Posted on November 14, 2013
One of the main bones of contention between customers seeking to insure commercial property and their insurers is the interest of third parties who require to be included on the policy.
Historically there has been much confusion over the terminology used and this has, in some part, been driven by requests from lenders to be “joint insured” on the policy to protect their interest in the property.
Of course, third parties – be they tenants, lenders or others who have a financial interest in the property (called an “insurable interest” in insurance speak) need to be protected. An understanding of the way insurance policies operate is the key to achieving this.
It should be noted that most policies designed for the commercial property market contain a clause designed to protect the interests of third parties in the event of a claim. The following levels of protection are therefore over and above that already provided in the policy.
As far as insurers are concerned, there are three ways of noting the interest of third parties and these will be dictated by the relationship between the insured and the third party as well as any legal documentation which defines this requirement, for example a lease wording or the requirements in a lender’s facilities agreement.
Noting of Interest
The simplest way of protecting a third party is for the insurers to note their interest on the policy schedule. Noting an interest requires insurers to advise the third party of any changes which may arise in respect of the contract – however, it does not allow the third party to make a claim. Some lenders are happy with this level of notation as they have the comfort that they will be informed if the policy is to be cancelled for example in the event of non-payment of the premium. They are then able to make their own arrangements to protect the asset by adding it to their block policy.
This is the term most commonly used by lenders who seek to have their interest protected as fully as possible. Joint insured status is meant to protect parties who each have an individual – but identical insurable interest in the property. A good example of this is a married couple who jointly own their home. It should be noted, however, that in the event of non-disclosure or fraud on the part of one party to the contract insurers have the right to cancel (void) the policy completely.
Composite Insurance (sometimes called Co-Insurance)
This level of protection is the best option for protecting the asset when two or more parties have different insurable interests in the same property. The intention is that cover is provided to each party “for their respective rights and interests”. Insurers need to be involved at the inception of any policy designed to protect commercial property so that they can be made aware of all the parties who have an interest and ensure that they are adequately protected.
One of the main benefits of Composite insurance is that the policy cannot be cancelled in the event of fraud or non-disclosure by one party. In this situation the other insured parties would still be able to submit a valid claim thus protecting the asset to the fullest extent possible.