The LMA has recently announced the publication of its own form of insurance broker letter for use on real estate finance investment transactions. Broker letters are used to provide comfort to lenders that the obligors are complying with their insurance obligations under the loan agreement, and that the lender (or agent, on syndicated transactions) will be made aware of any issues that arise with the insurance cover in place (such as non-payment of premiums). This is particularly important for the type of transaction where the lender(s) may only have limited recourse (restricted to the properties and related assets).
For a number of years broker letters have now and again reared their head on transactions as far more problematic than they should be. Different brokers take different approaches regarding the level of comfort they are willing to provide lenders, and they do not want to risk liability when they do not have to. It is hoped that the introduction of an LMA template will help smooth the way here.
As is usual with LMA documents however, the template is issued with the reminder that it is a starting point for drafting only, and needs to be tailored to the relevant transaction. The provisions, naturally, reflect the insurance provisions in the LMA REF Single Currency Term Facility Agreement for Multiproperty Investment Transactions, including the requirement that the security agent be composite insured in respect of its own separate insurable interest. This has been a point of negotiation on many transactions since the LMA first published the insurance provisions in its Real Estate Finance documents as insurers sometimes increase premiums in response to the request that the security agent (or lender on bilateral transactions) be named as composite insured.
Why Composite insured
The legal effect of co-insurance on a composite basis is that the rights of each co-insured are separate to those of the insured obligor. This means that, provided the policy contains the appropriate provisions, if one co-insured does something which vitiates (invalidates) its cover under the policy, this does not vitiate the other co-insured’s cover as well. This differs to joint insurance so the distinction is of particular importance to finance parties.
For more tips on dealing with insurance in loan transactions see our Top 10 tips here.
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