Typical issues covered in the project documents Insurance

• undertaking to effect required coverages – different for construction and operational phases – borrowers should ensure that obligation is to take them out “to the extent that the insurances are available” – to prevent the project company from being in default because relevant insurance markets withdraw certain insurance cover or raise premiums to unacceptably high level
•  insured amounts required and maximum deductibles (not always possible to specify this for operations phase at the outset) – borrower should ensure that lenders only have discretion to demand insurances that are “available” in the operations phase
• mechanism for increasing insured amounts – eg index-linking or agreement between the parties, with resort to an expert in event of disagreement
• is insurance for replacement value or indemnity (actual cash value) basis? Lenders usually insist on replacement value – lenders may agree to replacement value basis for terrorism insurance as it is difficult to obtain – but otherwise lenders insist on full reinstatement basis for insurance
• undertaking to effect insurances through a broker and for approval of the insurers by the banks on terms acceptable to the banks (including, possibly, non-vitiation clause)
• project company required to inform lenders direct of any changes to the terms of the polices
• insurer required to give lenders notice of cancellation of policy (so lenders may be able to pay premium if cancellation is for non-payment, etc.)
• undertaking to procure broker gives the banks a letter of undertaking, which will require broker to

1. arrange for loss payable clauses in agreed form to be included in policies
2. arrange for a notice of assignment to be endorsed on each policy (in some jurisdictions notice will need to be given jointly by borrower and the lenders in order to be valid)
3. hold insurance slips and policies to lenders’ order
4. advise the agent bank of any non-payment of premia and of any circumstances which might result in any insurance being avoided

•  undertaking to pay all premia when due and to provide the agent bank with evidence of payment
• provision that if borrower defaults in any of his insurance obligations, banks can perform those obligations in his name and at his expense.
• obligation to apply substantial physical damage insurance proceeds in prepayment of loans