Introduction to Payee and Payable Interest in Insurance
When a lender makes a loan secured by personal property, the lender receives its interest in the collateral under the applicable law of the state in which the lender lives. To further protect the value of the security supporting its loan, the lender also requires proof of insurance and occupies an endorsement on the borrower’s insurance policy. When a lender gets an endorsement as a “loss payee” as compared to a “lender’s loss payee”, it makes all the difference if the insured borrower’s policy is for some reason considered to be invalid or voided. The borrower buys the insurance policy and enhances the named insured to secure the lender. It should be ensured by the lenders’ counsel the lender is adequately covered under the policy.
There is a crucial difference between “loss payee” and “lender loss payee” endorsements. The two terms have similar names, but there is a difference between the practical effect of each in determining whether a secured party can recover insurance proceeds under the borrower’s insurance policy after a loss to automobile, equipment, or other personal property. (Keep in mind that the term “loss payee” should not be interchanged with “mortgagee,” but rather concerns personal property collateral rather than real property).
What is the difference between these two clauses?
Loss Payee and Lender’s Loss Payable: these two clauses sound similar and are included in the same endorsement, but the purposes served by them are different. Let’s start by discussing the Loss Payee and later about Lender’s Loss Payable.
- Loss Payee: A loss payee refers to a clause that is added to an insurance policy when any collateral is used by a person to secure a loan. The lender who is providing the loan requires that the collateral used by the borrower is insured and that the corresponding policy designates the lender as the “loss payee.” With this designation in the Insurance policy, the borrower and the lender both receive payment in the case of a covered loss on the collateral. Essentially then, the loss payee designation protects the lender—ensuring that it will be paid for the collateral, regardless of potential losses. It can be better understood by the following example:
Say John takes a secured business loan from Lender A and putting up his car as collateral that ensures the lender to repay the debt. In this case, Lender A requires John to have an insurance policy on that vehicle. Further, on that insurance policy, the lender wants to be listed as the loss payee. If something happens to the car and the insurance company pays John for the damages, Lender A is also paid.
- Lender’s Loss Payable: Lender’s Loss Payable designation is also a term that provides benefit to the lender. In addition to Loss payee benefits, it also covers the loss that occurs to the lender even if non-compliance of terms by the insured(in this case borrower) or wrongful acts of the insured comes into play.
Simply, a lender’s loss payable endorsement on an insurance policy provides the lender certain additional protections in the event if the borrower defaults on his/her loan—or if the insurance policy is canceled due to negligence—meaning the insured (the borrower here) violated the terms of insurance policy in some way and the insurance company canceled it. A notice is also sent to the lender by the insurance company in the event of a cancellation of the policy (non-payment or other reasons) or non-renewal by the carrier.
In total, we can say that under Lender’s loss payable status the lender can receive the loss payment, even if the insured( the borrower here) doesn’t comply with the requirements of the insurance policy or the loss of property or assets is due to the insured’s wrongful actions.
Although these two designations don’t put any day-to-day effect on an individual, personally, or in other ways. But the distinction between a loss payee and lender’s loss payable becomes extremely important when it comes to SBA(Small Business Administration) loan requirements. All approved SBA loan applicants must designate the lender’s loss payable on their insurance policy when their business property is used as collateral for the loan.