A loss payee clause must be added to an insurance policy when collateral such as a motorcycle, car, boat, or home is used to secure a loan. This clause ensures the collateral property and lists the name and address of the lender of the loan in question. This means that if something happens to the property in question, the lender is entitled to part or all of the resulting insurance proceeds. This is common when an automobile is financed, for example.

Lender Insurance Requirements

Loan companies require verification of insurance coverage for collateral property and must be listed as loss payee as soon as you purchase an insurance policy for that property. This verification must be in the form of a policy declarations page, not an insurance ID card. This includes necessary information for the lender such as:

  • The dates for which the policy is effective
  • The vehicle identification number (VIN) for the vehicle in question
  • The coverage on that vehicle
  • The correct name and address of the lender listed as the loss payee

Purpose of the Loss Payee

After the lender is designated as the loss payee, he or she will be regularly notified of your insurance status and of all activities on the policy. This includes:

  • When the loss payee is added to the policy
  • When changes to the policy are made
  • When premium payment is late
  • When the policy is canceled

If an insurance payout is made for your vehicle, the lender and you will both be listed on the claim check. If the vehicle is a total loss, the balance of the loan will be paid before you receive any remaining payout. If the insurance pays out less than what you owe on the loan, you will still be responsible for the balance. For this reason, many individuals who finance a car opt to purchase gap insurance.

When the lender is designated as the loss payee, it ensures that he or she will be paid for their collateral even in the event of a loss. In this way, it acts as a safety net to reduce the risk of the loan.

Loss Payee for Mortgage Insurance

As with an auto loan, loss payee coverage is required for your mortgage. You will be required to have enough homeowner's insurance to provide protection from loss, typically a policy to cover the amount of the loan. However, you should plan to have coverage for the total amount of your home so it can be replaced in the event of a loss. If your loan is for more than the value of the home, you will be required to carry coverage for the full value of the home.

In addition to listing the name and address of the lender as the loan payee, it's important to include "its successors and assigns" since mortgages are commonly sold to other companies.

If damage occurs to your home, the loss payee will receive a check from your homeowner's policy. Once you file an approved claim, you'll receive a check payable to both you and the lender. The lender will then confirm that the damage matches the claim and disburse the funds for repair.

Adding a Loss Payee

Make sure you use the correct address for your lender when adding them as a loss payee. Because most financial institutions have multiple addresses, confirm which one you should use for this purpose.

Forced Placed Insurance

If you do not list the lender as the loss payee on your insurance policy or do so incorrectly, your collateral may be subject to forced placed insurance. This type of policy is very expensive and covers only physical damage. You are required to pay the total premium cost. It's best to avoid this minimum coverage at a high cost by following your lender's directions about loss payee requirements.

Removing a Loss Payee

When the loan has been paid in full, you can remove the loss payee from your insurance policy. If you do not remove them and have a claim on your policy, you may be asked to show proof of the loan payoff. Avoid this issue by informing your insurance agent as soon as the loan is paid off.

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