What is the team’s past experience when it comes to Due Diligence and advising lenders?
Darren Ting: As a team, we have a combined experience of 21 years providing insurance advisory services to lenders. Whilst our experience in this field is paramount to ensure we provide the comprehensive service that we pride ourselves on, it is the teams’ vast experience in placing real estate portfolios into the insurance market that makes us unique. Each member of the team has been directly involved in the placement of pan-European and UK real estate insurance programmes. This experience ensures the team are fully versed with the nuances of the market and can provide an initial assessment in respect of the insurance requirements of the loan agreement.
Why do you think now is a particularly relevant time to be officially launching this additional service offering?
Darren Ting: There has always been scrutiny over all aspects of the lending process, however previously the insurance stream was often serviced by the legal advisors. It is clear that the tide has changed in this respect and the importance of insurance expertise to advise on this work-stream has come to the forefront, making this a perfect time to launch our offering.
The intense hardening of the real estate market has also been a factor in launching at this time as the market has changed dramatically.
Increased pricing is one outcome from this, but the shifting approach of insurers towards their policy wordings and their acceptance of changes to the policy form is far more pertinent. This shift in the placement spectrum means that certain changes to the insurance policies can be more difficult to achieve. Now, a lender who has the insurance expertise to coach the borrowers’ advisors on how to achieve their goal and who can provide pragmatic placement advice is more valuable than ever.
Furthermore, we have been providing Due Diligence services to a core group of lenders for a number of years at Gallagher, meaning we have ensured that our service protocols and standards have been formalised prior to this launch.
What does “Due Diligence” actually mean in this context; what do you do?
Craig Charlton: Due Diligence is an overarching term, which consists of us assisting lenders throughout the entirety of the lending process. At the core of this service is our advice and expertise, which allows us to speak candidly with lenders and provide market knowledge to allow for pragmatic approaches to the insurances in place. This includes working with the lender and their advisors, but also perhaps more importantly working with the borrower and their broker. We find that clear communication channels with the borrowers’ broker allows us to explain the requirements in a language they understand, and leads to a swift conclusion of the work-stream.
In addition, we also provide formal reporting by virtue of a Red Amber Green (RAG) report which clearly states which requirements have been met by insurance, and of course a Broker Letter of Undertaking.
Who or what does a typical client look like, and when do they approach you?
Craig Charlton: Put simply, a typical client is a real estate lender who requires support and advice in respect of the insurances pertaining to the asset(s) being used as collateral for the loan. We have been working with lenders across the spectrum from banks with a household name to boutique lenders specifically targeting certain asset classes or deal types.
It is important that we are approached at the outset of the deal, allowing adequate time to coach the borrowers’ broker and ensure that the insurance requirements are achievable in the current marketplace.
I have a new deal on the cards but I am comfortable with everything in place; why should I use you?
Craig Charlton: There are a number of reasons as to why our service should be implemented in this instance the most pertinent of these is to employ our expertise to review the policy with a fine tooth comb as often there can be nuances to policies which are not always picked up in a legal review.
Furthermore, our market knowledge allows us to advise as to whether the policy that is deemed adequate in order to meet the requirements of a loan agreement could still have potential flaws. For example, a loan agreement will generally require both Property Owners Liability (POL) insurance and Terrorism insurance to be in place; however, both requirements rarely state a specific limit of indemnity.
As a result, we have seen policies in place for POL with a limit of GBP5m for a high footfall shopping centre, where generally we would expect this limit to be at least GBP25m. Terrorism insurance especially in European territories is also a potential pit fall; many policies will have a first loss limit, essentially providing protection up to a limited amount and not for the full reinstatement value. Whilst this placement structure is not inherently defective, the limit procured is extremely important to ensure the bank is protected in the event of a claim.
It is therefore the detail and market expertise that we can offer, which helps ensure that your capital remains protected.
If I already have a retained broker, why could they not undertake this service?
Craig Charlton: The primary reason a borrower’s retained broker would not undertake this service is a conflict of interest; their broker is required to place any additional coverage required under the policy with the insurers. They would therefore be scrutinising their own work without any impartial review being undertaken by a third party. In our view, this can therefore not be relied upon.
Conditions and Limitations
This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/ or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as at 1st September 2020, but you will recognise that matters concerning COVID-19 are fast changing across the world.
You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual contact at Gallagher Construction.