Bank's property insurance requirements - “Co-Insured” and “Composite” is preferable

There may not be much new lending in the current market but banks are certainly re-financing and re-structuring existing debt and should take this opportunity to remedy any defects in the standard lenders' insurance requirements.

New loan documents should ensure that the lender's interest is sufficiently protected by requiring the borrower to refer to the lender as "co-insured in respect of its separate rights and interests" on the insurance policy making it clear that the cover is “composite" (i.e. the policy contains two contracts of insurance between the insurers and the borrower on the one hand and the lender on the other). A bank should avoid asking for its interest to be simply "noted" or for the bank to be named as a "joint insured". The key differences are:

"Co-insured for separate rights and interests" - the borrower and the bank have different interests in the property and each party effectively has the benefit of its own insurance policy. If the borrower's interest falls away, for example, as a result of the borrower failing to disclose something material to the insurer, or in the event of the borrower being struck-off, the bank's interest should still stand. There may possibly be an additional premium payable but this should be borne by the borrower.

"Joint insured" - the borrower and the bank share an identical interest in the property and the rights of one are indivisible from the rights of the other. So if one interest falls away, so will the other.

"Noted" - the bank will not be a party to the insurance policy and will not be able to enforce the policy. Despite this requirement being all too often the norm in lenders' requirements, there is little or no protection for the bank and should be avoided.