Morrison insurance Solutions

Insurers going extra mile for their customers over real estate lending

Insurers have witnessed a sharp increase in the number of requests for bank interest clauses as banks continue to de-risk their real estate lending.

In the wake of the financial crisis, banks are looking to pass on more risk to the insurance sector through increased protection against shortfalls or vitiation of insurances covering the loan security.

Meanwhile, the ending of the decades-old agreement between the Association of British Insurers and the British Bankers’ Association has created further confusion with suggestions that the two are linked.

The agreement had set agreed parameters for interaction between the two industries when a finance agreement was in place for a property, but those parameters bear little or no resemblance to the extent of undertaking that is now being requested.

Getting it right

The completion process can take longer than in the past, particularly as the insurer must ask more questions in order to gauge the additional risk it is being asked to take on. However, getting things right is in the interests of all parties, including the insured themselves.

Insurers have seen instances where these requests are summarily agreed, effectively just ‘ticking boxes’ rather than fully addressing all of the issues regarding bank interest clauses, with each real estate transaction seemingly posing more specific challenges for insurers and brokers than ever before.

Without such due diligence, there is the potential for the insured to receive unpleasant surprises when they try to make a claim. For example, if there is a ‘first loss payee’ clause in the contract then the bank could potentially choose to prevent the proceeds of claims being passed on to the insured using them to offset the loan, thereby leaving the insured in breach of a lease and/or with a property that cannot be occupied and which they cannot afford to repair.

Composite insured

As well as the potential for completion to take longer, there is also the likelihood of increased premiums where the insurer is being asked to take on more risk. Part of the requests by banks are to include them as composite insured, which means two parties on a policy are covered as if they were insured separately and neither party can invalidate the policy in respect of the other.

What to do next? 

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