What Is a Loss Payee?
The loss payee is the party to whom the claim from a loss is to be paid. A loss payee can mean several different things; in the insurance industry, the insured or the party entitled to payment is the loss payee. The insured can expect reimbursement from the insurance carrier in the event of a loss.
Loss Payee Explained
Loss payee can be different from "first loss payee," which is the party that must be paid first when a debtor defaults on a loan. 'Loss payee' is simply a generic phrase signifying the rightful recipient of any kind of reimbursement and is most often used in the auto insurance industry.
When financing a vehicle purchase, a buyer must agree to carry insurance on the secured property, otherwise forced placed insurance becomes a possibility. The financial institution making the loan typically insists that they are indicated as the loss payee on the insurance policy. The loss payee section is a section on an auto insurance policy that lists your lender’s name and address on the given collateral.
The lender will usually require verification of insurance coverage, and the loss payee should be added as soon as you buy insurance for the covered vehicle. This verification of insurance cannot be satisfied simply by an insurance id card; it needs to be a declarations page. The declarations page will have multiple pieces of crucial information listed for your lender:
- Policy effective dates
- VIN of the vehicle insured
- Vehicle coverage
- Loss payee listed properly
What Loss Payee Status Means
When listed as a loss payee, the lender will receive notification of your insurance policy’s status on a regular basis. The notifications will inform the lender of all activities on your insurance policy. The loss payee section of an auto insurance policy creates more than a direct link between your insurance company and your lender. Since you are not the sole owner of the collateral, claim checks will be payable to both you and the lender...or directly to a repair shop. In a total loss, the lender will be paid first.
The lender being listed as a loss payee ensures the lender will be compensated for their collateral, regardless of potential losses. The loss payee is essentially a safety net for the lender to reduce unpaid loans. If you do not list your lender as loss payee, it is probable the lender will put forced placed insurance on your collateral.