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Is your Motor Vehicle Loan Safe?

Insurance policies may not protect the credit union's lien

April 13, 2017

Today’s insurance world is a complicated scene. Insureds have more choice than ever for insurance coverage. If a federal credit union has a lien on a motor vehicle in South Carolina, you may be unprotected against the borrower’s malfeasance.

In South Carolina, the innocent insured/lienholder is not necessarily protected from intentional loss caused by another insured.  Our Courts have held that “in the absence of any statute or specific policy language denying coverage to a co-insured for the arson of another co-insured, the innocent co-insured shall be entitled to recover his or her share of the insurance proceeds.”  This allows insurance companies to restrict lienholders’ rights to recover collision or comprehensive benefits by use of restrictive policy terms.   Because the policy language covers the rights of the lender/lienholder to recover benefits in the event of loss or damage to the motor vehicle, it is important to understand the policy for each member who has borrowed money from the credit union. 

In this notice, we discuss the differences between the two types of loss  payable clauses applicable to credit union loans on motor vehicles, provide specific examples of the effect of each type of clauses, and suggest ways to review and improve your credit union’s loan protection through better insurance policy language.  

A loss payee clause (or loss payable clause) is a clause in a contract of insurance that provides, in the event of payment being made under the policy in relation to the insured risk, that payment will be made to a third party rather than to the insured beneficiary of the policy.  There are generally two types of loss payee clauses – open loss payable clause and a standard loss payable clause.

Depending on which clause is present in your members’ insurance policy, the credit union may not be protected against certain risks.  Knowing your members’ policies will help the credit union understand the risk.

Open Loss Payable Clauses

Open loss payable clauses declare that the loss, if any, is payable to a lienholder as its interest might appear.  These insurance clauses merely identify to whom the insurance proceeds are payable.  Under an open loss payable clause, the credit union merely stands in the shoes of the insured.  As a result, the credit union can recover benefits only if the insured has a valid claim.  If the insured does not have a valid claim, the credit union will not be paid on the claim.

Standard Loss Payable Clauses

Standard loss payable clauses use language similar to open loss-payable clauses, but further stipulate that, as to the interest of the lienholder, the insurance shall not be invalidated by certain specified acts of the insured.  As a result, the credit union, as lienholder, is “freed from policy defenses” which the insurer may have against the member/borrower. The credit union can recover policy benefits even where the insured is complicit in the loss.

Let Nexsen Pruet Help You:

Review:

• Review your loan agreements for language that requires the most comprehensive coverage available

• Review a sampling of members' policies to ensure maximum protection for the credit union.
• Review existing defaulted loans for coverage issues
 
Develop:
• Develop a strategy for existing loans to ensure maximum coverage at minimum cost
• Develop a strategy for new loans to make sure the borrower, dealer, and insurance agent assist in obtaining insurance that protects the credit union
 
Revise:
• Revise all loan agreements to require the proper loss payable clause
• Revise ancillary agreements to make sure the dealer and insurance agent are procuring the proper insurance coverage for the credit union