Identity of insured
Lenders may prefer the project company rather than one of the participants to take out the insurances as the lenders have more influence over the decisions and acts of the project company, it is the party probably best placed to obtain insurance for the whole of the project period and having one single source may help to avoid gaps in coverage. However, it may sometimes to cheaper to have a project participant provide cover if it has good standing.
Long-term cover
Lenders will want assurances that the insurance cover will continue for the term of the loans – even though insurance can only be taken out on an annual basis. Lenders may require some direct contractual commitment from a member of a consortium, for example, to continue to renew the insurances. Brokers are usually required to enter an undertaking to notify lenders of any proposed cancellation of cover/ amendments to a policy.
Lenders as Co-insureds
In order to perfect insurance security interests and to have control over how insurance proceeds are spent, lenders may seek to become co-insureds on the policies (and become direct beneficiaries of separate and independent policies). Being co-insured rather than joint insured is important as non-disclosure by one co-insured will not entitle the insurers to avoid (vitiate) the policy against the other insured.
However, insurers are resisting providing non-vitiation cover and endorsements for non-vitiation are resisted by them. It may be that insurers will give this cover for a higher premium. However, if it is intended that non-vitiation language is included, this should be made clear to the insurers from the outset otherwise they are likely to resist it. If it is not possible to obtain non-vitiation language, other ways to address the problem are: -
- Obtain a full non-vitiation endorsement from insurers in another insurance market
- Get project company’s insurers to agree that they are satisfied that full disclosure of all material facts has been made to them (not that helpful if need to renew policy or there is a continuing duty on insureds to disclose material facts during course of insurance)
- Banks take a separate policy similar to non-vitiation scheme
- Parallel policy to main banks for lenders only - but onus of providing full disclosure falls on the banks
- Obtain indemnity from other insured parties that if they cause insurance policy to be avoided it will indemnify banks against loss suffered as a result (only helpful if other parties credit worthy)
- Obtain indemnity from project company’s shareholders against losses banks suffer as result of insurance policy being avoided – unlikely to be acceptable to shareholders if have limited recourse financing.
A lesser level of comfort would be having their interests in the policies noted (with or without “loss payable” clauses being attached to the policies), however this will at best mean that insurers cannot obtain good discharge by paying insured – or merely that it has to enquire as to the nature of the lender’s interests before paying away insurance proceeds.
Loss payable clauses
Loss payable clauses are directions to insurers to pay all insurance monies below a certain level to project company and above a certain level to the lenders. Under certain legal systems care will need to be taken in relation to loss payable clauses in relation to third party liability insurance as they may be held to be ineffective. For this reason lenders tend to insist on being co-insureds on relevant policies taken out in connection with a project, with an appropriate loss payable claques being attached.
Subrogation
Project insurances should also include a waiver by the insurer of its rights to subrogation (the right to pursue the party at fault in respect of amounts paid out under the insurance contract). These rights may be inconsistent with the intention of the project company. The project company will not want the project to fail because the insurers used their rights of subrogation against one of the project participants or subcontractors, rendering them unable to perform their obligations. The insurers may therefore be asked to waive certain of their rights of subrogation.
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