UK: Insurance is a Valuable Asset

Last Updated: 26 January 2011
Article by Jeremy Hill and Christopher Henley

Insurance briefing from Debevoise & Plimpton LLP published in the October 2009 issue of The In-House Lawyer

In cases involving teh lending of large sums of money, the use of the borrower's insurance as a security asset is often viewed as the failsafe in the overall security package.1 In the event of a catastrophe giving rise not only to material damage but also to business interruption, or even the loss of a key member of the borrower's management, there may be no other significant asset available for recourse by the lender. It is therefore surprising that so little attention is sometimes paid to the technical requirements that need to be met for the insurance policy to become an asset available to the lender. Indeed, the insurance is sometimes an afterthought. Getting the technicalities right is perhaps more important to the lender of the money, but a small mistake by the borrower can have unintended, and sometimes extreme, consequences.


Problems usually only come to light when a claim is made on the insurance and is disputed by the insurer, who is primarily interested in validly minimising any payment under the policy. The position then becomes simply an untangling of the tripartite legal position – lender, borrower, insurer – rather than any constructive solution between the lender and the borrower to move forward commercially. The following problems in particular can arise:

  • the policy may be cancelled upon a specified period of notice by the insurer's exercise of a clause in the insurance contract;
  • expiry and non-renewal of the policy before repayment of a loan;
  • policy amendments taking effect upon renewal, at which time a new insurance policy comes into effect;
  • the policy may be avoided ab initio by the insurers for non-disclosure of a material fact or misrepresentation;
  • termination of the policy for breach of warranty (the breach of warranty need not be material to the loss and the termination of the insurance is automatic at the date of breach); and
  • the insured may fail to comply with any ongoing requirements and, in particular, notification requirements in the event of a potential claim.


The following areas of protection should therefore be considered by a lender.


The simplest method (which would also provide the maximum security) is for the lender to become an insured party, but this gives rise to both commercial and legal issues. Commercially, the addition of the lender is likely to increase the insurance premium, while legal issues will arise concerning the status of each insured, which will impact on its rights under the policy. The key distinction is whether the insurance is placed on a joint or composite basis. In either case each insured will be required to comply with the policy obligations and thus both will be liable for the whole premium. Equally, each insured will have a direct right of action against the insurer.

However, a joint insured is one who has an identical interest with another joint insured, so that a fraud or non-disclosure on the part of one will have serious (and usually terminal) consequences for both. A composite insurance is written where the insured parties' interests are divisible and identifies each insured individually, so that each has its own contract with the insurer. Where banks are concerned it is usually the case, even if not actually specified, that the insurance is written on a composite basis, ie that the lender and the borrower have quite disparate elements of insurance, with the effect that the borrower's peccadilloes will not affect other parts of the insurance. Composite insurance can be expressed by qualifying the parties' insurance as 'each for their respective rights and interests'. A non-vitiation clause – which expressly segregates the rights of each insured and specifies that the insurer will only implement any rights that they may have against the defaulting insured – need not be included if the interests of the insured parties are composite, because the rights of one party generally should not be affected by the misdemeanours of another.

However, it is possible that all such rights could be collectively affected, eg where the insurance is placed by an agent acting for all insureds who fails to inform the insurer of a fact material to them all, or the insurance proposal form contains a warranty in absolute terms (rather than as to best information and belief) that is incorporated into the policy by the usual 'basis of the contract' provision, breach of which terminates the policy. While in many cases the lender will not be affected by the borrower's breach, the lender would nevertheless be better advised to put in place a non-vitiation clause. There are, however, issues of cost.

The insured will also be subject to obligations (usually by warranty) as to its ongoing conduct, such as the proper maintenance of the property. The lender should therefore include a non-invalidation clause in the insurance to the effect that its interest should not be prejudiced by any act or neglect of the insured in respect of any property insured, provided the insured, on becoming aware, immediately gives written notice to the insurers and pays an additional premium if required

There is usually an (implied) automatic waiver of subrogation by an insurer against any joint or co-insured, or to any party entitled to the benefit of the insurance, to the extent of that party's interest, which might override a term saying that one insured is liable to another for negligence.2 In reality, where a bank is a co-insured there is no need for a separate waiver of subrogation clause in its favour, because it is highly unlikely that an insurer will ever pursue a bank. Nevertheless, issues of liability and subrogated recovery should be negotiated and clearly documented, as an express clause specifically dealing with subrogation in the loan documentation, as part of any clause limiting the liability of the lender to the borrower, and in the contract of insurance. The allocation of any subrogated recoveries should also be addressed.

