- The Evolution of the Loss Payable Clause in Automobile Policies
- December 1, 2009 | Author: Jeremy E. Catlin
- Law Firm: Swift, Currie, McGhee & Hiers, LLP - Atlanta Office
Originally, two types of loss payable clauses were found in automobile insurance policies: the “open” and the “standard” clause. The open clause, which often contains language indicating that the loss will be paid to the named lienholder “as its interest may appear,” was developed in response to demands by lienholders that they be included on checks issued to the named insured when they had a secured interest in the insured property. Open clauses provide lienholders no greater protection than that afforded to the named insured. The standard clause, on the other hand, developed in response to demands by lienholders that their coverage remain in force even if the named insured did something that caused coverage to be invalidated.A standard clause provides additional protection to lienholders by subjecting them only to defenses based on their own breaches, rather than those of an insured, based upon a separate contract between the insurance company and the lienholder.
The standard clause usually states that the insurance is not invalidated by any act of neglect of the named insured. However, the “standard” loss payable clause in automobile policies does not guarantee protection for the lienholder when the type of loss is not covered under the policy, rather than by some act of neglect of the named insured. While the majority of courts hold that, where an insured’s actions trigger an exclusion or breach a condition of the policy, the lienholder is still entitled to recover, the minority position views the standard loss payable clause as subject to the coverage provided by the policy. Thus, recovery by the lienholder is precluded where the loss falls outside the policy’s coverage. See Western Leasing, Inc. v. Occidental Fire & Cas. Co., 268 Ore. 426, 521 P.2d 352, 354 (1974) (insurer did not owe the insured or lienholder under the policy where a driver negligently pulled a damaged trailer for 1,000 miles because the damage incurred was not caused by a “collision” as required by the policy).
Insurers, presumably, in response to the uncertainty surrounding the “standard” clause, developed a “modified” clause. The modified clause traditionally excludes coverage for the lienholder if the loss was caused by the insured’s “conversion, embezzlement or secretion” of the vehicle. Such clauses provide substantially more coverage than the old “open” clauses, but less coverage than that found in a pure “standard” clause under the majority view. Under these modified clauses, coverage to the lienholder is not invalidated by the negligent or fraudulent act or omission of the insured, unless that act constitutes “conversion, embezzlement or secretion” of the insured’s vehicle. See Progressive American Ins. Co. v. Florida Bank at Daytona Beach, 452 So. 2d 42 (Fla. App. 1984).
Due to ambiguities as to what constitutes a “conversion, embezzlement or secretion,” some modified clauses have evolved to include “omissions” or “fraudulent omissions” by the insured as further barring a lienholder’s rights to coverage. This language has been interpreted to mean that the lienholder will not be protected from the fraud and omissions of the policyholder. Cardwell v. Chrysler Financial Corporation, 804 A.2d 18 (Pa. Super. 2002).
The rationale between the majority and minority positions is still an under-developed area of the law. In fact, no Georgia court has addressed the specific issue of the loss payable clause in an automobile policy. However, based upon Georgia courts following the majority view with regard to the standard mortgage clause found in homeowners policies, it is reasonable to assume Georgia will also follow the majority position with respect to loss payable clauses found in automobile policies. Because of the unsettled nature of the loss payable clause, though, it would be prudent for insurers to analyze the loss payable clauses in their policies to determine if the coverage being provided by the policy is what was intended when the policy was written.
For more information on this topic, please contact Jeremy Catlin at [email protected] or at 404.888.6144.