You may remember in the past when arranging your buildings insurance policy being asked if your property was mortgaged. If it was, you would be asked for the lender’s details, and these would be noted as ‘an interest’ on your policy.
The theory behind ‘noting an interest’ was that without suitable insurance cover, a property would be considered a risk to a lender. If the property were to be destroyed by fire or flood for example, and there was no suitable insurance cover in place, then the asset in which the lender had invested would be at best reduced in value, or at worst, worthless. A fair request then of the lender you would think, for the borrower to have adequate cover in place.
We said you may remember in the past being asked for your mortgage lender’s details when arranging insurance cover. But have you noticed that the question is rarely, if ever, asked these days? There is a reason for this.
Bankers and Insurers Agreement Ended
In the past, there was an agreement between the British Bankers Association (BBA) and the Association of British Insurers (ABI) whereby insurers agreed to give notice to a lender of any cancellation or change to an insurance policy. This agreement started in 1992, but it came to an end in 2012. So nowadays, even if an interest is noted, it affords very little protection for the lender. The noted party, i.e. the lender, has no rights under the policy itself and, if the insured party invalidates the policy, then the noted party will be left without protection.
You may be somewhat confused to learn this information, perhaps because your mortgage lender has continued to insist that you arrange suitable insurance cover, and in doing so, note the lender’s interest on your policy. This appears to be the case, with lenders seemingly continuing to ask borrowers to note their interest on their policies. However, it appears that insurers are these days not openly requesting the information like they were in the past. By some accounts, a few of them do not even agree to note an interest when requested.
You may have asked your insurer to note your mortgage lender’s interest on your policy, and have seen that carried out for you. But the key change is that this noting of interest no longer creates an automatic agreement between the insurer and the lender.
If by noting an interest the lender wants warning of cancellation, or of a change to the policy that may affect the lender’s security, say when cover has been downgraded, then it has been suggested by legal experts that the terms of the noting should be clearly set out. In other words, there should be a written agreement between the insurer and the lender, setting out precisely what the lender requires from the insurer, and in what circumstances.
Is noting an interest really necessary?
Some insurers say that there is no need to note a lender’s interest, because their policies automatically include clauses to cover it. However, having seen examples of such clauses, they appear to suggest that the insurer only needs to advise the lender if the property has been subject to damage, or if there is a change in the use of the premises which puts it at greater risk of damage. In other words, if the borrower changes or cancels the policy, there appears to be no requirement for the insurer to advise the lender. Clauses will of course differ from insurer to insurer, so it is impossible to draw any conclusions in this respect.
Since the end of the agreement between the BBA and ABI, lenders have been seeking alternative methods of protecting their interest in insured properties. Some will ask insurers to designate them as the first loss payee in respect of any payment made under the policy. This means that the proceeds of any claim will be paid to the noted party, rather than the policy holder. Other lenders will have the borrower assign the proceeds of the policy to the lender, although this may only be suitable for certain types of policy.
There is also a protocol known as ‘composite insured’ or ‘co-insured’, which adds the lender to the policy and creates a separate contract between them and the insurer. This has the effect of avoiding the risk of cover being invalidated by the actions of the borrower. Many of these alternatives are used in larger, commercial transactions where the risk to the lender is greater. If you are asked to agree to any such terms, you should take legal advice before proceeding so that you are clear on your position.
So, what can we conclude from all of this?
It would appear that, whilst some insurers will agree to note a lender’s interest on an insurance policy when asked, this action does not carry any formal requirement for the insurer to advise the lender of any change to or cancellation of the policy, unless there is an express agreement between them that states as such.