Seller Financing - Insurance

Loss Payee vs. Lender’s Loss Payee: One Word That Makes All the Difference

When you lend money secured by a borrower’s personal property, you’ll almost always require proof of insurance on that collateral. But not all endorsements are created equal. Choosing a simple loss payee endorsement versus a full lender’s loss payee clause can mean the difference between recovering claim proceeds—or walking away empty-handed if the borrower’s policy is voided.

What Is a “Loss Payee” Endorsement?

• Joint Payment Rights Only
  You’re entitled to share in any insurance payout—but only to the same extent as the borrower (the named insured).

• No Privity of Contract
  There’s no direct agreement between you and the insurer. If the borrower’s policy is invalidated by misrepresentation, late claims or other breaches, your right to recover disappears along with theirs.

What Is a “Lender’s Loss Payee” Endorsement?

• Direct Contractual Relationship
  The insurer and the lender share privity of contract, so your insurable interest stands even if the borrower’s policy is voided.

• Priority Proceeds
  Insurance payouts go first to you, not the borrower—preserving your collateral value.

• Cancellation Notices
  You receive advance warning of any policy changes or cancellations, letting you intervene before coverage lapses.

Key Differences at a Glance

Feature Loss Payee Lender’s Loss Payee Contract Privity No Yes Protection if Borrower Breaches No Yes Direct Payout to Lender Only if borrower recovers Always Notice of Cancellation Not required Required

Why It Matters to Lenders

1. Unbroken Protection
   Your loan remains secured against casualty losses—even if the borrower’s mistakes void their policy.

2. Simplified Recovery
   You avoid costly delays and legal disputes over claim proceeds.

3. Risk Management
   Advance notice of policy changes lets you enforce coverage requirements and avoid uninsured exposure.

Best Practices for Secured Lenders

• Always Insist on a Lender’s Loss Payee Clause. Don’t settle for a bare loss-payee endorsement.

• Obtain Written Endorsements. Keep a copy of the insurer’s “lender’s loss payee” endorsement in your loan file.

• Monitor Policy Status. Require annual proof of renewal and immediate notice of cancellation or modification.

Conclusion
In secured lending, a single word—“lender’s”—in your insurance endorsement can make all the difference between full protection and unacceptable risk. By securing a lender’s loss payable endorsement, you ensure your collateral remains covered under any circumstance, safeguarding your financial interest from borrower-driven policy lapses.