Loss payee
A clause naming a creditor, bank or lessor, as recipient of the indemnity if the property it finances suffers a loss, so that insurance money repays its claim rather than passing through the insured.
When an asset is financed on credit or leased, the lender or lessor has a direct interest in the insurance indemnity reaching it if the asset is destroyed: that value secures its claim. The loss payee clause organizes this transfer by providing that the insurer will pay all or part of the indemnity directly to the named creditor, above a threshold often set to leave small losses to the insured. It is often supplemented by a duty to inform the creditor of cancellation or non-payment of premium, so that it does not discover the absence of cover after the loss. In French law, assignment of the indemnity is common practice, and article L. 121-13 of the Insurance Code even allocates indemnities by operation of law to preferred and mortgage creditors, according to their rank. In international asset finance, aircraft, ships, power plants, the clause is a standard element of the security package the underwriter must accept. It does not change the scope of cover, but it makes the creditor sensitive to anything that might defeat it, hence its link with the non-vitiation clause.
Textbook case: an 80 million dollar airliner leased by an airline is destroyed. The airline's hull policy names the lessor as loss payee for any loss over 5 million: the insurer pays the agreed value directly to the lessor, which repays the bank that financed the aircraft, without the funds passing through the airline.
Follow the research
One letter a week. First, the week's underwriting note, when one is published: a dated, argued decision, signed by Paul Bernardski. Then what the observatory published on cyber risk, political risk and insurance. No account, no tracking.
No spam, one-click unsubscribe, no data ever sold.