The Name Game: How A Lender Is Designated - A Borrower's Policy Affects Its Rights If There Is A Loss (Part One)

Loan docs generally require Borrower to provide insurance on collateral in favor of Lender. Borrower presents Lender with a policy declaration page listing Lender as a "loss payee;" this is known as an open mortgage, loss payee or loss payable clause. Lender is protected if there is a covered loss, correct? To answer that question, we must first answer this one: what rights does a "loss payee" have under such a clause?

Virtually all commercial property policies contain "Loss Payable Provisions," sometimes on an endorsement (ISO form CP 12 18 is an example), and sometimes in the main text of the insuring agreement. A typical loss payee/open mortgage clause reads as follows:

For Covered Property in which both you and a Loss Payee shown in the Schedule or in the Declarations have an insurable interest, we will:

Adjust losses with you; and Pay any claim for loss or damage jointly to you and the Loss Payee, as interests may appear. This looks innocuous and comforting enough, but it needs unpacking.

First, consider "shown in the schedule or in the declarations." To have protection as a loss payee (or a lender loss payee), the lender's name must be listed in the policy. A lender must ensure that it is named—and correctly named—in the policy as a loss payee if it wants whatever protection being a loss payee provides. If the lender is "First National Bank of Anytown," a listing of "National Bank of Anytown" may be insufficient.

Second, "shown in the Schedule or in the Declarations" means what it says. If the loan is sold, the purchasing lender has no rights as a loss payee, unless it is named in the schedule or declarations. The same is true of servicers, because a servicer may have to be able to demonstrate that it is the lender's representative with rights to act on behalf of the lender to recover. (Check out the Florida residential mortgage foreclosure cases if you have doubts. E.g., BAC Funding Consortium Inc. ISAOA/ATIMA v. Jean-Jacques, 28 So.3d 936 (Fla. 2d DCA 2010).)

There is a possible workaround: if First National Bank of Anytown is to be the loss payee, the designation "First National Bank of Anytown ISAOA" can be use (although the author strongly prefers substitution of specific names at each transfer). The acronym "ISAOA" stands for "its successors and/or assigns," and its insertion in a designation may be sufficient to allow a successor lender or servicer to claim loss payee status. (But the successor may have to prove its status...