What Is a Loss Payable Clause?
A loss payable clause is an insurance contract endorsement where an insurer pays a third party for a loss instead of the named insured or beneficiary. The loss payable provision limits the rights of the loss payee to be no higher than the rights guaranteed to the insured.
A loss payable clause might also be called a loss payee clause.
- A loss payable clause is an insurance contract endorsement where an insurer pays a third party for a loss instead of the named insured or beneficiary.
- The loss payee is usually registered as the recipient because it has an assignment of interest in the property being insured.
- Loss payable clauses are often used to protect lenders who have leased property or extended credit.
- They are commonly found in commercial property, auto, and maritime insurance contracts.
How a Loss Payable Clause Works
A loss payable clause indicates that a third party, referred to as the loss payee, receives funds paid for a loss. Usually, the loss payee is registered as the recipient because there is an assignment of interest in the property being insured.
Loss payable clauses are often used to protect lenders who have leased property or extended credit. They are regularly present in commercial property insurance contracts, specifically for financed properties, where the mortgage holder is the loss payee. Because a lien exists on the property, the loss payee is also known as the lien holder.
A loss payee could be a lender, lessor, buyer, property owner or any other party with interest in the insured property.
Loss payable clauses are also commonly found in personal and commercial auto policies and maritime insurance contracts.
Example of a Loss Payable Clause
When financing a vehicle purchase, the buyer must agree to carry insurance on the secured property. Usually, the financial institution (FI) making the loan will require verification of insurance coverage and insist that it is registered as the loss payee on the policy. Failure to do so could result in the lender implementing forced placed insurance.
Listing the lender as loss payee ensures that it will be compensated, regardless of potential losses. In short, it essentially functions as a safety net for the lender to reduce unpaid loans.
Since the buyer of the vehicle is not the sole owner of the collateral, claim checks will be payable to both the driver and the lender — or directly to a repair shop. In a total loss, the lender will be paid first.
Loss Payable Clause Requirements
Insurance contracts often limit the amount of time that can pass between the occurrence of a loss and the filing of a claim. The time limitations may vary according to the type of risk covered since some losses take longer to develop.
If a loss occurs, the insured party is often required to file a claim. Should no proof of damage or loss be submitted within the allotted period, the loss payee then becomes responsible for filing the claim.
The insurer may make separate payments to the insured party and the loss payee. When payment is to the loss payee, the insurer earns the legal right to pursue and recoup funds from any third party that caused the damage. In other words, the loss payee waives its right to seek any third party damages as soon as it has been paid by the insurance carrier.
If a policyholder should cancel a policy after funds are submitted to the loss payee, the loss payee must assign the lien to the insurance carrier, to equal losses paid.
The wording of the loss payable clause often details exceptions when the loss payee's concern is unprotected. These cases include fraud, misrepresentation, or intentional acts committed by the policyholder such as deliberately damaging or destroying the property.
The loss payee may also lose its protection if aware that the property, such as a vehicle, changes ownership or faces an increased risk of damage or loss. If there is a reason for the insurer to deny payment to the policyholder, then the insurer is under no obligation to submit payment to the loss payee.