Additional Insured vs. Loss Payee
An additional insured is a third-party business or person with liability exposure due to your working relationship with them. On the other hand, a loss payee has the first right to a payout.
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.
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:
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.
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.
While a loss payee and additional insured both provide benefits to third parties, they have distinct differences. Here’s a breakdown:
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.
Now, you can spout knowledge about additional insureds and loss payees the word in front of the hors d’oeuvres spread.
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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.