Loss payees are supposed to be included on payments of claims checks. Depending on the language of the loss payable clause, that might be the only right a loss payee has.

A recent federal decision from Alabama reinforced a post I made 12 years ago in Loss Payable Clauses and Standard Mortgagee Clauses: Know the Basic Rule and Difference. The federal court ruled in favor of the insurance company and noted the following:

In insurance policies, loss payable provisions add parties, ‘Loss Payees’, other than the insured party to receive payment from the insurer in the case of property loss. There are two types of loss payable provisions under Alabama law: a simple loss payable provision and standard mortgage clause…Under the former, the Loss Payee only has a viable claim against the insurer if the insured has a viable claim against the insurer….The Loss Payee is ‘entitled to payment only in case a liability accrues to the insured.’ The second type of Loss Payable provision, a standard mortgage clause, creates a separate contract between the Loss Payee and insurer, meaning the Loss Payee may be compensated by the insurer even if the insured is not compensated by the insurer….These types of provisions are distinguished based on the language of the policy….

A standard mortgage clause is marked by specific language in the insurance policy forming a separate contract between the Loss Payee and the insurer….In Norwest, the insurance policy stated, ‘If we deny your [the homeowner/insured’s] claim, that denial will not apply to a valid claim of the mortgagee [i.e. Loss Payee]…’…. There, the court held this policy language created a standard mortgage clause because it indicated a separate contract between the Loss Payee and the insurer. Id. at 17. See also Am. Safety Indem. Co. v. Fairfield Shopping Ct., LLC, No. 2:12 CV- 02415-SGC, 2016 WL 4732581, at *2 (N.D. Ala., Sept. 12, 2016) (applying Alabama law) (finding a standard mortgage clause when the contract specified the ‘mortgageholder will still have the right to receive loss payment’ even if the mortgagor’s action exclude them from recovery)…

Here, Clause B of the Provision is a simple loss payable clause because it indicates the Loss Payee’s claim is dependent on the insured’s claim and because it does not include clear language of a separate contract between the Loss Payee and the insurer. Clause B states the insurer will ‘pay any claim for loss or damage jointly to [the Named Insured] and the Loss Payee.’ The term ‘jointly’ indicates the Loss Payee will only be paid if the insured is also paid. Additionally, Clause B does not include language of a separate contract that marks a standard mortgage clause. This contrasts with the language of the subsequent clause, Clause C, which states ‘if we deny [insured’s] claim because of [insured’s] acts… the Loss Payee will still have the right to receive loss payment.’ The explicit language of a separate contract in Clause C shows the parties intended a simple loss payable under clause B and a standard mortgage clause under clause C. Because the contract language indicates the Loss Payee’s claim is dependent on the insured’s claim and because it does not explicitly state that a separate contract is formed between the Loss Payee and the insurer, clause B is a simple loss payable clause.

Under a simple loss payable clause, the loss payee is named on a payment only if the named insured is entitled to payment. In this Alabama case,1 the insured did not file a proof of loss, provide requested documents, or attend requested examinations under oath. As a result, the court ruled in favor of the insurer, noting:

According to evidence submitted by Nautilus, the Insured failed to comply with the conditions precedent imposed by the Policy. Like the policy in Nationwide, Nautilus’s policy lists ‘Duties in the Event of Loss or Damage’, which include providing complete inventory of the damage, sending sworn proof of loss, and, upon Nautilus’s request, submitting to an examination. Nautilus repeatedly notified the Insured of these duties by including them in correspondences. Following the Policy, in the beginning of 2015, Nautilus requested a sworn proof of loss, other documents, and an examination of the Insured….Nautilus’s evidence suggests the Insured never provided a sworn proof of loss or any of the other requested documents. Additionally, after re-scheduling multiple times, the Insured finally canceled and never submitted to an examination. Because the Policy imposed conditions precedent and because Nautilus’s evidence shows the Insured failed to satisfy those duties, Nautilus is not obligated to compensate the Insured for the property loss.

Since the insured could not collect, neither could the simple loss payee.

Here, the owner of the property was listed as the loss payee. The owner’s tenant was the named insured. I would suggest that property owners obtain policies that place them as a named insured to fully protect their interests. Indeed, a tenant may have all kinds of motivations to not comply after a loss. Keeping the owner’s insurance interest separate and not dependent on the tenant is something insurance agents should discuss with owners of property.

Thought For The Day

Where an excess of power prevails, propertalay of no sort is duly respected. No man is safe in his opinions, his person, his faculties, or his possessions.
—James Madison
1 Lee Investments LLC v. Nautilus Ins. Co., No. 7:20-00903 (W.D. Ala. Aug. 1, 2022).