Loss payees must be included in payments of claim checks. Depending on the language of the loss payment clause, that may be the only right a loss payee has.
A recent federal decision from Alabama reinforced a post I made 12 years ago in Bad debt clauses and standard mortgagee clauses: Learn the basic rule and the difference. The federal court ruled in favor of the insurance company, noting the following:
In insurance, loss liability provisions allow parties other than the insured party, “loss payees,” to receive payment from the insurer in the event of a property loss. There are two types of provisions for loss payable under Alabama law: a simple provision payable for loss and a default mortgage clause… Under the former, the loss payee has a viable claim against the insurer only if the insured has a viable claim against the insurer… Loss payee is “entitled to payment only if a liability accrues to the insured.”; The second type of loss payment obligation, a default mortgage clause, creates a separate contract between the loss payee and the insurer, meaning that the loss payee can be indemnified by the insurer even if the insured is not indemnified 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 policy that constitutes a separate agreement between the loss payee and the insurer… In Norwest, the policy stated: ‘If we deny your [the homeowner/insured’s] claim, rejection will not apply to a valid claim from the mortgagee [i.e. Loss Payee]…’…. There, the court held that 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. Security Indem. Co. v. Fairfield Shopping Ct., LLCno. 2:12 CV- 02415-SGC, 2016 WL 4732581, at *2 (ND Ala., Sept. 12, 2016) (applying Alabama law) (finding a default mortgage clause when the contract specified that “the mortgagee will still be entitled to receive payment of loss” even if the mortgagor’s action excludes them from recovery)…
Here, paragraph B of the provision is a simple loss payment clause because it indicates that the claimant’s claim is dependent on the insured’s claim and because it does not contain clear language in a separate agreement between the loss payee and the insurer. Clause B states that the insurer will “pay all claims for loss or damage jointly to [the Named Insured] and the loss payee.’ The term “joint” indicates that the claim payee will only be paid if the insured is also paid. Additionally, Clause B does not contain the language of a separate contract marking a standard mortgage clause. This contrasts with the language of the subsequent clause, Clause C, which states ‘if we deny [insured’s] claims due to [insured’s] acts… The loss payee will still be entitled to receive loss compensation.’ The express language of a separate agreement in clause C shows that the parties intended a simple loss payable under clause B and a standard mortgage clause under clause C. Because the language of the agreement states that the loss payee’s claim is dependent on the insured’s claim and because it does not expressly state that a separate agreement has been drawn up between the Loss Payee and the insurer, clause B is a simple loss payment clause.
Under a simple loss liability clause, the loss payee is listed on a payment only if the named insured is entitled to payment. In this Alabama case,1 the insured has not submitted proof of loss, provided requested documents or attended requested examinations under oath. As a result, the court ruled in favor of the insurer, noting:
According to evidence provided by Nautilus, the insured has not met the precedent conditions imposed by the policy. Like the Nationwide policy, the Nautilus policy lists “Duties in the Event of Loss or Damage,” which include providing a complete inventory of the damage, submitting sworn proof of loss and, at Nautilus’ request, submitting to an investigation. Nautilus repeatedly notified the insured of these obligations by including them in correspondence. After the insurance, in early 2015 Nautilus requested an affidavit of loss, other documents and an examination of the insured…Nautilus’ evidence indicates that the insured never provided an affidavit of loss or any of the other documents requested. Furthermore, after rescheduling several times, the insured finally canceled and never submitted to an examination. Because the policy imposed conditions precedent and because Nautilus’s evidence shows that the insured did not meet those obligations, Nautilus is not obligated to compensate the insured for the property loss.
Since the insured could not collect, neither could the simple claim payee.
Here, the owner of the property was listed as the recipient of the loss. 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. In fact, a tenant can have all kinds of motives for not following through after a loss. Keeping the owner’s insurance interest separate and not dependent on the tenant is something an insurance agent should discuss with property owners.
Where there is an excess of power, no form of ownership is respected. No man is secure in his opinions, his person, his abilities, or his possessions.
1 Lee Investments LLC v. Nautilus Ins. Co.No. 7:20-00903 (WD Ala. Aug. 1, 2022).