Loss Payable Versus Lender's Loss Payable
What is a loss payable clause, and how does it differ from a lender's loss payable clause? These clauses can be confusing because their names are so similar. This article will explain the purpose of each clause and how it differs from the other.
A loss payable clause is often requested when a business is using property owned by someone else. A lender's loss payable clause is requested by a lender. Here is an 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 one new bay that will contain a new automatic car wash that Buckley's is purchasing with a bank loan. A second bay will contain a self-service car washing device that Buckley's is leasing from Laver Supply, a car wash supply firm.
Bill has received two demands. First, Laver Supply wants Bill to insure Laver as a loss payee under Buckley's commercial property policy via a loss payable clause. Secondly, Pleasantville Bank, the lender, is seeking coverage as a loss payee under Buckley's property policy via a lender's loss payable clause.
What is a Loss Payee?
The term loss payee 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 lender, a buyer of property or some other party. In the above example, Pleasantville Bank has an interest in the automatic car washing machine to the extent of the loan it has extended to Buckley's. Laver Supply has an interest in the self-service equipment because Laver owns the machine.
The term loss payee generally means someone who has an interest in personal property. A loss payee should be distinguished from a mortgagee. The latter 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 covered under a standard (ISO) endorsement added to a commercial property policy. This endorsement is entitled Loss Payable Provisions. Each loss payee to be covered must be listed in the endorsement. The endorsement lists the loss payee's name and address as well as a description of the property in which the loss payee has an interest.
The loss payable endorsement includes both a loss payable clause and a lender's loss payable clause. A loss payee may be covered under one or the other but not both. The two clauses differ from each other significantly. Which clause is appropriate depends on the loss payee's relationship to the personal property.
Loss Payable Clause
The Loss Payable Clause is generally used when the loss payee is a property owner rather than a creditor. In the Buckley's Service Station example cited above, Laver Supply owns the car washing machine. Thus, Laver has an insurable interest in the machine.
To protect its ownership interest in the car washing machine, Laver is requiring Buckley to insure Laver as a loss payee under Buckley's property policy. If the machine is damaged during the term of the lease by a peril covered by Buckley's policy, Buckley's policy should cover the loss. Note that Buckley's insurer will adjust the loss with Buckley, not Laver. Moreover, the insurer will make the loss payment jointly to Buckley and Laver .
Lender's Loss Payable Clause
This clause is used when the loss payee is a creditor. For a creditor be covered under this clause, its interest must be established by a written document such as a warehouse receipt or bill of lading. If property in which the loss payee has an insurable interest is damaged by a covered peril, the insurer will provide payment for the damage directly to the loss payee.
For the reasons listed below, the Lender's Loss Payable Clause affords the loss payee considerably more protection than the Loss Payable clause described above.
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 Service Station, it is still 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 that is due. 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 (for instance, the loss payee may have 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 of premium. 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.
Creditors Need Added Protection
Clearly, creditors obtain much better protection against property losses when they are insured under a property policy via a lender's loss payable clause rather than a loss payable clause. Keep this in mind if your company loans money or extends credit to other businesses.