When a bank lends and takes security over property it will want to know the property is fully insured and that should a claim on the insurance policy arise, it will receive the proceeds of the insurance.

The most legally robust method of ensuring the bank is entitled to the proceeds of any insurance claim is to name it as a Composite Insured on the policy alongside the original insured. However, this process is costly and time-consuming and when the Agreement between the British Banking Association (BBA) and Association of British Insurers (ABI) was signed in 1992, the volume of bank lending was such that it warranted a rational understanding between the major players - the banks and the insurers.

The Agreement formed a protocol designed to protect the banks' interest in property as a mortgagee. This protocol established that a bank would inform the insurer it had taken an interest (usually by way of mortgage or debenture) in a property noted on an insurance policy. It also agreed that on receipt of the notification, the insurer would let the bank know if there was any event which may affect the bank's security, for example cancellation of the insurance policy or changes in the terms. As additional protection for the bank, the insurer would continue with full cover for the policy for a period of time to allow the bank to resolve any issues or seek alternative cover.

This provided major comfort for the banks and has allowed them to merely note interest on insurance policies - a much quicker and cheaper method of obtaining some protection. This practice is currently the norm, especially on the high-volume, smaller lending transactions.

The BBA is due to meet with the ABI later this month to discuss the ABI's decision. It remains unconvinced by ABI's assessment that market developments have obviated the need for the Agreement and is seeking intelligence from BBA members to understand what percentage still value the protection afforded by the Agreement.

Some action points to consider.