Overview

Lenders have become far more focussed on the insurance arrangements in property transactions in recent years and it can take time and effort to ensure the lender is satisfied with these arrangements. It is therefore advisable to address the insurance position early in any transaction in order to help it run smoothly.
This briefing note sets out to look at the minimum requirements borrowers need to meet and also aims to give a user-friendly definition of some of the commonly misunderstood terms used when arranging insurance in a real estate transaction.


A lender's minimum requirements are that the borrower should insure the property to the full reinstatement value against:
any loss or damage;
loss of rent for a minimum of three years (five years for premium office space);
acts of terrorism; and
defects in title.
A borrower will also be required to have in place property owner's third party and public liability insurance. The loan agreement may contain a further general provision which provides that insurance should be effected and maintained over the borrower's assets and business in such a manner and to such extent as is reasonably customary for a business engaged in the same or similar activity and the same or similar localities to the borrower.
The insurance should be maintained with reputable insurance companies and underwriters of good standing. If the loan is to be securitised the lender will usually require that the insurer has a financial strength rating of at least:
A by Standard & Poor's;
A by Fitch; and
A2 by Moody's.
If a policy needs to be paid out for whatever reason, e.g. if the property is destroyed, the loan agreement usually ensures that proceeds are paid into a holding account with the lender that it has security over. The loan agreement will then allow for, subject to the terms of any relevant lease, the proceeds to be either applied in the reinstatement of the property or in repayment/prepayment of the loan.

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