Insurance and financing – how to avoid delay in getting your hands on the folding stuff

Author: Jenny Sargeant

More and more across the industry we find the most painful negotiations (whether you are a borrower, a lender or their lawyers!) centre around insurance.  There are a number of reasons why this is the case.  But with an awareness of these issues insurance can be dealt with in a collaborative way at the beginning of transactions, to ensure that deals proceed at pace in line with intended timetables.

Insurance contracts are deal specific

Each insurer has its own policy terms and terms of business (with policies tailored to incorporate specific additional provisions called endorsements).  Although the LMA (Loan Market Association) real estate facility agreements aim to provide a standard position in terms of insurance requirements, these sometimes do not match the particular policy to which they need to relate.  It is crucial for a borrower to send the insurance covenants in the facility agreement to its broker at the outset of a transaction asking for their input.  This allows the provisions to be tailored to reflect reality.  Sometimes legal terminology simply does not quite match insurance terminology and opening a dialogue with the broker can marry up the two.

The standard LMA position requires the following endorsements:

Composite insurance

Borrower and lender are both insured parties but have separate insurable interests and if the borrower’s interest is invalidated there is no impact on the lender’s insurance.  Lenders prefer composite insurance to joint insurance (where lender and borrower have the same insurable interest) because if a joint policy is invalidated by one party, the other party’s interest also falls away.

Non invalidation clauses

These can provide additional protection for a joint insurance policy, as they ensure that if the borrower invalidates the policy the insurer will only pursue its rights against the borrower as defaulting party.

First loss payee

An obligation for the insurer to pay proceeds to a nominated party (i.e. the lender).

As there are usually cost implications of adding endorsements to a policy the borrower should discuss the lender’s requirements with its broker early on.

Property insurance arrangements are often bespoke

Where the borrower owns and insures the property it is in control of varying its insurance to meet a lender’s requirements.  However, if the borrower’s landlord or tenant insures, the relevant lease will stipulate the insurance requirements.  Sometimes the lease will require the borrower’s interest (and possibly even the lender’s) to be jointly insured on the policy.  More frequently there is only a requirement that the lender’s interest is noted (which has no legal effect, although insurers would usually notify the party if a claim occurred).  Frequently this is dealt with by tailoring the facility agreement so that insurance requirements are met where the borrower enforces the insurance provisions in the lease against the relevant insuring party.  Another way of dealing with this is to obtain a supplemental policy, but cost implications mean this is usually only a requirement for large or high risk transactions.

Increased negotiation of brokers’ letters

Brokers’ letters are negotiated far more than in the past.  There is an increasing concern among brokers about accepting blanket liability statements and each broker will want to tailor the brokers’ letter to its particular terms of business.  A broker might approach negotiations from the perspective that it does not want to take on liability above and beyond the liability to its own client.  Lenders do, however, need the broker to confirm that the insurance policies in place meet the facility agreement requirements, insurance premia have been paid to date and the broker is not aware of anything that might invalidate the policy.  The lender’s security is only as good as the insurance in place if the property is destroyed so insurance requirements are naturally very important to lenders.  The LMA introduced a precedent brokers’ letter last year which has helped to simplify negotiations.

What can we do to manage insurance requirements?

Managing insurance requirements is all about proactivity:

  • Getting the broker involved early on:
    • checking the policy against the facility agreement insurance requirements;
    • pricing any additional endorsements that are required; and
    • reviewing the lender’s draft brokers’ letter (and if necessary checking this with the broker’s legal team).
  • Ensuring that the lender and its lawyers know at the outset who insures the property and whether the borrower has any control over the policy conditions.

Jenny Sargeant, Partner, Fladgate LLP (

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