RISK PROBLEMS/SOLUTIONS
Agent should be sure all loss payees are named in policy
By LeRoy H. Utschig, CPCU, ARM
During the 1990s, a storeowner suffered a fire that nearly destroyed the entire store. Prior to the loss, the storeowner had borrowed money in order to have operating capital. After the usual investigation to make sure that arson was not involved, the insurance company issued a check to the storeowner for the policy limits. The check did not name the lender.
The storeowner did not use the money to rebuild the operation. Instead, he took the money and left town.
The lender then asked for insurance money to cover its outstanding loan. The insurer responded that, as it had already paid the insured, it owed nothing. Following several rounds of correspondence between the lender and the insurer, the lender decided that it needed to sue someone to get its money. So the lender sued both the insurance agent and the insurance company.
As part of its defense of the agency, the errors and omissions carrier for the insurance company secured copies of the insurance company's claim file. The insurer furnished a copy of its claim abstract for the storeowner's property loss. This document provides important information including who is the insured, coverage effective dates, what coverage applies and deductible(s), and probably another dozen pieces of information regarding the loss. A loss payee or mortgageholder would also be shown on the coverage abstract.
The storeowner's claim was so large that the field adjuster did not have the authority to issue the draft in payment of the loss. The check was issued out of the home office. Two signatures were required on the claim draft--those of the number two person in the claim department and the head of the department. Before signing a draft such as this, each of these two signers was to look at the file and determine that all of the proper claim work had been done. At the very minimum, they were to look at the claim abstract and verify that it showed the correct name of the insured. They also were to verify that anyone with a legal interest in the loss was named. They did not know that a loss payee was missing from the claim draft.
The lawsuit was in full process when an attorney hired an insurance person. It did not take much time for the insurance person to notice the loss payable. Even though the insurance company had paid the policy limits to the storeowner, it had omitted the lender's name from the check. While the insurance company fought the idea for a while, it eventually concluded that it did owe the lender. The insurer sent a draft payable to both parties.
This loss demonstrates that we are a business of details. An insurance company forgot to name a loss payee on the claim draft. Yet, an insurance agent had an errors and omissions claim due to the insurer's error regarding a loss payee situation.
An agency has no control over whether or not a client notifies the agency of a loss payee. Typically, if the client forgets to tell an agent about a loss payee interest, the money interest will let someone know that it should be named on the policyholder's insurance contract. Knowing the name of a loss payee is not enough information. Loss payees need to be shown on the correct type of loss payable clause on the insurance contract.
Other complications with loss payees
Using fictitious losses, here are a couple of other examples to illustrate the operation of loss payable clauses.
* Uptown, Inc., had a loan from Mid-Town Bank, Ltd. The bank granted the note for the loan without securing an interest in any of Uptown's property. This loan is similar to commercial paper. The loan is based upon the good reputation of the person or firm that is borrowing the money. Due to the nature of the transaction, Uptown's insurance contract showed Mid-Town Bank as a loss payee.
A tornado totally destroyed Uptown's place of business including all inventory and structures. The company chose to rebuild as soon as possible. During the process of planning the rebuilding, it became obvious that Uptown did not have enough insurance. Uptown wanted all of the insurance proceeds and did not want its insurer to give any money to the bank.
The insurer could not ignore a loss payable on its insurance contract and issued a draft that included the names of both Uptown and Mid-Town Bank. This insurer had no interest in who would receive which part of the loss payment. It was up to Uptown and Mid-Town Bank to decide how much each would receive.
* Antiques, Ltd., owned a building and business personal property. It borrowed money from a lender, which was named as a loss payee on Antiques' insurance contract. Antiques suffered a severe fire loss. The state fire marshal concluded that the loss was caused by arson and that the owners of Antiques had started the fire.
Antiques' insurer declined to make any payment for the loss. The lender presented a claim for its interest also, but the insurer denied the claim. The lender's recovery rights were no better than those of the insureds.
Contract of sale clause
A contract of sale is a transaction where a person buys a piece of property and makes payments to the contract seller. If the contract purchaser makes payments for 25 years but fails to make the last payment, the titleholder keeps the property and 25 years of payments.
Let's say a purchaser buys a business under a contract of sale and included in the purchase is a building and business personal property. The purchaser's insurance policy shows the contract seller's name as a loss payee. A windstorm causes substantial damage to the property.
The purchaser and its insurance company start to work on the loss settlement. Then the contract seller enters the discussion, asking that the insurance company ignore the purchaser and deal only with the contract seller.
Per the insurance contract, the insurance company refuses to deal with the contract seller. The policy states that the insurance company is to deal with the named insured, the purchaser. Only when the loss is finally settled does the insurance company deal with the contract seller. The insurer's transaction with the contract seller is limited to including the contract seller's name on the claim draft to the purchaser.
Lender's loss payable
This last category of loss payables deals with creditors, mortgage holders or trustees. All of the types of money interest discussed below (using fictitious examples) have a similar characteristic. An insurer will pay these money interests even though no money is owed to the named insured.
* Bailee, Inc., has a mortgage with Bank, Ltd. Bailee suffers a fire loss. The state fire marshal's office determines that Bailee committed arson. As a result, Wise Insurance Company declines to make a loss payment to Bailee. However, Wise Insurance Company does make a payment to Bank.
When Wise Insurance Company makes payment to Bank, the insurance company acquires the bank's rights against Bailee. This means that Wise Insurance Company has a legal claim against Bailee equal to the amount it paid Bank.
* Warehouse, Inc., stores property for many firms. The firms storing property in the warehouse retain title to the goods while they are in storage. A storage receipt is given to each firm. These receipts state the value that the goods' owners put on the items. In the event of a loss, these receipts establish how much Warehouse's insurer will pay for the damaged items in storage. You can insure this exposure by using the correct type of loss payable on Warehouse's insurance contract.
* Trucker, Ltd., gives and keeps a copy of the bill of lading for each item the firm handles. These bills of lading include the value that the shipper places on the item. Sometimes, Trucker temporarily stores these items in a trucking terminal. If the goods are damaged while they are being stored, the insurance contract pays for them. The bills of lading are used to establish the value of each item being shipped. Trucker can insure this type of exposure by using the proper loss payable clause.
Here are some other categories of "money interest" that can be insured by using the proper loss payable clause:
--Contract for deed
--Financing statements
--Mortgagee
--Deeds of trust
--Security agreements
As an agent you cannot get proper information for a loss payable unless the insured gives it to you. Putting the "money interest" name in the wrong category of loss payable can result in a very difficult claim settlement. By showing the loss payee in the correct type of loss payable clause, a claim settlement will proceed much more smoothly. A policy change the day before a loss is easy to do. Try to make that same change the day after a loss and you probably cannot get it done.
Summary
Loss payable clauses are a part of many insurance transactions. An agent should obtain information about the loss payee. This information should include enough information so that you can be sure you are using the proper loss payable clause. *
The author
LeRoy H. Utschig, CPCU, ARM, is a Wisconsin-based insurance educator, consultant and expert witness.