Parties to an insurance contract are subject to a duty of good faith, which in essence requires the insured to specify all material facts that might influence the decision-making process of the underwriter as at the formation of the insurance contract. A lender who becomes an additional insured after carrying out due diligence for the purposes of its proposed loan, obtaining disclosure of the relevant business information, and negotiating the various representations and warranties in its loan facility, would therefore be obliged to disclose all material facts to the insurer. Any failure to do so would entitle the insurer to avoid the policy as against the lender in breach. In cases in which a lender is no better informed than an insurer as to the likelihood of a claim and particularly the moral hazard of the insured, it may attempt to modify the duty of good faith, with varying degrees of success. A good example of the pitfalls is HIH Casualty & General Insurance Ltd v New Hampshire Insurance Company & ors [2001], in which the clause in dispute read:

'To the fullest extent permissible by applicable law, the insurer hereby agrees that it will not seek to or be entitled to avoid or rescind this policy or reject any claim hereunder or be entitled to seek any remedy or redress on the grounds of invalidity or unenforceability of any of its arrangements with Flashpoint Ltd or any other person (or of any arrangements between Flashpoint Ltd or the purchaser) or non-disclosure or misrepresentation by any person or any other similar grounds. The insurer irrevocably agrees not to assert and waives any and all defences and rights of set-off and/or counterclaim (including without limitation any such rights acquired by assignment or otherwise) which it may have against the assured or which may be available so as to deny payment of any amount due hereunder in accordance with the express terms hereof.'

It might initially appear all-encompassing to a draftsman untutored in the wonders of insurance, but on dissection the Court of Appeal felt that it contained several flaws and misconceptions. The moral of HIH Casualty can only be that specialist expertise is required in this area if problems are to be avoided.


The insured simply assigns its contract of insurance to the lender, retaining full ownership of the insured asset. This is rarely effected for the entirety of the cover for commercial operating reasons, because the cover is primarily designed to protect against a catastrophe affecting the ability of the borrower to repay the loan. Instead, the borrower agrees as part of the loan to take out and maintain certain insurances and continues, as a result of a term in the loan document enabling it to receive insurance proceeds below a specified level, to receive any insurance payments in reimbursement of insured – essentially operating – losses that it incurs until the insurer receives notice to the contrary from the lender. The assignment is therefore part of the insurance only and certain areas of cover (eg liability) generally remain with the assignor anyway. Thus, as the assignment is of an unliquidated, future and contingent claim in respect of only part of the policy, its eff ect is that the assignment is equitable rather than legal. The fact that most insurances preclude assignment leads to the same result.

Assignment of the proceeds

The other option is for an assignment of the proceeds of the policy, rather than the policy itself. The assignor remains the insured party under the contract (and the assignee is only capable of enforcing its derivative right against the insurer in the name of the assignor). The assignment of the proceeds is more akin to an assignment of a debt, though contingent and unliquidated.3 The assignor remains the insured and all obligations owed as insured must be complied with, such as notification and co-operation, although it should not matter which of the assignor or assignee discharges them. If it is the assignor who is legally obliged to do so, the assignee can nevertheless do so as agent for the assignor, the actual and ostensible authority for their actions having been provided by the assignment and notice of assignment to the insurer, and usually specified in any security document. The liability for premium will remain with the assignor.4 The sum payable by the insurer will therefore be quantified by reference to the assignor.5 The assignment is effective without the consent of the assignor, even if the policy contains an express prohibition on assignment or the absence of any insurable interest on the part of the assignee (because it is not a contract to indemnify the assignee).6

Assignment of policy v assignment of proceeds

Generally an equitable assignment of the policy is considered to be better than an equitable assignment of the proceeds for reasons shown in the table below.


The traditional method of attempting to protect a security interest was for the lender to 'note its interest' on the policy document itself, with the intention that production of the policy on payment of a claim would require the insurer to pay any sums due under the policy to that third party. Usually the wording would be vague and unclear, often stating little more than that a particular lender had an interest in the policy, so that its wording would be too uncertain to be capable of sensible construction and was therefore unenforceable, but the tripartite arrangement would usually work because the parties knew what was intended and were prepared to give it effect, without subjecting it to any formal legal analysis.

