Loss payee vs. Lender’s Loss Payable: A Guide for your Business

A loss payee designate is an amendment to a property insurance measure to protect a lender whenever the property is used as collateral on a commercial loan. Sometimes this is known as a common loss payable clause.

This classification gives a lender added protection through your insurance policy, because the lender now has the same insurance coverage as you.

What Is a Loss Payee?

A loss payee is the party who receives payment from an insurance company after submitting a claim.

A loss payee can be different entities, depending on the circumstances. In the insurance sector, the loss payee is the insured or the entity entitled to payment.

Example of a Loss Payee

Assume you obtain a secured business loan from a Lender and use your home as collateral. In this case, the Lender will demand you to obtain insurance on your home, and the Lender will insist that they are listed as the loss payee on the policy. If something bad happens to your residence and your insurance company pays you for the damages, the Lender can be paid by the insurance company.

This makes sense, since the Lender’s collateral was damaged, so the Lender suffered the loss alongside you.

It is important to note, however, that a loss payee designation is not a bilateral deal between the insurance company and the loss payee (the lender).

Adding a loss payee endorsement to your policy simply grants the lender the same rights as the named insured.

What Is Lender’s Loss Payable?

You should now have a better idea of what a loss payee is and why a lender could ask you to include a loss payment clause in your collateral insurance policy.

Lender’s Loss Payable designation is another provision that benefits the lender. In addition to Loss Payee advantages, it also protects the lender’s loss even if the insured (in this case, the borrower) violates the terms of the policy or commits an improper activity.

Simply put, a lender’s loss payable affirmation on an insurance policy provides the lender with special provisions in the event that the borrower defaults on his/her loan—or if the insurance policy is canceled due to negligence—which means that the insured (the borrower in this case) violated the rules of the insurance policy in some way and the insurance company canceled it.

Under the Lender’s loss payable status, the lender can get the loss payment even if the insurer (the borrower) does not comply with the requirements of the insurance policy or the loss of property or assets is the result of the insured’s illegal acts.

Loss Payee vs. Lender’s Loss Payable

The terms “Loss Payee” and “Lender’s Loss Payable” may sound similar, there is a significant difference in the insurance protection provided to the lender in the event of a loss. When a covered loss occurs and the insured is liable to payment, the payment is made to the lender for the amount owed by the insured if the lender is designated as a loss payee.

Under a “Lender’s Loss Payable” designation, your lender has much more protection. The insurance policy will pay the lender even if you, as the insured, do not comply with your policy terms. This feature makes the “Lender’s Loss Payable” endorsement more expensive than just a “Loss Payee” endorsement.