The insured was a plastic injection molding firm.
They had borrowed money from a bank in the amount of 1,800,000 dollars for the purchase of their equipment. The equipment collateralized the loan. The bank had requested that the agent add them on as a loss payable; provide them with notice of insurance; and provide that the insurance was non-derivative of any actions, acts or omissions of the insured. Both the request for the notice of cancellation and “separate” insurance were in the detail on the back of the bank’s standardized form for a secured loan of this sort.
The insured had become delinquent on their payments and after several months the bank representative personally went to the location and discovered that the business had vacated the premises and the equipment was gone. The bank immediately made notified the insurance company and took over the payments of the premium as coverage was still in force. What was clear was that the insured had absconded with their equipment. What also became clear was that the insured denied the bank coverage because they had been identified on the policy as a Loss Payable rather than a Lender s Loss Payable as their requirements for coverage would have dictated.
Often time a bank will request to be added as a “loss payable”. What many agents do not realize is that a “loss payable” endorsement has three separate choices as to how the policy will pay which is indicated on the Declarations Page of the policy: Loss Payable; Lenders Loss Payable and Contract of Sale. In this situation, the agent named the bank as “Loss Payable” which, according to the endorsement only provided that the policy would pay any claim for loss or damage jointly to the insured and the Loss Payee as interest may appear. This loss was NOT payable to the insured, the plastics manufacturer, as they had stolen their own property. What should have happened was that the bank be named as a Lenders Loss Payable. This clause provides: “If we deny your claim because of your acts or because you have failed to comply with the terms of the Coverage Part this loss Payee will still have the right to receive loss payment if the Loss Payee: (1) pays the premium due and (2) submits a sworn proof of loss within 60 days….” The last choice is for a contract of sale for situations wherein the loss payee has entered into a “contract” with the insured for the sale of Covered Property.
The mistake here was simply that the agent did not provide the coverage that was requested by the bank. The agent had received a copy of the request but failed to review its terms and requirements. The choice to name the bank as a Lenders Loss Payable would not have cost any more premium dollar then to have named them as Loss Payable. A word to the wise, when a bank has lent money, specifically on equipment they are requiring the Lenders Loss Payable Form. In this case it was a 1,800,000 dollar mistake.