Lender’s Loss Payable Endorsement for Mortgage Lenders

ISO 1993 438 BFU (Arizona, California, Nevada, Oregon and Washington) or ISO CP 12 18 is referred to as a “Lender’s Loss Payable Endorsement.” It is critical to understand the scope and breadth of this endorsement when compared to other coverage provisions or endorsements that deal with different but commercially related concepts.

The Lender’s Loss Payable Endorsement, ISO 1993 438 BFU NS,[1] provides protection for a lender and is used for mortgage securities involving real estate transactions. It is special because of the broad protection it gives to the lender if the borrower (usually the named insured) commits some act that may invalidate the insurance coverage. ISO 1993 438 BFU or ISO CP 12 18 basically provides that as to the Lender and its successors and assigns, the insurance shall not be invalidated by:

• Any error, omission or change respecting title, ownership or possession (paraphrased);
• The commencement of foreclosure, or giving notice of sale (paraphrased)
• Any breach of warranty, act, omission, neglect, or non-compliance with the policy and riders by the named insured, borrower, mortgagor, trustor, vendee, owner, tenant, warehouseman, custodian, occupant or their agents, or their permitting of the happening of any event, or failing to prevent an event which would invalidate or suspend the insurance as to the named insured (paraphrased)

[1] For your information you can download and view Lenders Loss Payable Endorsement – ISO 1993 438 BFU NS

The concept of the protections provided to lenders in the Lender’s Loss Payable Endorsement can be traced back prior to 1928. The historical development from an economic and business perspective is outlined by Thomas H. Anderson in a 1928 article, “Proceedings of the 52nd Annual Meeting of the Fire Underwriters Association of the Pacific.” As lenders began to draft their own agreements with the insurance carriers, the variations developed created the opportunity for confusion and problems that the Fire Underwriters felt should be addressed and corrected. “Inasmuch as a Mortgagee has an insurable interest in the property, separate and distinct from any other interest, it follows that the Mortgagee’s interest could, very properly, be separately insured against any hazard that would partially, or totally, destroy the property. The Mortgagee very properly should not be jeopardized, or unnecessarily in any manner affected by the acts or neglect of the owner, with or without criminal intent.” “The Committee first having the matter in charge, after studying the question from -every angle, very properly conferred with bodies representing Banks, Building and Loan Associations and Mortgage Corporations-principally the former-in an attempt to reach some common ground upon which agreement might be had, amply protecting the interests of both the Mortgagee and the Insurance Company. Ultimately, the concepts were reflected in ISO 438 BFU NS, which was promulgated in 1942 by the Pacific Fire Rating Bureau.

Home Savings v. Continental Insurance Co

Cases have reviewed the several versions of Lender Loss Payable Endorsements and sought to determine whether they are “Open” or “Standard” Endorsements, the former giving the Lender no protection against breach by the borrower and the latter providing coverage even if the borrower destroys the house. See Home Savings v. Continental Insurance Company, (2001) 87 CA 4th 835 wherein the various endorsements and treatment by different states are extensively discussed. Home Savings decided that the language constituted a “Standard” Endorsement and ruled that the lender had coverage spite the conduct of the named insured.

The use and scope of ISO 1993 438 BFU NS and ISO CP 12 18, Lender Loss Payable endorsement also needs to be considered and compared to other possible circumstances that could create confusion and less coverage for the lender.

Lender Loss Payable Endorsement relate to Loss Payee Endorsements

How does the Lender Loss Payable Endorsement relate to Loss Payee endorsements that historically are used with respect for personal property and not real property? The experts at the Anderson Edge have been involved in matters involving Lender Loss Payable Endorsements. The major difference in coverage between the two is that Loss Payee endorsements are subject to insurance company defenses against the primary named insured. So, if the named insured or his representative performs or fails to perform acts excluded under the policy, those defenses and exclusions will in most cases apply to the lender’s coverage as well. Furthermore, many lenders on personal property need to be especially careful about getting the proper endorsements evidencing their coverage. Just being listed as a Loss Payee may not grant any coverage to the lender.

The experts at the AndersonEdge have been involved in matters involving Lender Loss Payable Endorsements. Please call if you have questions concerning their use. See our other areas of expertise.