If you’ve ever met an insurance agent at a party and they started tossing out industry jargon like additional insured and loss payee, you likely made a quick exit. In case you got away before they got into the juicy details: An additional insured is someone you add to your insurance plan because of their liability exposure as a result of their relationship with you. In contrast, a loss payee is an individual listed on a policy that covers property because the individual has a financial interest in the property.

Knowing what these terms mean and whether or not you should add one to your insurance policy — or request to add your business to another company’s policy — can be extremely important to the ongoing success of your small business.

You can add an additional insured or a loss payee to many insurance policies, including a Business Owners Policy (BOP). Let’s address the key differences between an additional insured and a loss payee.

What is an additional insured?

An additional insured is a third-party business or person that has a liability exposure due to your working relationship with them. An additional insured could be a contractor, a supplier, a manufacturer, or any outside business partner. It is important to remember that additional insured status does not provide full insurance coverage for the person or entity with respect to its own operations, but it does protect them if they are sued or considered responsible for injury or damage arising out of your operations.

When should you add an additional insured to your insurance policy? It’s often a requirement of commercial landlords, so if you rent space for your small business, it’s likely the landlord will want to be listed as an additional insured on your liability coverage.

Other reasons to add an additional insured include:

  • Contractual requirements — Like landlords, you’ll find that some companies you work with will request additional insured status on your policy as part of your business contract with them. For example, if you’re a painter and an interior designer brings you in to do a job, that designer may wish to be listed as an additional insured.
  • Government statutes — Government agencies may require being added as additional insureds in order to issue permits and licenses. You can run into this scenario if you rent out a government property, even just a government parking lot used as overflow parking for your event.
  • Attracting talent — Voluntarily offering to add another business or person as an additional insured on your insurance coverage can be used as a sign of goodwill to attract an in-demand consultant or another contractor who has their choice of clients.

Keep these factors in mind when the circumstances are reversed (if you want to ask another company to add you as an additional insured on their policy). Also, keep in mind that the Named Insured is not obligated to honor your request.

What is a loss payee?

On the other hand, a loss payee is another person or company who can receive a payment because of a loss to property covered by your insurance policy. A loss payee is technically anyone to whom a claim payment under an insurance policy may be made. A loss payee clause is necessary when someone other than the Named Insured also has an insurable interest (a financial interest) in the property covered by the Named Insured’s policy. Loss payees usually have the first right to a payout made after a claim. If you add a loss payee clause to your insurance policy, then payments for covered losses would be paid to that payee to the extent of its insurable interest.

Why would another loss payee get to skip ahead of you in the payment line? Their insurable interest in the property is typically honored first because the loss payee may have loaned the named insured money to purchase the property in question, or may still have a partial ownership interest in the property. As a result, the loss payee usually requires its interest to be satisfied before the named insured receives any reimbursement. Here’s a typical example. If you’re still paying loans on your work vehicles, the loan company is often a loss payee on your commercial auto insurance.

Imagine that you damage your company’s leased delivery truck. In that case, the insurance company must notify any loss payees with an insurable interest in that vehicle as soon as you file an insurance claim. When the insurance company cuts a check for the vehicle repair costs, they’ll make it out to the loss payee (your loan company) and to the Named Insured to make sure that the repairs are completed. If the vehicle is a total loss, drafting the check in the name of both parties ensures that the loan company is able to recoup its financial interest in the vehicle.

In practice, the loan company would then receive the check, verify the amount of the outstanding loan, determine with you where the vehicle is being repaired, and then endorse the check back to you or to the repair shop to pay for the repairs.

What is the difference between an additional insured and a loss payee?

While a loss payee and additional insured both provide benefits to third parties, they have distinct differences. Here’s a breakdown:

Loss payees added to a policy

  • Mostly applicable to property-related claims. When the third party in question owns or partially owns the named insured’s physical property (also called “first-party property”). Examples include leased equipment or vehicles, leased offices, retail or manufacturing space, or property that is financed.
  • Rights do not extend to all damage. Loss payees are entitled to insurance payments for damage to items or equipment in which they have an insurable interest. So, if the policy covers the garage where you park your leased vehicle, and if the garage is damaged in a fire but the vehicle is not in the garage at the time of the fire (and, therefore, not damaged), the vehicle loan company would not receive payment for the garage damage although it is a loss payee.
  • Do not add expenses to your policy. A loss payee may be added at no additional charge under most insurance policies since it does not add additional coverage, but rather merely amends who gets paid in the event of a claim.

Additional insureds

  • Only applicable to liability policies. A person or entity can be added as an additional insured to the policy by way of an endorsement when they have liability exposure due to their business relationship with you, the policyholder. In other words, an additional insured is only covered when their liability arises out of actions or operations of the Named Insured.
  • Do not have control over the insurance policy. Additional insured status does grant coverage for the additional insured’s own operations on the named insured’s policy. They are only covered for liability arising out of the actions of the Named Insured. They have to have their own policy to cover their operations.
  • Contracts with a Named Insured often include an indemnity clause. This can be a contractual agreement between the Named Insured and the additional insured(s) where one party is protected from certain potential third-party liabilities. Some additional insureds do not have contracts with the Named Insured and not all contracts contain an indemnity clause.
  • Typically an added expense to your policy. Adding an additional insured usually involves a charge since it expands coverage under the policy. But not always with Thimble! Many types of additional insured endorsements added by Thimble are added at no additional charge. We’re special like that.

How to add an additional insured or a loss payee to your policy

Putting an additional insured or loss payee on your policy is usually accomplished by way of an endorsement, meaning it requires an insurance policy addendum that modifies your coverage. Insurance companies do love their forms!

You can request an additional insured endorsement at any time it is required. Typically, a loss payee is added to the policy when a lease agreement or purchase loan is signed. You must remember to add the loss payee to your new policy when you change your insurance on a property on which someone has an insurable interest. (For example, if you change insurance policies on a vehicle that’s still being financed.) Loss Payees can be removed from a policy contract when a lease ends, or you fully repay the loan. At that point, the loan provider no longer needs to be a loss payee on your plan.

Become an insurance wiz

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Business insurance protects your company’s interests and can save you from massive out-of-pocket expenses. Adding an additional insured or loss payee to your policy is a great way to provide the protection your business partners need as well.