Certificate of Title Top-Up Insurance – a guide

The rising cost of professional indemnity insurance (PI) is a continuing issue for businesses – as well as potential purchasers and lenders on large transactions.

Many law firms are now unwilling to move beyond a set figure of liability (driven by their PI limit) regardless of the size of deal. This is leaving a gap on large transactions between what law firms are offering and the level of protection an investor or lender needs.

Lockton have designed a new product to resolve this and here we guide you through exactly how it works.

What is Certificate of Title Top-up Insurance and how does it work?

Certificate of Title (CoT) Top-Up Insurance is a new product designed to fill the gap left by law firms capping their financial liability under a CoT. The main premise is that the limit of the CoT Top-Up policy would “top-up” the insured’s financial cover to the full purchase price of the acquisition property (or the facility amount in the context of a refinancing).

In terms of how it operates, it is important to note that it is not additional professional indemnity cover for the law firm that is issuing the CoT; the CoT Top Up policy insures the property by reference to certain statements and certifications contained in the CoT.

The CoT Top Up policy sits in excess of the financial liability offered under the CoT and in order to claim under the CoT insurance policy, the insured party must have a successful claim against the CoT provider under the CoT (save that the relevant law firm must have already paid the limit of their financial liability under the CoT). In this sense the limit of liability is treated as the retention under the CoT Policy.

Who is the insured party under the policy?

The insured party under the policy is the addressee named in the CoT. It is also possible to assign the policy to another member of the purchaser’s group following completion of the acquisition if a restructuring is contemplated. In the context of a refinancing, the security agent is typically the named insured under the policy and there is flexibility built into the policy should the members of the lending syndicate change over time.

How long is the policy in force?

The policy is in place for as long as the addressee of the CoT owns the relevant property – there are no specific time limits built into the policy.

Is it expensive?

The pricing for this product is driven by (i) the total enterprise value (EV) or facility amount; and (ii) the financial limit set in the CoT (which will be the retention / excess under the policy). The rate on- line (being the premium as a percentage of the cover limit) for this product is typically between 0.025% - 0.06%.

Looking at a recent example, on a £500m acquisition where the limit under the CoT was set at £250m (and so the cover offered under the policy was a further £250m to reach the EV), the rate on-line was set at 0.05% which equated to £125k (excluding the applicable insurance premium tax).

What is the max limit of cover that can be included here?

At present, the maximum sum we have seen the market offer is £850million (on top of a sizeable excess).

Which statements and certifications in the CoT are insurable?

As an illustration of the scope of cover under a policy on a recent transaction (noting that this is determined on a purely case by case basis), the underwriter has been able to provide cover using the City of London Law Society standard:

  • most if not all the certifications given at 2.1.3 of the CoT (Title);

  • all the statements in Schedule 2 (Property Details);

  • Statements 1-11 of Schedule 3 (Matters affecting the property);

  • Statement 12, 18 and 19 of Schedule 3 (planning) – subject to receipt of the supporting planning applications / permissions;

  • Statutory matter 22 in Schedule 3 (compliance);

  • majority of the statements in Part 2 of Schedule 4 (Headlease); and

  • Schedule 5 (letting documents) – dependent on the asset and sub-sector.

There is considerable flexibility on the extent of the cover offered under the policy based on the findings from the CoT provider and the scope of the due diligence undertaken, however generally speaking the underwriter is unable to provide cover in respect of:

  • the terms of any head lease or underlying letting documents (save with respect to title, for example statements relating to rent review, repair and alienation provisions would be excluded);

  • environmental notices and permits;

  • construction work, fixtures or fittings;

  • technical and/or structural matters; and

  • matters relating to taxation or the correct payment of taxes.

Is this product available for certificates using forms other than the City of London Law Society Standard (CLLS)?

It’s strictly only for the long form CLLS CoT template. On transactions utilising a different form, this product isn’t available and we would recommend using the more common title to real estate insurance policy in such circumstances.

If you are interested in discussing this solution in further detail, please contact Somers Brewin at somers.brewin@lockton.com (opens a new window) or + 44 (0)7920 106 875.