A loss payee is a third party who is listed on a policy declaration page. Loss payees are entitled to receiving compensation first in the event of a claim or loss on a property. The reason a loss payee receives first compensation is that they have an insurable interest in the property that must be protected first.
The process for a loss payee is as follows:
- Loss payees must be notified when the policyholder files a damage claim.
- The insurer issues a payment to cover repair expenses.
- The check from the insurer must be made out to both to the named insured and the loss payee.
- When the loss payee receives the check, it must verify the loss with the business.
- The loss payee then endorses the claim check back to the business owner to pay for the repairs.
In real estate, it is common to se loss payees listed on insurance policies. This is because real estate lenders have a financial interest at stake in the property and rely on the owner to properly care for that investment.
Scenarios such as the above are common on fix and flip properties, with investors using the BRRRR method of real estate investing, and properties under renovation.
Let's use the example of a fix and flip property. Say the property or equipment is damaged or destroyed by a peril (like fire, earthquake, wind), or equipment is stolen or damaged during the renovation process. The lender, as the one who has provided the funds for this project, could potentially lose a portion of their investment as a result. To prevent this scenario, the owner would list the lender as a loss payee on the property policy.
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