
minute hurdles relating to insurance. As
banks do not have an efficient monitoring
well as reviewing specific transactions on
regime – this could potentially leave
a project by project basis, we operate the
lenders vulnerable to uninsured losses.
JLT Sharepoint site – a web based system that enables efficient and on-
The insurance market is cyclical and in a
going monitoring of all the insurances in
hard market it is not just premiums that
which the lender has an interest.
DO’S AND DON’TS • Don’t assume the loan agreement requirements will be accepted by the insurer. • Do understand that insurers will look at each agreement separately – they may not agree to something they accepted on another policy. • Lenders requirements are evolving so don’t assume that an insurers attitude will be static – what is acceptable to an insurer today may not be tomorrow. • Do involve your broker and insurer from the outset.
JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW www.jltgroup.com
Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No. 01536540. VAT No. 244 2321 96. © September 2014 268995
This publication is for the benefit of clients and prospective clients of JLT Specialty Limited. It is not legal advice and is intended only to highlight general issues relating to its subject matter but does not necessarily deal with every aspect of the topic. If you intend to take any action or make any decision on the basis of the content of this bulletin, you should first seek specific professional advice.