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Non-Payment Insurance Policies – Practical Drafting Tips for Policyholders

Posted by Marian Boyle on Jun 6, 2022 12:29:06 PM

In the latest edition of Sullivan's webinar series, Marian Boyle, Head of Insurance and Dispute Resolution at Sullivan's London office discussed the key clauses found in comprehensive non-payment insurance (NPI) policies. She gave practical advice for policyholders on what to look out for in NPI wordings and provided examples of how the duties NPI policies impose can impact on the operation of the underlying credit risk they insure.

NPI policies provide an indemnity in the event of non-payment for any reason (save for those expressly excluded). If appropriately drafted, NPI policies permit policyholders to manage risks and to expand their financing capacity/offering using these highly effective credit support instruments.

The legal landscape

While NPI policies are subject to general English contract law principles, they are also governed by a body of statutes and common law principles peculiar to insurance contracts. How these rules operate in practice is not always evident from a plain reading of the contract. Thus, when taking out NPI, understanding the legal framework within which all such policies operate is vital for ensuring that the risk transfer relied upon is as robust as possible.

As with other English contracts, any NPI policy must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably be available to the parties when they entered into the contract, would have understood the language of the contract to mean. Evidence about what a party subjectively intended, or understood the contract to mean, is not relevant.

The insuring clause

The insuring clause describes the risk that insurers will cover. It always needs to be read in conjunction with the policy exclusions (see below). It is important that it is clear when a loss will be considered to have occurred.

It is equally important to ensure that the trigger for insurers’ indemnity is appropriate for the financing transaction that is being covered. The trigger for loss in respect of non-payment under a term loan is very different from structures where the insured is participating between the direct lender and the policyholder. Similarly, if what is being insured are potential losses under a receivables purchase agreement, the loss trigger will need to be drafted differently.

Exclusion clauses set out the circumstances in which coverage will not be provided, even if losses would otherwise fall within the scope of the insuring clause. NPI policies might, for example, exclude cover where the non-payment is caused by a breach by the policyholder of some term of the financing agreement, or where the loss is caused by the fraudulent or illegal act of the policyholder.


Any exclusion needs to be carefully reviewed to ensure that the scope does not unreasonably undermine the extent of the coverage. The trigger for the exclusion should also be scrutinised carefully. Exclusions that are drafted to operate even if the matter excluded is only remotely connected to the loss suffered can narrow the scope of coverage unacceptably.


The term warranty has a very specific meaning in the context of insurance law. They are terms that must be exactly complied with, whether or not material to the risk. If a warranty is breached, the consequences for the insured are serious. Save in limited circumstances, insurers will be excused from liability in respect of any loss occurring or attributable to something happening during the period when the insured is in breach of warranty.

NPI policies may require the policyholder to warrant, for example, that the obligor's payment obligations under the facility agreement that is being insured are enforceable. If it turns out that they are not, insurers may well consider themselves as off-risk.

If a warranty is capable of remedy, so that the risk to which the warranty relates, after the breach is rectified, becomes essentially the same as that originally contemplated by the parties, insurers will come back on risk. At present, there is little guidance as to how the English courts will interpret these relatively new provisions imposed by the Insurance Act 2015 (2015 Act). Given the potential impact on cover, it is vital for policyholders to consider the precise form of the warranties carefully and to assess how practical it will be operationally to comply with during the life of the policy.

Conditions precedent

Where a policy condition is expressed as a condition precedent to the inception of risk, then the risk being insured will not attach until the condition is satisfied. If a condition in a policy is expressed as a condition precedent to insurer’s liability then, if the condition is not complied with, the insurer will be entitled to deny liability. Unlike warranties, a breached condition precedent cannot be remedied. So, the practical advice, as with warranties, is to consider the scope of any conditions precedent carefully and assess how likely it is that a breach might occur and how that risk might be managed.

Fair presentation

NPI polices are likely to contain provisions addressing the policyholder’s duty of fair presentation. The duty arises whenever a new insurance policy is taken out or when an existing policy is varied. Failure to properly discharge the duty of fair presentation can lead to avoidance of the policy by insurers. It is therefore important for policyholders to be fully familiar with the extent of the duty of fair presentation. It is governed by Part 2 of the 2015 Act, which is widely accepted to have extended the disclosure burden on policyholders.

