Question:
I had a commercial lender with a bank where we do quite a bit of partnership events with reach out to me about the difference between Loss Payee & Lender's Loss Payable regarding insurance. I tried to do some research on my own about this, but I'm not fully understanding the difference between the two. As far as I can tell from what I have read, Lender's Loss Payable adds coverage in the event from acts that the insured caused, so even if the insurer would deny coverage due to fraud or illegal acts, then the carrier would still pay the Lender's Loss Payable could still be paid from the loss, if I'm understanding correctly? I couldn't find any videos on the topic either. Here is what he had emailed me…
We have a question I have been searching for an answer to, and no one can really give us a certain answer.
We have SBA loans, and the SBA mandates a Lenders Loss Payable Endorsement in an insurance policy for loans secured by personal property valued over $5,000.
Is this endorsement any different from being listed as the Loss Payee on a declaration page? If it is, do you have an example you could share with us?
Are we asking the right question is the other thing I guess we could ask.
Thanks in advance for any thoughts, info and help on this.
I have not attached any policy forms as this question is not specific to any certain company. I'm wondering more about the overall difference & if I am understanding it correctly. Any help on this would be greatly appreciated so I can help better explain the differences between the two.
Thank you!
Answers Below:
From my understanding, I believe that your understanding regarding a lender's ability to collect under a policy even if the insured cannot collect is correct and is the aim of a lender's loss payable endorsement. The information in this link is quite detailed, and I was happy to see that a couple of examples were included (like one that apparently accompanied early standard fire insurance policies). I am thinking too that some property policies incorporate the language in the policy itself.
I sincerely hope this is helpful!
PS: I think ISO includes the modern version of the language in ISO CP 12 18. ==================================================================
The main difference between a loss payee and a lender's loss payee is the potential level of protection provided to the party listed as such:
Loss payee
A loss payee is an entity with a financial interest in covered property that the insurer will include don a check for an insurance claim payment, along with the policyholder. A standard loss payee endorsement provides no greater rights to the loss payee than those of the insured. It also requires no specific duties of the loss payee. The loss payee's rights to payment are contingent on the insured's rights. If the carrier denies payment to the insured, it also denies payment to the loss payee. For example, if the insured commits arson, the insurer denies the claim to the insured, and the insurer denies the claim to loss payee.
Lender's loss payee
A lender loss payee provision can be used when there is a collateral interest in covered property that is real (no mortgage in place – a mortgage holder provision would likely apply) or personal property. A lender's loss payee is a loss payee that may receive more protection than a standard loss payee. A lender's loss payable endorsement may protect the lender's interests even if the insured invalidates the policy. A lender loss payee has certain obligations under the wording of the endorsement, as well. If the lender loss payee has complied with the lender loss payee's duties under the provision, the lender loss payee may receive payment regardless of denial to the insured. For example, if the insured commits arson in destroying covered property, claim payment is denied to the insured. But it is possible the lender loss payee may still receive claim payment for their interest in covered property. A lender's loss payable endorsement usually also provides the lender with advance notice if the insurance company intends to cancel or nonrenew the policy.
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Yes, there is a difference. The preferred form for lenders is the Lender's Loss Payable. As you note, it provides broader protection to the lender if the lender complies with its provisions. If a covered loss occurs, the lender will have the right to the loss payment, even if the carrier invalidates the policy because of non-compliance of terms by the insured or wrongful acts of the insured that result in denial of coverage to the insured. The Lenders Loss Payable status and endorsement also states the carrier will give the lender notice in the event of a cancellation (non-payment or other reasons) or non-renewal. The lender then has the right pay premium if cancellation was for non-payment. And typically, it requires payment to the Lender.
The Loss Payee endorsement does not include the same provisions though it acknowledges the Lender has an interest in the property and receives the same coverage as the Named Insured thus the Lender's rights are only as good as the NI's rights. Typically, payment is made jointly to the NI and the Lender – not solely to the lender.
Lenders and their lawyers are often confused. I recently asked a Lender team why they insist on a Loss Payee in addition to the Lenders Loss Payable form that is the better form for the Lenders. The three people on the call admitted they do not have insurance knowledge, but it is in their check list, and they need to get that second form to check the boxes to close the loan. Bottom line they often request both forms out of an abundance of caution and ignorance.
It is not your job to act as a legal advisor to the ignorant Lender. You could provide the two forms, so that the Lender team and its lawyers could review both to compare the differences. There are many legal writings on the topic that the Lender's lawyers could review, as could the Lender insurance reps.
Below are some links for you.
Burr Forman LLP legal article at Lexology
Donald Malecki 2006 Article at Rough Notes.
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I think the SBA may be using "Lenders" as an adjective to say that they require a loss payable endorsement or clause in favor of the SBA. There may be some manuscript policies that include the language "Lender's Loss Payable Endorsement" but I've never seen it used.
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You are correct - if you compare the wording of the loss payable endorsements, one of the main differences with a Lender's Loss Payable Clause is that the acts of the insured (including arson) do not void the coverage for the lender. However, the lender still has obligations under the policy (sworn proof of loss, etc.). In the usual Loss Payable clause, the rights of the loss payee do not rise above the rights of the named insured. The mortgageholders condition in the ISO Building and Personal Property Coverage Form (CP 00 10) has similar wording as the Lenders Loss Payable Clause and is often used in lieu of an endorsement.
I would also suggest the lender should have their own staff, including legal counsel, who should be able to answer the question.
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You are correct. Under a typical Loss Payee endorsement, the Loss Payee is covered only when carrier provides coverage to the insured. In other words, if the insured [intentionally] causes the loss, the insured is not covered, and neither is a Loss Payee. A Lenders Loss Payee allows payment to the third party even if the claim is denied for the insured. Think of it as similar to the insurer paying a mortgagee when the insured torches their own house.
Here is an example. The insured is default in their payments to the Loss Payee on a large piece of equipment. Because of that, the lender goes to repossess the equipment, but it is gone, as well as the insured. The lender reports the incident to the police, thinking that the insured stole the equipment without completing the payments on it. The police report shows it as suspected theft, so the insurance carrier denies coverage for the insured, stating that the insured stole the equipment. Under a Loss Payee clause, the lender is paid nothing. Under a Lenders Loss payee, the lender is paid. Theft is just one example. The insured could have vandalized the property in a relationship gone south. There is stronger protection for the third party under a Lenders Loss Payee.
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Using ISO property forms as an example, the Loss Payable Provisions Endorsement CP 12 18 10 12 is used to add four types of additional interests – Loss Payable and Lender's Loss Payable are two of the four. The endorsement indicates whether it includes a named Loss Payee under the Loss Payable clause or the Lender's Loss Payable clause.
Loss Payable simply means that the carrier will add the Loss Payee's name to the claim check if there is to be a claim check.
Lender's Loss Payable is different and more beneficial for the lender. I recommend reviewing the endorsement's language in its entirety, but a key difference is this. "If we deny your claim because of your acts or because you have failed to comply with the terms of the Coverage Part, the Loss Payee will still have the right to receive loss payment...." A Lender's Loss Payable Loss Payee has rights that are more like that of a mortgageholder. It might get paid even if the named insured does not, such as in the case of fraud, which you gave as an example.
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