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What Are A Lender’s Rights As A “Loss Payee” Under An Insurance Policy In Indiana?

If you work for a lending institution that makes secured loans, then you may have heard of the term “loss payee.”  If you are not sure what that means, then the Court’s decision in Monroe Bank v. State Farm, 2010 U.S. Dist. LEXIS 119736 (S.D. Ind. 2010) (.pdf) will help. 

The loan and the loss.  In Monroe, the lender funded a loan to the borrower that was secured by a lien on the borrower’s boat.  The loan agreement between the lender and the borrower called for the borrower to obtain insurance for the boat and to name the lender as a “loss payee.”  The borrower did just that.  Thereafter, the boat fell on hard times, so to speak, by being stolen twice and ultimately suffering severe damage.  As a result, both the borrower and the lender filed an insurance claim but, for reasons not explained in the Court’s opinion, the insurer denied the claim. 

Loss payee definition.  Black’s Law Dictionary defines “loss payee” as a “person named in insurance policy to be paid in event of loss or damage to property insured.”  For more background, here is a link to Wikipedia’s definition of a “loss payee clause.” 

Direct suit by lender.  Due to the damage to its loan collateral, and in light of the insurer’s denial of the claim, the lender filed suit against the insurer.  Specifically, the lender filed a breach of contract claim and sought damages for its losses associated with the damage to the boat.  The insurer filed a motion to dismiss under Rule 12(b)(6) and advanced two arguments in support. 

    Direct action rule.  The insurer’s first argument rested upon Indiana’s “direct action rule” that “prohibits a third party or judgment creditor from directly suing a judgment debtor’s insurance carrier to recover an excess judgment.”  The Court, concluding that the direct action rule did not apply, rejected the argument.  The lender in Monroe was not a “third party,” but rather a loss payee under the policy.  As such, the lender “was a third party beneficiary of the contract between [the insurer] and [the borrower].” 

    Suit limitations clause.  In the alternative, the insurer contended that the policy’s suit limitations clause barred the lender’s claim.  The clause stated that “no action shall be brought unless there has been compliance with the policy provisions.  The action must be started within one year after the date of loss or damage.”  The premise of the insurer’s argument was that the lender had to include the borrower in the suit.  In Monroe, the borrower was not included in the suit, and it was undisputed that more than one year had elapsed since the date of loss.  Again, the insurer’s argument failed, and the reason was that the insurer “ignored the fact that as a loss payee, [lender] is a third party beneficiary to the insurance contract.”  In Indiana, as a third party beneficiary, the lender can sue the insurer directly to enforce the insurance contract. 

Rights, generally.  I am no insurance law expert.  Such matters for our firm generally are handled by my partner, Dale Eikenberry.  Nevertheless, it is important for attorneys like me, who handle litigation involving secured loans, to be conversant with insurance fundamentals.  Similarly, representatives of secured lending institutions need to know the basics.  Hence this post about Monroe, which teaches us that, generally, in Indiana a secured lender, named as a loss payee under its borrower’s insurance policy, can as the situation warrants file suit directly against the insurer if a claim is wrongfully denied.