Marine loss payee clauses
Category: Marine insurance · Reviewed by the Apex broking team · Last reviewed 2026-08-22 · ~5 min read
Category: Marine insurance
Also known as: loss payable clause, named loss payee, sole loss payee, loss payee endorsement
Related concepts: Marine Insurance Act 1906, marine insurance, cargo insurance
What the clause does
A loss payable clause appears in hull, cargo and other marine wordings, and directs that some or all of the sums payable under the policy be paid to a named third party rather than to the assured. Wordings vary: some direct payment of all losses to the payee, some only losses above a threshold or total and constructive total losses, leaving partial losses to be paid to the assured so that repairs can be funded.
The commercial reasons are straightforward. A bank lending against a vessel wants the insurance money if the security is destroyed. A seller shipping goods on credit terms wants the proceeds if the cargo is lost before payment. A buyer who has paid in advance wants the same. The clause is the simplest way of routing the money.
Why a loss payable direction is weaker than it looks
The critical limitation is that naming a loss payee does not usually make that party an assured or give it an independent contract with the insurer. The claim remains the assured’s claim; the direction tells the insurer where to send the cheque. It follows that if the assured’s claim fails — because of breach of warranty, non-disclosure, unseaworthiness, wilful misconduct or any other defence — there is generally nothing for the loss payee to be paid out of.
That is the point financiers most often miss. A loss payee clause protects against the borrower diverting the proceeds. It does not protect against the borrower having destroyed the cover. Whether the payee has any enforceable right at all against the insurer depends on the wording and, where the clause is intended to confer a benefit on the payee, potentially on the Contracts (Rights of Third Parties) Act 1999, which many marine wordings expressly exclude.
Assignment, and what the Act says
The stronger route is assignment of the policy. Section 50 of the Marine Insurance Act 1906 provides that a marine policy is assignable unless it contains terms expressly prohibiting assignment, that it may be assigned before or after loss, and that where it has been assigned so as to pass the beneficial interest, the assignee is entitled to sue on it in its own name. Assignment may be by indorsement on the policy or in other customary manner.
But the same section preserves the insurer’s defences: the defendant is entitled to make any defence arising out of the contract which it could have made had the action been brought in the name of the original assured. So assignment gives the financier standing to sue — a real advantage over a bare loss payable direction — without curing defects in the underlying cover. Assignment also normally requires notice to, and often the consent of, the insurer, and the policy’s own terms govern that.
Co-assured status and composite interests
The third route is to be named as an assured. Where a financier is a co-assured with its own separate insurable interest, the policy may be construed as composite — a bundle of separate contracts with each assured — so that conduct by one assured does not necessarily defeat the cover of another. Whether a given wording achieves that depends on its drafting and on the nature of the interests insured; it is not a consequence of simply adding a name to a schedule.
This is the protection banks generally want and often do not get. The difference between “loss payee”, “additional assured” and “co-assured for its respective rights and interests” is not a matter of style.
Mortgagees’ interest insurance
Because none of the above fully protects a financier against the assured’s own acts, a separate product exists. Mortgagees’ interest insurance is bought by the lender, on its own behalf, and responds where the owner’s claim under the primary hull or war risks policy fails for reasons within the owner’s control. It is a distinct contract with its own conditions and exclusions, and it is the answer to the risk a loss payable clause cannot address.
Whether it is needed is a credit decision rather than an insurance one, but the analysis should be done at the point the finance is documented, when the loan agreement’s insurance covenants are still negotiable.
Practical checklist
Read the loss payable wording itself rather than relying on the label. Establish which losses it captures — all losses, or only totals and constructive totals above a figure. Check whether the policy excludes the Contracts (Rights of Third Parties) Act 1999. Establish whether what has been given is a payment direction, an assignment with notice, or genuine co-assured status, and make sure the finance documents ask for the one that was actually intended. And where the lender’s exposure to the borrower’s own conduct matters, treat mortgagees’ interest cover as a separate line item, not as something the loss payee clause has already dealt with.
Frequently asked questions
Does being named loss payee give a bank a claim against the insurer?
Usually not by itself. A loss payable clause is a direction as to where proceeds are sent. Unless the payee has taken an assignment or is a co-assured, it generally has no independent right of action, and any right it does have depends on the wording and on whether the policy excludes the Contracts (Rights of Third Parties) Act 1999.
What does section 50 of the Marine Insurance Act 1906 provide?
That a marine policy is assignable unless expressly prohibited, may be assigned before or after loss, and that an assignee to whom the beneficial interest has passed may sue in its own name — subject to the insurer keeping every defence it would have had against the original assured.
What is the difference between a loss payee and a co-assured?
A loss payee receives money under someone else's claim. A co-assured is insured in its own right, and where the policy is composite the conduct of one assured does not necessarily defeat another's cover. Which one a wording creates is a question of drafting, not labelling.
Why would a lender buy mortgagees' interest insurance as well?
Because a loss payable clause and even an assignment leave the lender exposed where the owner's own conduct defeats the primary policy. Mortgagees' interest insurance is a separate contract, taken out by the lender, designed to respond in exactly that situation.
Related entries
This entry is part of the Apex Insurance Wiki. This entry states the position as at August 2026. It is insurance information, not legal advice. Last reviewed 2026-08-22. Next review: 2027-02-22.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This page is general information, not advice on a specific policy.