Posted on October 9, 2014
Pii posted a blog last May in which we gave an overview of the clauses being requested by lenders in order to protect their exposure on loans.
In the interests of providing balance – and ensuring that property owners are aware of the pitfalls, we thought it would be worth re-stating the most common requests from the banks and pointing out how agreeing to these can affect property owners in the event of a claim.
Lenders always want to ensure that the buildings insurance policy cannot be invalidated in respect of their interest – regardless of any action by the borrower. They commonly therefore request to be Composite Insured which means that they have equal status with the property owner.
The bank has a different driving interest to the property owner. An example of how this can be detrimental to the property owner is as follows:
Following damage which is covered under the buildings policy the property owner wishes to negotiate a cash settlement as the property is performing poorly from an investment point of view and they wish to redirect the insurance settlement to an alternative property. However, as a composite insured – with the same rights – the lender could insist on reinstatement of the asset.
Flipping this example the other way round the following scenario could occur:
The lender decides – following damage to the property – to negotiate a cash settlement with the insurer and use the funds to offset the loan. This would mean that any claim for loss of rent would cease on conclusion of the claim. This could leave the property owner in a difficult position with regard to their lease obligations. It will also mean that the property owner will need to fund repairs and suffer the ongoing lack of rent until the property can be re-occupied.
Lenders also generally wish to control claims payments in the event of a loss and so request to be noted as First Loss Payee. This sounds fine in principal – but can mean long delays as authorisation is generally required from the bank. If there are a number of small claims this can be particularly onerous and it is therefore prudent to agree to the bank being First Loss Payee for claims in excess of a fairly large figure to eliminate this problem.
Although the above clauses are the most common ones we come across there are new lenders entering the market with their own form of wordings for their facilities agreements. It is always wish to speak to your insurance broker before agreeing to any bank conditions – not least to fully understand the potential impact of agreeing to the banks terms in the event of a loss – when it will be too late.
Pii are always happy to provide advice on this subject and if you have any queries, contact Steve Packer [email protected].