Non-Invalidation Clause
The non-invalidation clause preserves cover for other parties, such as lenders or affiliated companies, even where cover would otherwise be invalidated as against the policyholder because of that policyholder's own breach of duty.
- Clause type
- Condition
- Origin/Market
- London Market (LMA/NMA/Lloyd’s)
- Favours
- Insured
- Negotiability
- Negotiable
Purpose
In international property programmes covering several insureds – for example a parent company, several subsidiaries and financing banks – there is a risk that a breach of duty by a single insured (such as a misrepresentation or an increase in risk caused by a subsidiary) could jeopardise cover for all other parties involved. The non-invalidation clause limits this risk by preserving cover for the other, innocent insureds and named third parties.
Effect and limits
If an insured breaches its obligations or acts in breach of the policy, cover generally remains in force for the other insureds and named interested parties (loss payees, mortgagees), provided they neither knew of nor participated in the breach. The insurer typically retains the right, however, to raise defences against, or seek recovery from, the party in breach itself. The clause operates in a similar, though not identical, way to a “severability of interest” clause, with which it is frequently combined.
Negotiation and practice
For lenders and uninvolved group companies in group programmes, the clause is an essential protective tool and should always be reviewed together with the loss payee / mortgagee clause and a severability of interest provision. It is worth clarifying, in each case, whether “knowledge” is assessed at group management level or only at the level of the relevant subsidiary, since this materially affects how effective the protection is in practice.