In Plain English
Quick Answer
The party who receives insurance money when a claim is paid because they have a financial stake in the property.
Definition
Definition
A loss payee is a party designated in an insurance policy to receive insurance proceeds in the event of a covered loss, typically because they have a financial interest in the insured property. In construction, lenders financing a project are commonly listed as loss payees on the builder's risk policy so that insurance proceeds are applied to the loan rather than paid solely to the borrower. A loss payee has rights to the insurance payment but does not have the same rights as a named insured.
Context
Why It Matters in Bidding
Loss-payee designations on builder's risk insurance are a recurring requirement in lender and owner contracts, and bidders must read them carefully because they govern who controls insurance proceeds after a fire, flood, or other covered loss. Failing to name the right party, or confusing loss payee with additional insured status, can stall claim payouts and disrupt the cash flow needed to rebuild and finish the job.
Example
Example
The construction lender requires the GC's builder's risk policy to name the bank as loss payee, so that if a partially built structure burns, the insurance check is applied to the loan balance rather than paid directly to the borrower.
See Also
Related Terms
FAQ
Questions Contractors Ask
What is the difference between a loss payee and an additional insured?
A loss payee receives claim proceeds for first-party property loss because of a financial stake in the property, but has limited policy rights. An additional insured gains liability coverage and defense under another party's policy for third-party claims. The two serve different purposes and are not interchangeable in contracts.
Why are lenders named as loss payee on builder's risk policies?
Lenders financing a project hold a security interest in the improvements, so they require loss-payee status to ensure insurance proceeds protect their collateral. If a covered loss occurs, the money is directed toward the loan or rebuilding rather than disbursed solely to the borrower, reducing the lender's exposure.
Does a loss payee have the same rights as the insured?
No. A loss payee can receive payment for a covered loss but generally lacks the broader rights of a named insured, such as adjusting the claim, making coverage changes, or independent protection if the insured violates policy terms. A mortgagee clause grants stronger protections than a basic loss-payee designation.
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