Understanding Insurance Clauses within a Lender’s Facility Agreement for Real Estate Transactions

Understanding Insurance Clauses within a Lender’s Facility Agreement for Real Estate Transactions

Have you entered into finance negotiations with Lenders and been asked to note their interest or to comply with various Insurance Clauses within a Lender’s Facility Agreement. Do you understand what it means to you as the Borrower / Insurance policyholder? Would you be surprised to hear that many insurance providers will not agree to these conditions as standard?

Set out below are some of the more common clauses / conditions which are used within these agreements and what they mean.

Composite Insured – a Lending institution might require to be named as Composite insured or “Co-insured” on the insurance policy (which affords them the same rights against the insurer as enjoyed by the insured borrower but separately and in addition to the Borrower / Property Owner, effectively 2 separate contracts under the one policy. All names of insured parties appear on the face of the policy. If one party is guilty of a non-disclosure/breach of the policy, the other innocent insured party are still ordinarily entitled to an indemnity under the policy.

First Loss Payee – a Lender may request to be named as first-loss payee in respect of certain claims (normally Property Damage and Business Interruption Claims) so that the Insurer pays proceeds in respect of those claims directly to the lender rather than the insured borrower (Property Owner). Usually, there is a monetary threshold with this clause that allows the Borrower to receive amounts up to that threshold but it is not always the case. This could be set at €50,000 for example. Therefore, if you as the property owner have a claim within this limit, you will receive the claims payment, but if it goes above that threshold, then the payment will be sent directly to the Lenders.

Variations of this clause are;

Sole Loss Payee clause (Only the bank receives the proceeds of a claim) and Joint Loss Payee clause, where the proceeds are issued to all parties jointly.

Joint Insured – This is the opposite of Co-Insured or Composite insured above. There is one contract in place for both parties and they have identical interests. Breach by one party invalidates the policy for the other.  As both parties are jointly insured, they are deemed equal with the same insurable interest.

Noting the Interest of a Lender – Only the insured party (property owners) Names appear on the face of the policy. Noting an interested party (Bank / Lender) does not automatically infer rights to insurance proceeds on an insurance policy.  There is no separate contract with the insured.

Non-Vitiation & Non-Invalidation clauses – a non-vitiation or non-invalidation clause prevents the insurer from invalidating the insurance against the lender by reason of the insured borrower’s breach of certain provisions of the insurance contract.

In other words, if the Property owner / Insured Policyholder is found to be in breach of the conditions of the policy, then the Insurer still needs to insure the Lender’s insterest as if no breach occurred.

Cancellation – this is typically where an insurer agrees to give a minimum period of notice to a lender of any non-payment of premiums by the borrower or any other matters that could invalidate or result in the cancellation of an insurance policy (so that a lender can remedy such situation should it choose to do so). They may also request a longer notification period to that of a standard wording.

Waiver of subrogation – Most insurers will have the right to recover the cost of a claim that is paid out when a third party is responsible for the claim. A lender may require the insurance company to waive this right which is often referred to as a Subrogation Waiver (but exceptions may be made for claims paid out as a result of any fraud or criminal offence)

 At S.A. Faughnan Brokers Ltd, we have access to insurers who can comply with ALL of the above Insurance Clauses within a Lender’s Facility Agreement and more. Can your insurer agree to this?

Read more about Real Estate insurance for Property owners here;  https://www.safaughnan.ie/commercial-real-estate-property-owners-insurance/

Contact S.A. Faughnan (Brokers) Ltd. on 01 8245555 or at newbusiness@safaughnan.ie or visit us at www.safaughnan.ie