Our question is whether, if a loss payee is named on an auto policy, the insurer can arbitrarily pay the insured without including the name of the loss payee. The loss payee endorsement reads, in part: payment for loss to a covered vehicle will be made according to your interest and the interest of any loss payee or lienholder shown on the declarations page or designated by you; payment may be made to both jointly, or separately, at our discretion.
We have always been under the impression that that wording meant that if an individual had some equity in an auto and a small balance on the car loan, the insurer would pay the loan company for its interest and the insured for his. But, the insurer now is interpreting the wording to mean that, regardless of the lienholder's interest, the insurer can pay the insured alone and ignore the loss payee altogether. What is your interpretation?
Nebraska Subscriber
The loss payee endorsement you have is different from the standard ISO endorsement in that the ISO form does not state that payment may be made jointly or separately. That phrase does offer grounds for easy misinterpretation. The ISO endorsement makes clear that the interest of the loss payee is equal to that of the insured and that, in some events; the interest of the loss payee will not be affected by the actions of the insured. Also, the status of the loss payee is respected in another way in that the ISO endorsement declares that the loss payee will receive the same advance notice of cancellation as the named insured receives. The bottom line is that the ISO endorsement treats the loss payee as an entity that will be paid for its interest in the covered auto. The loss payee is an innocent third party and a business partner of the named insured and as such, should have its financial interests in the covered auto honored by the insurer.
As for the insurer's endorsement, it has that strange phrase about payment being made jointly or separately; still, we believe that the insurer is misinterpreting the phrase. It means that the insurer can issue a payment check for loss to the covered auto in the names of the named insured and the loss payee together, or it can issue separate checks to both parties to cover their separate interests in the covered auto. In other words, the check can be issued to “John Doe and Loss Payee” so that both parties have to endorse the check and receive their respective payments, or the checks can be issued to “John Doe” for his interest and to “Loss Payee” for its interest.
The insurer is misinterpreting the wording to infer that the insurer can pay either the named insured or the loss payee. The company should look to the first sentence of the loss payee endorsement where it states “payment for loss to a covered vehicle will be made according to your interest and the interest of any loss payee.” The endorsement declares that the loss payee will be paid and the only question is how that happens, not whether it will happen.
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