Even when the interest had been noted with clarity and precision so that it could be considered to be a proper loss payee clause, the doctrine of privity of contract – that a person who is not a party to the contract cannot enforce it or be made subject to any obligation enforceable by the contracting parties – would, until 2001, have prevented the loss payee from enforcing the clause directly against the insurer. The insured could also replace or remove its instruction to the insurer to pay the loss payee without the loss payee being able to do anything to the insurer to compel payment to them.

Today, however, the Contracts (Rights of Third Parties) Act 1999 (the 1999 Act) gives rights under contracts to identifiable third parties so that a loss payee need not rely on the common law, with the latter's attendant pitfalls, eg that notice is not properly given to the insurer. A loss payee clause contained in the policy will constitute an obligation – that the insurer will pay to the loss payee any sums due to the insured arising out of a claim made by the insured and quantified by the loss suffered by the insured – that the loss payee could enforce directly against the insurer. Adding a loss payee clause to the insurance contract after it has been formed is a variation of that contract that must clearly be agreed to by an insurer if it is to be enforceable by the loss payee (unless it is a valid assignment). It is theoretically subject to a duty of good faith in relation to the variation, although this is impliedly waived as a matter of market practice and by the failure of the insurer to ask any questions in the total absence of any information from the loss payee.7

On the face of it, therefore, the position of the loss payee has been strengthened by the 1999 Act. The problem, however, with most insurance policies is that the insurer usually excludes the 1999 Act so that a loss payee clause will have no eff ect unless it bypasses the Act or, back to the old days, effectively constitutes either an assignment to the loss payee or makes the loss payee a co-insured (unlikely). Thus where a lender requires an enforceable right against the insurer it should initially include a provision in the underlying loan agreement to the effect that any insurance taken out by the borrower will not exclude the bank's rights to enforce the insurance as an interested party under the 1999 Act, which the insured will then have to negotiate with its insurer. This should be monitored for implementation because although the lender will have a claim against the insured borrower for its breach, the security on which any such successful claim would bite would be the very pot of insurance money that it cannot directly claim against!


An agreement between the lender and the insurers can sometimes be reached, usually encapsulated in an endorsement to the policy. In essence the insurers agree to advise the lender if they intend to cancel, amend, suspend or avoid the cover, or of any act or omission that might invalidate all or part of any insurance or claim. The lender must draft this agreement carefully. It is a 'straightforward commercial contract' and not one of utmost good faith.8 The agreement does not contain any implied term that the insurer will inform the lender of any aspect of the insured's activities that impact adversely upon the insurance or the lender's position, even if such activities are fraudulent. The insurer will be entitled to adhere to the specific terms of the contract and will not owe any separate duty to the lender.


The next best thing to agreement with the insurers is to obtain an undertaking from the insured's brokers to inform the lenders of all items considered above, but this can be extended beyond what an insurer would provide because the broker is often in receipt of more information than the insurer. However, it is important that the role and obligations of the broker to the lender are clearly identified, and that any conflict with the duties owed by the broker to the insured is waived.

The letter should confirm the appointment of the broker as agent of the borrower and provide details of the insurances placed, that they are suitable and reasonable, contain any relevant endorsements and confirmation of assignments, and specific obligations to the lender, eg advising of:

  • any material change in cover;
  • any failure of the borrower to instruct that (or another) broker to renew, or of any termination of authority, or any notice of termination of cover;
  • failure to pay premium;
  • to supply copies of relevant documentation, all usually subject to various caveats, such as the termination of authority;
  • the administration of claims; and
  • the collection of premiums.


Insurance should be regarded as a valuable component of any security package, but it will only achieve this status if afforded the appropriate care and diligence in its structuring.


1 As an alternative to the lender effecting credit insurance, for which the borrower would pay.

2 Tyco Fire & Integrated Solutions (UK) Ltd v Rolls-Royce Motor Cars Ltd [2008] EWCA Civ 286.

3 Akin to, but definitely not, a debt.

4 Punjab National Bank v de Boinville & ors [1992] 1 Lloyd's Rep 7, 23.

5 Jan De Nul (UK) Ltd v Associated British Ports [2001] Lloyd's Rep IR 324, 355.

6 Re Turcan (1888) 40 ChD 50.

7 Attempts have been made to modify the duty of good faith to fit the circumstances of the

insurance, with varying degrees of success.

8 The 'Good Luck' [1988] 1 Lloyd's Rep 514, 547.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.