What is an insurance broker letter?
This is a letter from the borrower’s insurance broker, addressed to the lender, that outlines the insurance policies the borrower has in place and confirms to the lender that the policies comply with the insurance specific covenants contained within a loan agreement.
Where would you expect to see a broker letter?
Insurance broker letters are commonly required by lenders on real estate finance transactions. Insurance over the relevant properties and related assets represent a core part of such transactions. Lenders will often look to take security over the proceeds of the insurances and will set out key requirements as to what the insurance should cover in the loan agreement. The broker letter is often required as a condition precedent to funding under a loan agreement for such transactions, as it confirms to the lender(s) that at the point of funding insurance is in place which meets the requirements under the loan agreement.
What confirmations do lenders typically require in a broker letter?
A broker letter will typically provide a summary of the insurance cover in place for one or more properties, confirm that the insurance policies meet the requirements set out in the loan agreement and that all premiums on those policies have been paid in full.
In addition, a lender might ask for a broker to confirm certain additional matters in its broker letter. These might include confirmations relating to the following:
- Composite Insured – a lender might be named as composite insured or “co-insured” on the insurance policy (so providing the lender with its own separate insurable interest under the insurance policy and with it the same rights against the insurer as enjoyed by the insured borrower)
- First loss payee – a lender may be named as first-loss payee in respect of certain claims (excluding perhaps claims under any public liability and third party liability insurances or possibly claims below a certain threshold) so that the insurer pays proceeds in respect of those claims directly to the lender rather than the insured borrower
- Non-vitiation clauses – a non-vitiation or non-invalidation clause prevents the insurer from invalidating the insurance as against the lender by reason of the insured borrower’s breach of certain provisions of the insurance contract
- Waiver of subrogation – most insurers will have the right to recover the cost of a claim that is paid out when a third party is responsible for the claim. A lender may require the insurer to waive this right which is often referred to as a waiver of subrogation (but exceptions may be made for claims paid out as a result of any fraud or criminal offence)
- Notifications of invalidation / cancellation - this is typically where an insurer agrees to give a minimum period of notice to a lender of any non-payment of premiums by the borrower or any other matters that could invalidate or result in the cancellation of an insurance policy (so that a lender can remedy such situation should it choose to do so)
What is the starting point?
The Loan Market Association has prepared a template form of insurance broker letter that can be used for real estate finance multi-property investment transactions. That said, many insurance brokers will prefer to use their own form of broker letter, particularly if they are seeking to include their preferred form of reliance, disclosure and limitation language.
Is there a better way?
Lenders could look to get an insurance consultant (IC) who is a specialist on the particulars of insurance policies and contracts to carry out due diligence on the borrower’s policies and report directly back to the lender. The IC can then liaise with the broker/ insurers and request specific amendments/endorsements in line with the lender’s requirements.
Whilst introducing a third party may seem like extra work, by having an IC review and report on the policies in place the lender may get the comfort it seeks, whilst the borrower may avoid a prolonged and expensive legal debate over the terms of a broker letter.
Key take away
Negotiating the specific wording of an insurance broker letter often takes a considerable amount of time. It is not unusual for the first draft of a broker letter to contain inadequate confirmations from a lender’s perspective. For this reason, borrowers and their lawyers should look to fast-track any requirement for a broker letter to avoid any delays as the transaction progresses.