28th August 2019

From borrowing to building: Understanding lender requirements

By Chloe Black
Account Handler
By Jodie Warren
Account Handler
Couple planning renovation

Many property owners require additional finance to start or complete their renovation project. It is very common for lenders to have a number of requirements with regards to the insurance policies as they need to protect their own investment.

Since the end of the British Bankers Association/Association of British Insurers Bank Agreement in 2012, insurers have recognised that there has been an increase in the number of requests from lenders to make amendments to insurance policies. Primarily, these requests are to protect the lender’s interest in the property and the finance they have provided. However, some requests can be more complex, causing challenges for insurers.

The four main requests that are commonly encountered are: noting of interest, first loss payee, non-invalidation and composite insured. Here are the differences between each.

Noting of Interest

This is usually the most common and simplest request. This simply means that the lender’s interest is noted on the borrower’s policy. Noting the lender has no specific legal effect and the lender does not become party to the insurance.

First Loss Payee

Loss payee clauses designate a third party as being authorised to accept money paid out under an insurance policy. Once your lender is noted on your insurance policy as a loss payee, they will receive notification on your insurance policy’s status. The type of notifications they will receive include whether there have been any changes/amendments to the policy, late payment and policy cancellation. In the first instance, insurers would contact the First Loss Payee to establish who the money is to be paid to. Usually there is a monetary limit of £10,000, and smaller payments may be paid directly to the borrower without consultation. An implication of this clause is that it could result in the claims money being used to pay the initial loan rather than reinstate or repair the property following the loss.

Non-Invalidation

This ensures that the policy remains in force even if a policyholder invalidates their cover. This has significant implications for insurers as they can no longer rely on their policy terms and may pay claims they would have perhaps declined.

Composite Insured

Composite insurance requires two separate contracts of insurance and provides the lender with a separate, distinct right of claim against the insurer which is segregated from any rights the borrower may have. Each party insures their own limited interest and can only recover the amount representing that interest. This enables both parties to make an independent claim under the policy and could result in the insurer paying out twice for the same event.

This clause is the most burdensome for insurers and can cause a number of implications because insurers could lose their right to avoid against the lender, even when the borrower is guilty of non-disclosure or misrepresentation. This could be due to the lender insisting on a non-invalidation clause and excluding the duty of disclosure. This is a significant change to the policy structure and must not be underestimated.

Renovation Plan is able to cater for all of the above. If you require a quotation, please click here to view the specialist schemes and products we offer.