Glossary

A loss payable clause is an insurance provision authorizing payment in the event of loss to a person or entity other than the named insured with an insurable interest in the covered property or, in some cases, jointly to the insured and the other person or entity. Under a typical loss payable clause, the insurer is under no obligation to make payment to the loss payee if payment for a loss can be denied to the insured. If the insurer makes any payments to the loss payee, the insurer obtains the loss payee's (subrogation) rights against any other party. Loss payable clauses are common in commercial auto and personal auto policies in which one or more vehicles are financed through a financial services company. The coverage afforded to the loss payee under this provision is "as its interest may appear." In other words, it will only pay the financial institution's actual loss sustained, even if the value of the vehicle is greater. Loss payable clauses are also commonly used in commercial property insurance policies to protect the interest of an entity that has extended credit or leased personal property to the insured.

The loss payee is a person or entity that is entitled to all or part of the insurance proceeds in connection with the covered property in which it has an interest. Often those asking to be named as loss payees have leased some type of equipment to the insured—a photocopy machine, for example. Several different loss payee clauses address different insurable interest situations. A loss payee is also common in a personal auto policy (PAP) in which the automobile is financed. The lending institution would be listed as the loss payee on the declarations page.

A mortgagee clause is a property insurance provision granting special protection for the interest of a mortgagee (e.g., financial institution that has an interest in the property) named in the policy, in effect setting up a separate contract between the insurer and the mortgagee. It establishes that loss to mortgaged property is payable to the mortgagee named in the policy and promises advance written notice to the mortgagee of policy cancellation. It also grants continuing coverage for the benefit of the mortgagee in the event that the policy is voided by some act of the insured (e.g., arson). In this situation, the clause specifies the obligations of the mortgagee in continuing coverage. The mortgagee would be expected to notify the insurer of any changes in ownership, occupancy, or exposure; pay any due premium; and submit a signed, sworn statement of loss within the appropriate time frame. Without the protection of the mortgagee clause, financial institutions would be unlikely to loan the large amounts of money necessary to purchase homes, office buildings, or factories.