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2. PP
3. PP-04-95

Form PP 04 95: Loss Payable Clause (Personal Auto Policy)

The PP 04 95 Loss Payable Clause is an endorsement to the standard Personal Auto Policy (PAP), such as the PP 00 01. Its primary purpose is to protect the financial interest of a lender or lessor (the loss payee) who has provided a loan or lease for a covered automobile. In the event of a covered loss to the vehicle, this clause ensures that any claim payment is made jointly to the named insured and the designated loss payee, as their interest may appear. This means the lender/lessor is prioritized for payment up to the outstanding amount of their loan or lease on the damaged or stolen vehicle.

Classes of Business and Real-World Examples

This endorsement is exclusively used in Personal Auto Policies. It is not designed for commercial auto risks. The most common scenarios where the PP 04 95 is utilized include:

• Financed Vehicles: When an individual purchases a car and finances it through a bank, credit union, or other lending institution, the lender will almost invariably require a Loss Payable Clause. For example, if John finances his new sedan through ABC Bank, ABC Bank would be listed as the loss payee on his auto insurance policy using this endorsement. If the car is totaled in an accident, the insurance payout would go to both John and ABC Bank to cover the outstanding loan balance first.
• Leased Vehicles: Similarly, if an individual leases a vehicle, the leasing company (lessor) retains ownership and has a significant financial interest in the vehicle. The PP 04 95 will be used to name the leasing company as the loss payee. For instance, if Sarah leases an SUV from XYZ Leasing, XYZ Leasing will be the loss payee. If the SUV is stolen and not recovered, the insurance settlement will be made to Sarah and XYZ Leasing.

Special Considerations

There are several important points to consider when using the PP 04 95:

• Mandatory Requirement by Lenders/Lessors: Most financial institutions will not approve a vehicle loan or lease without confirmation that they are named as a loss payee on the borrower's or lessee's auto insurance policy. Failure to maintain this endorsement can lead to the lender force-placing insurance, often at a higher cost to the insured.
• Interest of the Loss Payee: The clause specifies that payment is made "as interest may appear." This means the loss payee is only entitled to the amount of their outstanding financial interest in the vehicle at the time of loss. If the insurance payout exceeds the loan/lease balance, the remaining amount goes to the named insured.
• Protection for Loss Payee: The endorsement provides certain protections to the loss payee. For example, the policy typically states that the loss payee's interest will not be invalidated by certain acts of the insured (like fraud or misrepresentation), unless the loss results from the insured's conversion, secretion, or embezzlement of the vehicle. However, the insurer usually reserves the right to cancel the policy according to its terms, which would also terminate the agreement for the loss payee, though advance notice of cancellation is typically provided to the loss payee.
• No Greater Rights: It's important to note that the loss payee generally does not have greater rights under the policy than the named insured. If a claim is denied for the insured due to a policy violation (e.g., excluded use of the vehicle), the loss payee may also not receive payment, except as specifically provided for in the endorsement regarding certain acts of the insured.

Key Information for Agents and Underwriters

• Verification of Loss Payee Information: Agents must ensure the correct legal name and address of the loss payee are accurately listed on the endorsement and in the policy declarations. Errors can lead to delays in claim payments and dissatisfaction.
• Underwriting Guidelines: While the presence of a lienholder or lessor is common and doesn't typically increase the underlying risk of an accident, underwriters should verify that the vehicle's value and the loan/lease amount are reasonable. Extremely high loan-to-value ratios could, in rare circumstances, be an indicator of moral hazard, though this is more closely scrutinized in commercial lines.
• No Impact on Premium: Adding the PP 04 95 endorsement itself generally does not directly impact the premium for the physical damage coverages (Comprehensive and Collision). The premium is based on the vehicle, coverages selected, driving records, and other standard rating factors.
• Relation to PP 00 01: The PP 04 95 amends the standard Personal Auto Policy (PP 00 01) by adding provisions specific to how losses will be paid when a loss payee is involved. It does not alter the fundamental coverages provided by the PP 00 01 but rather directs the payment of claims for covered physical damage.
• Communication with Loss Payees: Insurers must have procedures in place for notifying loss payees of policy changes, such as cancellation, as stipulated in the endorsement and by state regulations.