Loss Payable Clause
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A loss payable clause is a provision stipulated in an insurance contract that protects a lender from losses incurred should a collateral used in a secured loan losses it value due to damage or destruction.
While these types of terms can be used to protect the interest of lenders on both real property assets and personal property, for Singapore consumers, people are probably most familiar with it in car loans and auto insurance.
This is so as to ensure that the lender gets their money back should a vehicle be destroy in an accident. Since the car would be almost worthless when condemned, this clause ensures that insurers would repay the loan owed to the bank.
In terms of real real estate such as a completed landed house, a loss payable clause enables a lender to receive funds for settlement of an outstanding loan should the property be badly damaged or destroyed.
Consider that if there is no livable property on the land, it would technically make no sense for the bank to foreclose it as they would not get their money back from an auction.
For example if $1,000,000 is the remaining principal for a home loan on a house, and it is in such a bad condition that it has to be condemned, then the value of the land and house might be worth less than the $1,000,000 owed. Should the borrower default on the loan, then the mortgage insurance would provide coverage for the loan to be repaid.
It must be said that such situations are rare in Singapore, yet not unheard of.
Some insurers call it by a different name. But the essence of the loss payable clause remains.
Some homeowners might contain that any claims made towards an insurer for property damage should be made to them instead of the lender. This might be the case for home contents insurance but not for mortgage insurance as the latter is primarily meant to protect the loss of funds loaned out to the borrower.
It must be noted that coverage usually only apply to the principal outstanding balance.
So if the bank applies other types of charges on the borrower such as late payment fees, default interest, interest in lieu, etc, the homeowner might have to pay for these fees in cash out of his own pocket.
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