As with the new legislation in relation to warranties, at present there has been no case law clarifying the areas of uncertainty arising from the drafting of the 2015 Act. These uncertainties can however be addressed by agreement between the parties.

The key aim of any fair presentation clause in NPI policies should be to ensure that the scope of the fair presentation obligation is clear and that from a practical perspective, the policyholder is able to comply with it. More details on this topic can be found in our previous presentation.

General conditions

General conditions are considered as distinct from exclusions, warranties and conditions precedent. Breach by the policyholder of a general condition in most circumstances is only likely to give rise to a claim for damages in the event that insurers can show that they have suffered some loss as a result of the breach. However, many general conditions in NPI policies will impact the policyholder’s management of the underlying transaction during the life of the policy. It is thus important that anyone responsible for running the facility is aware of these conditions and the effect they may have on limiting the policyholder’s freedom to act. These clauses include:


NPI policies will require notification to insurers in the event of a request to reschedule an insured payment. Rescheduling requests may have to be dealt with quickly in order to achieve an optimal outcome. The policy should provide clarity as to the steps a policyholder is permitted to take in the event of conflicting or delayed decisions from insurers.


 NPI polices are likely to provide that acceleration of the underlying loan does not give rise to an automatic requirement for insurers to pay a claim on an accelerated basis. The general position is that the policy will only pay on the original maturity date, unless insurers otherwise agree.

 Amendments to the insured loan

 NPI policies will provide that a policyholder cannot agree to amend the underlying financing without insurers’ consent. Often this prohibition is framed as a warranty. It is vital, on a practical level, for policyholders to have a system in place to ensure insurers are consulted before any variations of the terms of the insured loan are agreed.

Notification of circumstances

An obligation to notify insurers of the occurrence of a loss event, or of circumstances that might give rise to a loss, is common in NPI policies. Any time limits imposed need to be carefully managed. The aim is to enable insurers to become involved at an early stage in decisions regarding loss mitigation steps.

Loss mitigation

NPI policies are likely to contain a general condition requiring the insured to take all reasonable steps within its power to prevent or minimise loss. Such clauses often require consultation with insurers regarding the measures that are being proposed. Reasonable measures could be deemed to include enforcing security or commencing legal process against the obligor.

Claims process

NPI policies may contain fixed timescales within which policyholders should submit a claim following the date of default. Most policies provide fairly extensive waiting periods or claims assessment periods which specify the time that must elapse from the date the loss occurs before a claims payment is due from insurers.

Obligation of confidentially

Many NPI policies require policyholders to maintain strict confidentiality regarding the existence and terms of the policy. Such clauses are usually subject to a carve out for disclosure to the insured’s own professional advisors and its regulators.


There is no substitute for a careful reading of policy terms. An insurer’s agreement to indemnify under a NPI policy is subject to compliance with key policy terms and conditions.

When considering any policy, assess whether the operational obligations that are being proposed are manageable. Stress testing of policy terms should include a detailed assessment of whether it will be possible to put in place a robust system to ensure compliance with the terms and conditions of the policy. Everyone responsible for running the insured facility should be aware of the effect these conditions have on limiting the freedom to act.

Click here for a link to a video of the webinar.

For further information regarding policy drafting or the use of insurance as a credit support instrument generally, please contact Marian Boyle or Hannah Fearn.


Topics: commercial insurance policies

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About the Blog

Talking Trade Finance is here to provide you with all of the latest updates in the Trade & Export Finance Industry.

The material on this site is for general information only and is not legal advice. No liability is accepted for any loss or damage which may result from reliance on it. Always consult a qualified lawyer about a specific legal problem.

Meet the Editor


Ellis Lawson is a partner in the Trade & Export Finance Group in Sullivan's London office. He has extensive experience across a wide range of finance products and geographies, having spent significant portions of his career based both in London and in the Middle East and having advised on transactions across Europe, the Middle East and Africa. Ellis is also a speaker for Sullivan's Trade & Export Finance webinars.


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