Loss Payable Versus Lender's Loss Payable
Has a loss payable clause been added to your commercial property policy? How about a lender's loss payable clause? These clauses have similar names and are included in the same endorsement, but they serve different purposes.
What is a Loss Payee?
To understand loss payable clauses you must first comprehend the meaning of loss payee. This is a generic term meaning a person or entity that has an interest in property held or used by someone else. A loss payee may be a property owner, a lessor, a lender, a buyer or some other party.
For example, Bill Buckley owns Buckley's Service Station, a gas station located in Pleasantville. Bill is expanding his business to include car washing services. He is adding a new bay that will contain a self-service car washing device that Buckley's is leasing from Laver Supply, a car wash supply firm. As the owner of the car washing equipment, Laver Supply clearly has an insurable interest in it. Thus, the lease agreement requires Buckley's Service Station to insure Laver as a loss payee under Buckley's property policy.
A loss payee differs from a mortgagee. This term means a lender that provides funds for the purchase of real property (land and/or buildings). Mortgagees are covered under a standard mortgage clause that is included in most property policies.
Loss Payable Provisions Endorsement
Loss payees are typically added to a commercial property policy via a standard (ISO) endorsement called Loss Payable Provisions. The endorsement includes a schedule for listing each loss payee's name, address, and the property in which that party has an interest. The schedule should also indicate which loss payable clause applies. There are four options, and only one should be selected for each loss payee.
- Loss Payable Clause. Should be selected when the covered property is personal property (not a building)
- Lender's Loss Payable Clause. Should be selected when the loss payee is a creditor
- Contract of Sale Clause. Should be selected when the insured business is purchasing property by making periodic payments to the seller over a specified time period.
- Building Owner's Loss Payable Clause. Applicable when the loss payee is a building owner
Loss Payable Clause
The Loss Payable Clause (option 1) should be used when the loss payee is not a creditor and owns property other than a building. The Building Owner's Loss Payable Clause (option 4) is appropriate when the loss payee is a building owner.
In the Buckley's Service Station example cited above, Laver Supply can be insured under Buckley's property policy via the basic loss payable clause (option 1). If the machine is damaged during the term of the lease by a peril covered by Buckley's policy, the policy should cover the loss. In accordance with the loss conditions in the policy, Buckley's insurer will adjust any loss with Buckley, not Laver. The insurer will make the loss payment jointly to Buckley and Laver.
Lender's Loss Payable Clause
The Lendor's Loss Payable Clause should be used when the loss payee is a creditor. This clause will apply to a lender only if its interest is established by a written document such as a warehouse receipt, financing statement or bill of lading. If insured property is damaged by a covered peril and the creditor has an insurable interest it, the insurer will make a loss payment directly to the loss payee.
For example, suppose that Bill Buckley (in the previous example) decides to add a second bay for car washing. This bay will contain a new automatic car wash that Buckley's is purchasing with a bank loan. As a condition of the loan, Bill's business must insure Pleasantville Bank, the lender, as a loss payee under Buckley's property policy via a lender's loss payable clause.
Pleasantville Bank has an interest in the automatic car washing machine to the extent of the loan it has extended to Buckley's. For the reasons explained below, the bank will be afforded considerably more protection under the Lender's Loss Payable Clause than it would receive under the standard Loss Payable clause.
Under the Lender's Loss Payable Clause, the loss payee has the right to receive loss payment even if it has started foreclosure or similar action on the covered property. For example, suppose that Buckley's Service Station fails to make payments on its loan from Pleasantville Bank. The bank begins foreclosure proceedings. Two weeks later, the automatic vehicle washing device is destroyed by a fire. Even though the bank has foreclosed on the loan it made to Buckley's, it is eligible to receive payment for the loss under Buckley's property policy.
Acts Committed by the Insured
The loss payee retains its right to receive loss payments even if the insurer denies the insured's claim because of acts the insured committed (such as dishonesty) or because the insured has failed to comply with the terms of the policy. For example, Pleasantville Bank will retain its right to receive payment for a covered loss even if Bill has failed to pay a quarterly premium. However, the bank must fulfill certain obligations.
First, the loss payee must pay any outstanding premium that is due. If the insured has failed to submit a signed, sworn proof of loss, the loss payee must submit one. The loss payee must also notify the insurer if the ownership of the insured property has changed (e.g., the loss payee has repossessed the property).
The loss payee will be notified if the insurer cancels the policy or decides to non-renew it. If the insured has failed to pay the premium, the insurer will provide 10 days' notice that it intends to cancel the policy for nonpayment. The insurer will provide 30 days' notice if it cancels the policy for any other reason. If the insurer decides to non-renew the policy, it will notify the loss payee 10 days before the policy expires.