Insurance on real estate financing transactionsAssuring is usually a critical element of a lender`s security during any real estate financing transaction. The ABI`s recent withdrawal from its agreement to inform lenders in advance of any cancellation or change in the insurance coverage of the property that is the subject of the loan should encourage lenders to review the insurance requirements they take over in their facilities and to check whether they are maximizing their security. In this context, this note examines the latest practical developments that may have an impact on lenders` insurance approach, as well as the options available to lenders to ensure that they can exercise control over the level of coverage and income from rights. Types of insurance required by lendersThe facility contract will generally define in detail the insurance requirements of lenders. As a rule, property damage and service interruption insurance is required, which is usually marred by lack of rent. These insurances cover the risk of damage to the guaranteed asset and disruptions (resulting from the insured damage) to the borrower`s income stream. The contractor`s risk insurance is required for development projects. Other insurances that lenders may include in their requirements include liability coverage for people and products and, in appropriate cases, environmental insurance (which covers an environmental risk). Terrorism coverage Coverage against property damage caused by terrorism is offered by default by some, but not all, insurers.
Therefore, in order to avoid uncertainty, a lender should always ask for confirmation that the borrower`s insurance covers terrorism. Each insurer is free to use its own definition of terrorism: it may, in practice, follow one of the definitions used in laws such as the Terrorism Act 2000, when this is not necessary. It should be ensured that the wording of the definition in the insurance contract concerned corresponds to any definition that may be included in an obligation in a rental agreement or other document. The effects of listing a lender`s interest on an insurance policy are largely misunderstood. It is often wrongly assumed that it gives the lender the right to be granted the right to insure himself of a possible insurance product. Indeed, a lender whose interest is noted is currently only entitled to notification from an insurer of the termination or non-renewal of the policy or a change in the terms of coverage. This claim was formalised in 1992 in an agreement between the Association of British Insurers (ABI) and the British Bankers` Association (“BBA”). However, the ABI recently announced its intention to withdraw from this agreement. The notice period for resignation and each insurer`s approach on a case-by-case basis have yet to be confirmed, but the result will be that banks will no longer be able to rely on insurers to receive notifications from insurers about changes that may affect their safety. Given this development, it is worth reminding lenders of the other options available to them, which are listed below. The clause is a clause obliging the insurer to pay the proceeds actually paid to the party referred to in the clause as beneficiary.
From a lender`s perspective, this is clearly an improvement over the rating of their interest in the policy. However, the lender would not be a part of the insurance contract and therefore could not enforce the loss clause by the insurer: this would have to be done by the insured. Lenders could argue that the Contracts (Rights of Third Parties Act) of 1999 gives them the right to directly require the insurer to comply with the loss payment clause by the insurer. . . .