Loss Payable Clause

A loss payable clause is an insurance contract endorsement where an insurer pays a third party for a loss instead of the named insured or beneficiary. The loss payable provision limits the rights of the loss payee to be no higher than the rights guaranteed to the insured.

A loss payable clause indicates that a third party, referred to as the loss payee, receives funds paid for a loss. The loss payee received funds because it has an assignment of interest in the insured property. This is commonly found in property insurance contracts, specifically for financed properties, where the mortgage holder is the loss payee. Because a lien exists on the property, the loss payee is also known as the lien holder.

The wording of the loss payable clause often details exceptions when the loss payee's concern is unprotected. These cases include fraud, misrepresentation, or intentional acts committed by the policyholder such as intentionally damaging or destroying the property. The loss payee may also lose its protection if aware that the property, such as a vehicle, changes ownership or faces an increased risk of damage or loss. If there is a reason for the insurer to deny payment to the policyholder, then the insurer is under no obligation to submit payment to the loss payee.

Insurance contracts often limit the amount of time that can pass between the occurrence of a loss and the filing of a claim. The time limitations may vary according to the type of risk covered since some losses take longer to develop. If a loss occurs, the insured is often responsible for filing a claim. If the insured fails to file a proof of damage or loss within the allotted period, the loss payee then becomes responsible for filing the claim.

The insurer may make separate payments to the insured party and the loss payee. When payment is to the loss payee, the insurer has the legal right to pursue any third party that caused the damage. The loss payee gives up their right to seek any third-party damages, since they have received payment. An insurance carrier may wish to recover any amount paid to the loss payee due to the fault of a third party.

Also, if a policyholder should cancel a policy after funds are submitted to the loss payee, the loss payee must assign the lien to the insurance carrier, to equal losses paid.