BANKNOTE – INSURANCE CONDITIONS PRECEDENT

BEWARE OF ONEROUS CONDITIONS

BANKNOTE – INSURANCE CONDITIONS PRECEDENT

Insurers have historically used conditions in policies as a means to cause an insured party to act in a

certain way in order to implement prudent or specific risk management measures.

Depending upon the nature or type of such conditions, a breach can have varying significance to the

insured parties (including the lenders). A breach of an “ordinary” condition would typically require

the insurer to show that the breach prejudiced the insurer. However, we are seeing an upwards trend

in the use of conditions precedent which could enable an insurer to decline a claim and/or avoid the

policy, regardless whether the breach had any bearing on the loss.

Insurance policy conditions typically relate to the conduct of the insured party during the policy

period including the claims procedure, and can be categorised as follows:

1. CONDITIONS PRECEDENT TO RISK:

2. CONDITIONS PRECEDENT TO LIABILITY:

3. “CATCH ALL” CONDITIONS PRECEDENT TO LIABILITY:

These relate to the validity of the contract and the attachment of risk (effectively the commencement of insurance). An example would be the requirement for the insured to pay the premium as a condition precedent to the insurance coming into force.

Specific conditions, typically the material obligations such as prompt notification of occurrences which may lead to a claim. A breach allows an insurer to avoid liability for a claim regardless as to whether the breach prejudiced the insurer. This would not affect any future claim provided the condition was complied with.

Often characterised by all-encompassing language, these state that every condition in the policy is a condition precedent to liability regardless of materiality.

It is not unreasonable for insurers to specify critical risk management requirements as a condition to

providing cover. However, we have seen an increase in the use of conditions precedent, bearing little

relation to any critical activity and even worse, sweeping “catch all” conditions precedent.

It is therefore imperative to identify potentially onerous insurance conditions precedent early and

(wherever possible) have these removed, appropriately modified and/or to incorporate carefully

worded non-vitiation provisions to robustly protect the innocent parties’ (including lenders’)

interests.

In the next edition of Banknote, we will explain the purpose of non-vitiation provisions and how these are utilised to safeguard lenders.

ABOUT MARSH’S STRUCTURED FINANCE TEAM

Marsh’s structured finance team is exclusively dedicated to provide lenders’ insurance,

due diligence, and advisory services for projects worldwide.

Since 1995, our team of professionals (based in the UK) has acted as lenders’ insurance adviser

(LIA) on more than 700 projects, and in the last three years on projects spanning more than

40 countries and 20 industry sectors. Our objective on all our engagements is to assist lenders

and project counterparties to achieve a bankable insurance solution.

Our depth and breadth of knowledge and experience in this specialist area of insurance advice is

further reinforced by being a component of our Global Infrastructure Practice. Marsh’s extensive

global infrastructure expertise assists clients’ interests throughout negotiation and execution of

contractual structure, design and build, operations, maintenance and refurbishment – all this in

context of construction projects, secondary purchase and sale of assets, public and/or private

financing, or related capital raising.

The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.

Marsh Ltd is authorised and regulated by the Financial Conduct Authority.

Copyright © 2016 Marsh Ltd All rights reserved

GRAPHICS NO. 16-0730

For more information about Marsh’s risk management services and solutions, contact your localMarsh representative or visit uk.marsh.com

DAVID BORTHWICKStructured Finance Practice HeadT: +44 20 7357 5179M: +44 7885 751 493david.borthwick@marsh.com

CHRISTOPHE PUN SINSenior Vice PresidentT: +44 20 7357 3314M: +44 7971 781 470chris.punsin@marsh.com