Legal Issues

Loss Payable Clauses

Whether an Insurer pays or refuses to pay a lienholder due to an intentional act or fraud committed by the insured, or the insured’s failure to cooperate with the Insurer during its investigation, or the insured otherwise fails to comply with the terms and conditions of the policy of insurance depends solely upon one thing... the wording of the Insurer’s Loss Payable Clause.

The Georgia Courts recognize two (2) different types of Loss Payable Clauses. In the "Open" clause, the loss is paid to the loss payee (Lienholder) named in the policy declarations or endorsements "as its interests may appear". Under this "Open" clause, the loss payee (Lienholder) is a mere appointee of the fund whose right of recovery is no greater than that of the loss payor. See: Southern States Fire & Casualty Ins. Co. v. Napier, 22 Ga. App. 361, 96 S.E. 15 (1918); Decatur Federal S & L Association v York Ins. Co., 147 Ga. App. 797, 250 S.E.2d 524 (1978);

Conversely, where the Loss Payable Clause contains language providing that the loss payee's (Lienholder’s) interests shall not be invalidated by any act of the payor or owner of the property, the effect of such language is to create a separate and distinct contract on the loss payee's interest and give to it independent status. See: Northwestern National Ins. Co. v. Southern State Phosphate and Fertilizer Co. , 20. Ga. App. 506 (1917); Pacific Ins. Co. v. R.L. Kimsey Cotton Co., 114 Ga. App. 411 (1966); Aetna Life & Cas. Co. v. Charles S. Martin Distrib. Co., 120 Ga. App. 133 (1969). This is known as the "New York Standard" or "Union" loss payee clause. See: Decatur Federal S & L Association v. York Ins. Co., Supra; Canal Ins. Co. v. Savannah Bank & Trust Co., 181 Ga. App. 520, 352 S.E.2d 835 (1987) INA v. Gulf Oil, 106 Ga. App. 382 (1962); Employers Fire Ins. Co. v. Pennsylvania Millers Mutual Ins. Co., 118 Ga. App. 665 (1967); Reserve Ins. Co. v. Associates Discount Corp., 116 Ga. App. 792 (1967); Citizens Finance Co. v. Ins. Co. of St. Louis, 105 Ga. App. 422 (1962); Corbin v. Aetna Life & Cas. Co., 447 F. Supp. 646 (N.D. Ga. 1978).

A loss payee or lienholder protected by a New York Standard clause will still recover proceeds from an insurer under an insurance policy containing such a provision, notwithstanding a breach of the policy by the insured, by fraud or other means, which would otherwise preclude recovery by the insured.

So, what does an Open Loss Payable Clause look like?

"Loss or Damage under this policy shall be paid as Interest may Appear to You and the Loss Payee Shown in the Declarations. This Insurance Covering the Interest of the Loss Payee Shall Become Invalid Only Because of Your Fraudulent Acts or Omissions."

Under this policy provision, even if the insured commits fraud or fails to cooperate with the insured during its investigation, the lienholder or loss payee is still paid for its loss due to the occurrence.