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What Is a Loss Payable Clause?

Read the fine print on an insurance policy carefully to understand exactly what to expect should a claim arise. Your policy may contain several clauses or provisions that alter your rights or options after suffering a loss. One of these provisions might be a loss payable clause—a standard endorsement on many commercial property and car insurance policies.

How Loss Payee Clauses Work

A loss payable clause, also called a loss payee clause, is an insurance endorsement that authorizes payment to someone other than the insured person. In the event of property damage or loss, the loss payable clause will send benefits to a person or entity other than the policyholder—someone who has a vested interest in the vehicle or property. This person is the loss payee. In most cases, the loss payee is the owner of the property, while the insured policyholder is someone who is renting, leasing or financing the property.

Loss Payable Clause Requirements

If your insurance policy includes a loss payable clause, it means your creditor or lender shares the same rights to compensation as you do in the event of a property loss. In general, a loss payable clause cannot grant the loss payee more money than the insured would receive based on the limits of the policy. Most lenders, such as financial institutions, require buyers to make them loss payees on their insurance policies. To do this, you must officially register the lender on your insurance plan. This will ensure your lender receives payment for property damage, regardless of whether or not you receive compensation.

Commercial Property Insurance Loss Payable Clause

Commercial property insurance plans commonly have loss payable clauses. This is because the insured party is often renting or leasing the commercial space for use by his or her business rather than owning the property. If a covered peril such as a fire or burglary damages the leased property, the loss payable clause may send the loss payee a check before or at the same time as the insured party for damages. It will be up to the business owner—the party that purchased the insurance—to file an insurance claim seeking these losses. If the insured fails to file within the right amount of time, the owner of the property may file a claim instead.

Car Insurance Loss Payable Clause

A car insurance policy for both commercial and personal purposes could contain a loss payable clause if the insured does not own the vehicle. If the insured person is renting or leasing the vehicle or financing it through a lender, a loss payable clause may be a requirement to prevent the lender from financial damages in a car accident. After a car accident caused by a third party, the loss payee can receive a check from the at-fault party’s insurance company directly. If you caused the accident as the insured person, your own insurance might offer benefits to the loss payee before you receive benefits, if any are available.

If you get into a car accident with a loss payable clause on your auto insurance, you and the loss payee may both receive checks for your losses. An insurance claim could pay you for personal losses such as medical bills and lost wages while the loss payee receives a check directly to repair or replace property losses. If the vehicle was a total loss (totaled), the loss payee will receive a check first. When a loss payee receives funds, the insurance company has the legal right to recoup these funds from a third party that caused the accident. This is a different insurance process called subrogation.

If you need assistance understanding a loss payable clause on your insurance policy or dealing with insurance bad faith as an insured person or loss payee, contact a bad faith lawyer before time runs out.