The protocol (dating back to 1992) designed to protect banks’ interests as mortgagees of property between The Association of British Insurers (ABI) and the British Bankers’ Association (BBA) came to an end on 31 December 2012. Under the 1992 agreement, insurers agreed they would:
- Advise the bank if the policyholder did not renew the policy
- Advise the bank if the policyholder reduced the insurance cover, or any risk previously covered was restricted or cancelled; and
- Keep the bank's interest in the policy in force, provided the bank agreed to pay the premium
The agreement aimed to reduce the administration for insurers (who had previously had to produce separate endorsements dealing with the banks’ interests). It also aimed to provide a safety net for the banks if they failed to make specific arrangements to ensure they could rely on the insurance cover.As the majority of policies are for an annual period, it is likely that insurers’ undertakings in respect of any notification made under the 1992 agreement prior to 31 December 2012 will reduce, as each policy terminates, expires, is cancelled or renews on their respective relevant dates, during the course of 2013 and be fully extinguished by 31 December 2013.
Benefits of ‘Noting of Interest’
The benefits of having an interest “noted” are, in reality, very limited. Having your interest “noted” does not by itself:
- protect you if the acts/omissions of the borrower enable the insurer to avoid the policy or refuse to pay out;
- make you a party to the insurance or give you a right of enforcement;
- entitle you to payment of the proceeds of any insurance claim;
- protect you from facing subrogation proceedings brought by the insurer; or
- give you priority over other creditors if the borrower becomes insolvent.
If a lender wants to achieve any of these objectives, they need to provide for this in the finance documents and often also need to get the insurer’s agreement.
In addition, as many insurance policies only last for a year, whatever safeguards a lender puts in place at the beginning of a transaction, it needs to monitor that these safeguards remain in place for any replacement policies.
Protecting an interest in an insurance policy
A lender may have the following options to protect its interest in its borrower's insurance policy:
- being named as a co-assured on the policy;
- taking a security assignment of its borrower’s right to be indemnified under the insurance policy;
- being named as loss payee in the policy;
- relying on the rights available under the Contracts (Rights of Third Parties) Act 1999; and
- establishing a trust over the insurance proceeds.
A lender can use some of these in tandem, but not all are available for every transaction or every policy. And not all methods of “sharing” the benefits of insurance provide equal protection. In each instance, a lender needs to consider:
- Do I want to be able to enforce the right to the insurance proceeds in my own name?
- Do I want to ensure the insurer cannot refuse to pay out because of the insured’s non-disclosure, misrepresentation or breach of policy?
- Do I want to avoid having to share any insurance proceeds with other creditors if the borrower becomes insolvent?
Once a lender has developed a strategy it needs to engage with the insurer as soon as possible. The insurer may not always agree to the preferred approach.
The end of the AIB/BBA protocol is an opportunity for lenders to review their requirements of borrowers in relation to insurance, and how these are expressed in both facility letters and reinforced in the security documents.