What Is a Loss Payable Clause?
A loss payee is any party eligible to receive payment in the event that a piece of property covered by an insurance plan is damaged. Loss payees can be a seller or owner of a piece of property, as well as a lender with an interest in the piece of property.
A loss payable clause protects a party who still has an ownership interest in a specific property.
In insurance, we often think of it as a tale of two main parties: the policyholder and the insurance company. But really, the cast of characters is far more complex, with various other stakeholders as supporting actors.
On the side of the policyholder, there are numerous additional individuals and companies impacted by the insurance policy. One such party is a loss payee, who comes into the scene on an insurance contract via the loss payee clause. This guide will walk through everything there is to know about loss payable clauses.
First, let’s pull the curtain back on the loss payee.
Lights, camera, action!
What is a loss payee?
Not a what, but a who.
A loss payee is any party eligible to receive payment in the event that a piece of property covered by an insurance plan is damaged. Loss payees can be any of the following:
- A seller of a piece of property
- The owner of a piece of property
- A lender with an interest in the piece of property
Loss payees most often play a part in commercial property insurance policies, but they may also be included in other types of property insurance policies. Loss payees are typically added to policies by way of an endorsement, or edit to the document.
Usually, this payable endorsement uses a standard form called “loss payable provisions.” Any such endorsement will have multiple clauses, each written specifically for a different type of loss payee.
The first and most important of these clauses is the loss payable clause.
What is a loss payable clause?
It’s protection for a loss payee’s item while it’s being used by someone else.
The loss payee clause becomes part of the script when a policyholder is in possession of a piece of property owned by a different entity. The loss payable clause protects the owning entity in the event that the real or personal property is damaged.
Often, this clause involves relationships between buyers and sellers of goods when the buyer is paying for one or more goods over a period of time.
If the buyer is using a line of credit from a lender to finance the purchase, another kind of clause is added: a lender’s loss payable clause. It functions in the same way, protecting the lender in addition to (or instead of) the seller, but protects the lender’s interest to the full extent of the lender’s interest, even if the lender’s interest is greater than that of the insured.
How does a loss payable clause work?
There are two stars of the show in a loss payable clause: the seller and buyer of a good or service. The clause is typically added to the insurance policy at the point of sale, and comes into play in the event that the property is damaged.
Let’s play out a scene for purposes of an example:
A smaller company (Sal’s Sandwich Shop) is purchasing a necessary piece of equipment (a state-of-the-art deli slicer) from a large industrial manufacturer (HiTech Inc.) and paying for it over the course of a year.
For the duration of the year, until the purchase is fully paid off, both Sal’s Sandwich Shop and HiTech Inc. have an insurable interest in the valuable piece of machinery. The insurable interest of each party is directly related to the percentage of ownership. The more Sal’s has paid, the more insurable interest Sal has. The more insurable interest Sal’s has, the less HiTech has.
Sal’s Sandwich Shop purchases commercial property insurance and adds a loss payable clause naming HiTech Inc. as a loss payee with respect to the deli slicer. In the event that there’s a creditor involved (a bank), they would also be added as a loss payee in a lender’s loss payable clause. In the event of a covered loss, Sal’s Sandwich Shop may be damaged, along with its HiTech Inc. machine. Sal’s will be able to recoup some of its losses through its insurance policies.
With respect to the loss payable clause, the insurance company (should the state-of-the-art deli slicer incur damages) would pay not only Sal’s Sandwich Shop, but also HiTech Inc. The percentage paid to each party would reflect their respective insurable interests of the property:
If Sal’s Sandwich Shop has paid off 50% of the value of the machine at the time of the incident, it will receive 50% of the amount of loss or damage to the deli slicer from the insurer, as would HiTech Inc.
This example showcases the complex provisions in place.
However, as complicated as they can be in practice, they’re really quite simple: loss payable clauses protect a party who still has an ownership interest in a specific property. If it falls victim to a disaster before a buyer has finished paying for it, both parties are indemnified to the extent of their proportional ownership up to that point.
Being that many expensive goods need to be paid over time (and not with one lump sum), it’s an effective type of risk management tool for both parties.
Protect your business with the right insurance
While loss payees are specific to property your business owns or leases, there are a few other types of business insurance every business can benefit from.
- General liability insurance
- Professional liability insurance
- Workers’ comp insurance
- Equipment insurance
With these details in hand, you’re ready to get the commercial property insurance policy you need and add loss payees with conviction!
As a reminder, the biggest takeaways about loss payable clauses are:
- A loss payee is a party who gets paid if property they own is damaged while in the possession of another party covered by commercial property insurance.
- A loss payable clause is the specific payable endorsement (or policy edit) that details the relationship between buyer and seller, and who gets paid coverage.
- A lender loss payable clause works in a similar way, but the loss payee in this case is not the seller, but a creditor financing the purchased property.
That’s a wrap!