Loss Payee

From CEOpedia | Management online

A loss payee is a secured lender, creditor, named on an insurance policy, to whom the borrower has delivered clearly defined personal property as a security for the payment of a loan. A creditor may hold the right to specific payment for losses that are provided with a cover by the policy. Even though a loss payee's name figure in the policy documents, it is not an insured[1].

Loss payee endorsement

By this definition, we understand that the insurance underwriter accepts the instruction to make payment for all claim proceeds. In this option, financier could not put claims or control the policy. On this account, a co-insured endorsement is stronger than loss payee endorsement. If available is only a loss payee endorsement, financing needs to be covered with recourse[2].

Loss payee as a banker's clause

Banker's clauses are a number of certain conditions that must be met, should be taken into account in insurance policies. The procedure is required by lenders to ensure themselves properly protection. One of the banker's clauses is loss payee[3].

"The lenders' agent bank or security trustee is named as sole loss payee on policies covering loss or damage (or loss payee for amounts above an agreed figure, with smaller amounts payable to the Project Company). (However, payments fr third-party liability are made directly to the affected party.) This may also give the lenders the right to take action directly against the insurance company in some jurisdictions, but in any case assignment of the insurance policies forms part of the lenders' security package"[4].

Loss payee in different aspects

Below, there is presented description of loss payee in different fields:

  • Loss payee in motor vehicles. The interest of a creditor who has pawned the motor vehicle is protected by the loss payable clause concerning extensive coverage and collision. The regulation demands from the insurer to protect the interest of a person who has the right to property in case of devastation or damage caused to the vehicle. The insurer has to give at least 10 days termination if it wants to cancel the contract. Consequently, the lien holder has a chance to obtain property damage coverage to secure completely its interests. The overage for the creditor can not be closed down as a consequence of neglect from both lender or proprietor, which is provided by loss payable clauses[5].
  • Loss payee in law of maritime insurance. There is a big difference between the loss-payee and the assignee when it comes to marine policy. The way Randall Bunnell sees it "A loss-payee is the person, other than the insured, named in the loss-payable clause to whom the payment under the policy is to be made in the case of an insured loss." A loss-payable clause ensures that when we make any payment under the policy, we pay it out to a loss payee, not to the insured. It is a chore of the sole right to require the payment derived from insurance profit, while unchanged is any other obligation or right. For that reason, if there is a loss covered by policy, the conditions of the policy decide about the insurer's obligation. In accordance with the law, it is not necessary to have any insurable interest by the loss-payee, it does not matter what kind of legal relationship it is, he cannot have any allegation for the reason that the policy it is not his interest. The exception is when the loss-payee appears in the policy as an additional insured or is named as a co-insured. In reality, the loss-payee will often refer to economic interest and he can act as a co-insured or an added insured[6].

Examples of Loss Payee

  • A mortgage lender may be a loss payee. For example, a homeowner who takes out a mortgage loan to buy a home may have the lender listed as a loss payee on the homeowner's homeowner's insurance policy. That way, if the home is destroyed by a disaster, the insurer will pay the mortgage lender directly for the covered losses.
  • A car loan lender may also be a loss payee. For example, if a borrower takes out a car loan and has the lender listed as a loss payee on the borrower's car insurance policy, the insurer will pay the lender directly for the covered losses in the event the car is damaged or destroyed.
  • A leasing company may also be a loss payee. For example, if a business leases a piece of equipment, the leasing company may be listed as a loss payee on the business' insurance policy. That way, if the equipment is damaged or destroyed, the insurer will pay the leasing company directly for the covered losses.

Advantages of Loss Payee

The advantages of having a loss payee on an insurance policy include:

  • Protection of a creditor's interest in the property: The loss payee will receive compensation for any losses in the event that the property is damaged or destroyed. This helps to ensure that the creditor is not left without the funds they are owed.
  • Ensuring that the borrower is responsible for any losses: The borrower is held accountable for any losses incurred, which helps to keep them honest and accountable.
  • Enhancing the security of the policy: By having a loss payee, the policy is more secure and it also provides additional assurance that the policyholder will be able to make the payments.
  • Avoiding confusion and disputes in the event of a claim: Having a loss payee ensures that any claims are clearly defined and easily understood, helping to avoid any confusion or disputes in the case of a claim.

Limitations of Loss Payee

A loss payee has certain limitations when it comes to receiving payments from insurance companies. These limitations include:

  • They can only receive payments up to the amount of their loan balance, or the amount of the property they have secured as collateral.
  • They are not entitled to any payments for damages to other property, or for any other losses that may occur as a result of the incident.
  • They cannot make any changes to the policy or its coverage, as any changes must go through the policyholder.
  • They are not entitled to any payments for legal fees or other expenses that may be incurred during the claim process.
  • They cannot pursue any legal action against the insurance company on behalf of the policyholder.
  • They cannot make any decisions regarding the payment or denial of any claim.

Other approaches related to Loss Payee

A loss payee is a secured lender, creditor, or other party who is named on an insurance policy to receive payment for losses that the policy covers. Other approaches related to loss payee include:

  • Loss mitigation - This is an approach to managing potential losses through proactive steps such as reducing risks and improving safety in the workplace.
  • Risk transfer - This is a strategy of transferring the risk of a loss occurring from one party to another through the use of insurance, contracts, or other legal agreements.
  • Loss control - This is a management technique used to reduce or prevent the occurrence of losses through careful planning, monitoring, and assessment of risks.

In summary, a loss payee is a party who is named in an insurance policy to receive payment for losses that the policy covers. Other approaches related to loss payee include loss mitigation, risk transfer, and loss control.


  1. E. A. Wiening (2002), p. 6
  2. S. A. Jones (2018), p. 433
  3. E. R. Yescombe (2002), p.131
  4. E. R. Yescombe (2002), p.131
  5. R. Bunnell (2018), p. 367
  6. M. Fitzmaurice, D. J. Attard, I. Arroyo, N. A. Martínez Gutiérrez (2016), p. 611

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Author: Kinga Podlasek