What Is the Loss Payee Clause in Mortgage Hazard Insurance?


For many people their home is the largest investment they ever make. It is also the largest asset they will ever own. Homeowners insurance companies protect the home using homeowners insurance policies. These policies promise to repair or even replace a home, which is damaged or destroyed from a covered peril. These perils include wind, fire, hail, lightning and many other accidents that could hurt or destroy a home. Mortgage companies usually require the home owner have enough coverage to replace the structure should it be completely destroyed and want their company listed in the lost payee clause of the policy.

Why Lenders Require Insurance

Mortgage lenders provide loans for hundreds of thousands or millions of dollars per property. Lenders understand their only true security is the property itself. Because of this, if fire destroys the home, they realize the home owner probably doesn’t have enough money to rebuild it herself. If she did have enough money to rebuild a house, she wouldn't need a mortgage. Therefore, they require the home owner buy and maintain hazard insurance for the home. This ensures the lender that it will not be stuck with the loan for a house, which has been destroyed.

Loss Payee Clause

To secure the lender's interest, it may require that the home owner list it in the lost payee clause of the insurance policy. This is a separate section of the policy, which lists everybody who has an interest in the insurance and is not a policy holder. Hazard insurance companies list the lenders in this section of the policy.

Claims Checks

When a home owner makes a claim against the insurance policy, the insurance company lists both the home owner and everyone listed in the lost payee clause on the check. This is to ensure the home owner does is simply cash the check and not do the repairs. The mortgage company co-signs the check once it verifies that the work is completed. This often requires a contractor completing the work before receiving payment. The mortgage company may pay someone to visit the home to ensure the work is completed as required before counter signing on the check.

Changing Insurance Companies

Mortgage lenders cannot require the home owner use a certain hazard insurance company. Home owners are free to use whatever hazard insurance company he wishes. This includes allowing the home owner to change companies from year to year. When a home owner changes to a new hazard insurance company, he must inform the new insurance company of a lost payee. The lost payee clause must be completed with the lender's name, address and loan number. If the lender maintains an escrow account for the hazard insurance, the lender will need to know the new annual premium amount so the lender may adjust the monthly amount collected to pay them.

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