We recently represented a US bank in Ontario on a secured refinancing for a Canadian borrower. The Canadian borrower owns a number of Canadian and US subsidiaries (the Canadian borrower and its subsidiaries, the “Loan Parties”) which delivered secured guarantees. US counsel for the bank agreed to a request of US counsel for the Loan Parties that the US security agreement contain only a grant of a security interest (in contrast to also including an assignment, charge etc. by way of security like the US security agreement did on the original financing). The bank’s US counsel stated that they accepted this request on the basis that the Uniform Commercial Code applied to insurance proceeds.
The Loan Parties’ US counsel requested that the Canadian security agreement be conformed to the US security agreement on point. We advised our client to not accept this request on the basis that the Personal Property Security Act (Ontario) ("PPSA") does not apply to a claim in or under, or the proceeds of, the Loan Parties’ property insurance (which is unlike some other Canadian jurisdictions where the PPSAs are stated to apply to insurance proceeds) and, accordingly, the Canadian security agreement should contain an assignment by way of security. Canadian counsel for the Loan Parties agreed with us and, accordingly, the Canadian security agreement was not conformed to the US security agreement on point.
The covenant in the 2012 credit agreement on naming the collateral agent as loss payee under the Loan Parties’ property insurance also was amended, from the unconditional covenant contained in the original credit agreement, to require the Loan Parties to use commercially reasonable efforts to so name the collateral agent. This accommodation of the Loan Parties was made on account of their expressed administrative burden in amending approximately 100 insurance policies (the collateral agent not being the same person under the refinancing as in the original financing). We advised our client that in order to be perfected on property insurance, the insurers should at least be notified of our client’s interest in the Loan Parties’ insurance and requested to acknowledge that interest. The collateral agent made the business decision that it would accommodate the Loan Parties on point and only require their commercially reasonably efforts to name the collateral agent as loss payee.
It is customary in secured transactions that the loan parties represent and warrant and covenant to ensure that the liens granted to the lender parties are perfected first priority liens on the collateral, subject to permitted liens. In the secured refinancing referred to above, such representation and covenant should provide for an exception for insurance claims and proceeds until the applicable action is taken to perfect the assignment of such claims and proceeds.