Time to refinance – are you covered?

On 30th June 2012, the Association of British Insurers (ABI) gave notice that it had withdrawn from the protocol that gives secured lenders the ability to note their interest on insurance policies and receive certain information. Under the former regime, if a lender’s interest was noted, the insurer would notify a lender of any variation or cancellation of cover, if the policy was not renewed and maintain an agreement to keep the lender’s interest noted provided they continued to pay the premium. For those of you who are looking at refinancing your existing loan arrangements this change is likely to mean that you will be subject to new insurance requirements as lenders look to protect their position.

What are the new requirements?

Most lenders will now insist upon being a “co-insured” on the relevant policy.  There are two types of co-insurance: composite co-insurance and joint insurance.  Joint insurance is most commonly used where the insured parties have the same interest in the asset e.g. a joint owner of property.  Most lenders require co-insurance as this gives the lender its own composite policy running alongside your policy which will continue notwithstanding any vitiation of your own policy.

Some other alternatives that may be required are first loss payee provisions for the lender over a specified amount, security being granted over your insurance policy together with the service of a formal notice to the insurer or a broker’s letter from your insurance broker confirming that insurance is in place in accordance with the terms of your facility agreement.

How will this affect you?

There are some downsides to co-insurance.  Firstly it may cost you an extra premium to make the policy change and some insurers will only allow their own standard co-insured wording and will not accept a lenders standard wording.  Secondly, if you have a block policy covering other properties (which are not in charge to the lender) the block policy may need to be separated into separate policies resulting in a further cost.  There may also be issues if there is more than one lender seeking co-insured status.

If a broker’s letter is required by a lender it is best to notify your insurance broker of this requirement at an early stage as it can often take a while for a broker’s letter to be provided and, in some instances, can result in you incurring additional costs.

If it is not possible for you to comply with a lender’s insurance requirements it is best to raise this with a lender early on as it is very often something that can take some time to resolve. Additionally, different insurers have different approaches to the requirements of lenders and so time should be allowed to account for this or to change insurers if it is not possible for you to satisfy the lenders requirements with your current insurer.

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