We can ‘note’ no more
It has been a standard approach in the lending community to request that the Bank’s interest in any property of the borrower that is insured is noted on the policy rather than requiring the insurer to produce separate endorsements in favour of the Bank. This approach or protocol (which was agreed between the Association of British Insurers and British Banking Association, has now come to an end.
It’s not as bad as it might sound however, because in reality the noting of an interest offered limited benefits. It did not, for example, protect the bank against any acts or omissions of the borrower that might avoid the policy, give the bank a direct right of enforcement, entitle the bank to recover the claim proceeds, or give the bank priority over any other creditor.
As to the way forward, lenders have the following options:
- being named as a co insured;
- taking a security assignment (or outright assignment) of the right to be indemnified under the policy;
- being named as a loss payee under the policy;
- relying on the rights available under the Contracts (Rights of Third Parties) Act 1999;
- establishing a trust over the insurance proceeds.
Lenders will need to determine what their approach will now be so that this can be set out in the relevant facility letter. Bear in mind that the approach may also depend on the circumstances and the nature of the policy in question: Whatever the aim, it is imperative that the Bank engage with the relevant insurer as soon as possible in any given transaction.
For further details on any of the issues covered in this update please contact Angela Stallard, Partner in Corporate and Commercial Department on 020 7583 2222 or [email protected]