Insight Loss Payee vs. Lenders Loss Payee
Secured lenders of personal property collateral, such as inventory or equipment, generally require borrowers to insure the collateral against loss or damage on the lender’s behalf. Whether the policy designates the lender as a loss payee or a lenders loss payee likely has a dramatic effect on the lender’s right to the insurance proceeds in the event of loss of, or damage to the collateral. If a policy includes a loss payee provision, a lender’s interest under the policy may be invalidated by acts of the borrower, as the insured, while a policy containing a lenders loss payable provision continues to insure the lender even if the acts of the borrower invalidate the policy. See Westfield Ins. Co. v. Talmer Bancorp, 2013 WL 5812027 (6th Cir. 2013) (lender named a loss payee and due to insured’s fraud, lender’s interest under the policy invalidated); Foremost Ins. Co. v. Allstate Ins. Co., 486 N.W.2d 600, 602 (Mich. 1992) (lender named as lenders loss payee and lender’s interest under the policy remained despite borrower’s arson).
In order to obtain lenders loss payable status, a secured lender should make a written request to the insurer that the secured lender be named as a lenders loss payee on the Evidence of Commercial Property Insurance and that the policy include a lenders loss payable endorsement. Prior to the loan disbursement, the secured lender should review the Evidence and endorsement to confirm that the secured lender is named as lenders loss payee and that the policy includes a lenders loss payable endorsement.
If you have questions about this or any other banking issues, please contact our banking group or call 208.344.6000.