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Loss Payee

Reviewed by Stefan Tirschler

Noun

loss pay·ee | ˈlɔs peˈiː

Definition: The person or entity that will receive any payment following the resolution of an insurance claim.

The mortgage lender required that the insurance policy list them as a loss payee.

What is a loss payee?

At the surface, loss payee is a simple term in insurance policies: a loss payee is a person who receives payment following a claim.

If you own your property outright, your insurance policy will pay you for any insurable losses. In this case, you’re the only loss payee on the policy.

It gets more complicated once mortgages and co-owners come into the picture: anyone who has an insurable interest in the property can be a loss payee.

If your home has a mortgage, the mortgage lender has an insurable interest in it, and they want to protect their investment. To that end, mortgage lenders always require that the homeowner add them to the home insurance policy. Once the policy includes the mortgage lender, the lender becomes a loss payee.

If the home were damaged, any claim settlement would be made co-payable to the mortgage lender and the homeowner.

Every home insurance policy in Canada includes the Standard Mortgage Clause, which explains how the mortgage lender fits into the insurance picture.

The lender gets their share of any claim settlements. They even get their share if the homeowner does something to violate the terms of the policy. If the homeowner intentionally burns down their house for the insurance money, they get nothing—that’s insurance fraud. However, their mortgage lender would still get a settlement for their share of the property. Then, the insurance company can recover that settlement from the homeowner that committed the fraud (fraud is never a good idea, in other words).

There can be other loss payees aside from mortgage lenders, too. Anyone who has at least partial ownership of the property could be a loss payee. Owners who aren’t named on the insurance policy need to be added as additional insureds before they’re officially loss payees, however.

Example

April and her friend Natascha decide to invest in a rental property together. They get a co-ownership mortgage and they split all the payments equally. At the outset, April contributes 10% as a downpayment, Natascha also contributes 10%, and their mortgage lender contributes the remaining 80%. These percentages represent each party’s interest in the property.

April takes out an insurance policy for their rental home. As the person buying the policy, she is the named insured, and a loss payee by default. April adds their mortgage lender to the policy as well, making the lender a loss payee. She also adds Natascha as an additional insured, because Natascha is a co-owner of the home. Natascha is now also a loss payee.

With this example in mind, here are a few scenarios to help illustrate what loss payees are and how the concept works:

  • If the rental home were to be destroyed by a fire, let’s say April and Natascha receive a settlement of $200,000 to rebuild the home. That settlement would be co-payable to the two owners and their mortgage lender, meaning they can’t deposit the cheque without approval from the lender. The lender might actually hold on to the settlement and use it to pay rebuilding contractors directly. They want to see that the home is rebuilt (since they have a significant interest in it as their collateral for the mortgage). Mortgage lenders are generally allowed to hold settlement funds up to the balance of the mortgage for this purpose.

  • Let’s fast-forward 10 years and pretend the mortgage has been paid off completely. April and Natascha each have a 50% ownership share of the home. The mortgage lender’s share is now 0%, and they’re no longer a loss payee on the policy. Now the fire happens: April and Natascha receive the same $200,000 settlement, but they don’t need any approval from the mortgage lender to do anything with it, since the lender no longer has any interest in the property.

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What’s the difference between loss payee and additional insured?

Loss payee and additional insured are closely related terms.

Loss payee refers to anyone who could receive payment under the policy after an approved claim. Like we discussed above, that can include the named insured, their mortgage lenders, and any other co-owners of the insured property.

Loss payee only refers to the person, people, or company that receive payment after a loss.

An additional insured gets all the benefits the policy has to offer. They’re protected in the same ways as the named insured, including liability and additional living expenses coverages. They might become a loss payee as well, but that’s only one part.

When you add a mortgage lender to your home insurance policy as a loss payee, you’re not extending all the protections of an additional insured. The mortgage lender doesn’t get liability protection under the policy, for example.

The important points

  • On an insurance policy, a loss payee is anyone who would receive payment as part of a claim settlement.
  • The named insured is a loss payee by default, but mortgage lenders and co-owners of the property can be added as loss payees as well.
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