Banks quite naturally have a concern to ensure that the properties on which loans (of whatever scale) are secured retain their value and so generally require borrowers to insure the property against all the usual risks.  An issue for the banks can be alterations to the insurance cover which might affect the banks' security, such as cancellation of the policy or changes to the scope of cover.

Since 1992, an agreement has been in place between the Association of British Insurers ("ABI") and the British Banking Association ("BBA") whereby a bank could notify its interest in relation to secured properties and the insurers would tell the bank of any cancellation or alteration in cover, with a grace period to allow the bank to arrange its own policy if the borrower had failed to maintain the required cover.

The ABI has announced that it intends to withdraw from this agreement.  The notice period for the withdrawal has yet to be confirmed, but the effect will be that banks will no longer be able to rely on receiving notice from insurers of changes that might affect their security.

Mere noting of a bank's interest on the borrower's policy gives the bank very little legal protection as far as changes to or cancellation of the cover is concerned and the more robust approach commonly used on large transactions is for the lender to be named as a co-insured on the policy for its own respective rights and interests, giving the bank direct rights.  On lower value transactions, this approach is less common (in part because it often increases the premium payable and because of increased administration involved) and it is here that the withdrawal of the agreement is likely to be felt.  Lenders who have not historically been named as co-insured may now wish to review their internal policy, as well as the insurance policies which ought to be in place.

To read more about co-insurance, click here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 12/09/2011.