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.