Loss Payee vs. Additional Insured: Definition, Benefits, and Examples

Your business has reached a point where you need to branch out and create partnerships. Whether for logistical reasons or simply to increase your brand’s footprint, this can be an exciting and scary time in a company’s lifespan. While partnerships can represent growth and opportunity, the experience can also increase your liability.

If your brand partner or a contractor damages property, injures a customer, or engages in any legally questionable behavior, your name — as well as business assets — is technically on the line as well. In this scenario, a smart business would require that not only does your partner have liability insurance, but that they add your firm to the policy.

However, as with many things in the insurance industry, this isn’t always a cut-and-dried process. Typically, you’ll be added in one of two ways — as a “loss payee” or an “additional insured.” Each endorsement influences how much protection you have under your partner’s insurance. So, before you agree to anything, make sure you know what you’re requesting.

What is a loss payee?

A loss payee is covered under a loss payable clause. Yes, it can feel like technical jargon. But the simple nuts and bolts are that the loss payee is the person or entity that receives part or all of the funds paid out on a submitted claim. That claim is usually based on damages or losses accrued on the payee’s property.

Such a clause is ideal for businesses that are contracting third parties to perform on-site tasks. For example, imagine you own a server business and hire an IT vendor to perform system updates on your server farm. However, they manage to start a fire that damages your property.

Your business would be the loss payee. As such, you would be entitled to financial restitution — either partially or completely covering the full cost of damages to your physical property. Note that your business can also be listed as the loss payee even if you’re simply loaning property such as equipment for a third-party contractor to use.

What is an additional insured?

Additional insured can seem similar to loss payee, but the scenario is slightly different. In most cases, asking to be added to another company’s policy as an additional insured means that you’re viewing the relationship as a more long-term agreement.

When do you need to add an additional insured?

Typically, requesting additional insured status is best reserved for more long-term business partnerships where the risk extends beyond property damage. The designation helps to mitigate risk but is also something that’s often required before entering into a legally binding long-term contractual agreement with a potential partner.

What rights do additional insureds and loss payees have?

Both being an additional insured or a loss payee comes with benefits, but they can be very different. Additional insureds are entitled to the same liability protection as the primary policyholder. In other words, an additional insured receives preemptive protection.

By contrast, a loss payee is only covered if the insurer determines that property damage has occurred. However, the loss payee is often entitled to all or a part of the claim payment and is the first to be paid out.

Loss payee vs additional insured: Key differences

Besides coverage, there are a few key differences between being listed as a loss payee versus an additional insured on another business’ liability policy. As mentioned previously, an additional insured receives the same liability protection as the policyholder.

However, neither a loss payee nor an additional insured can access the policy directly. The policyholder is the only one who can submit claims, make coverage adjustments, or cancel the policy entirely.

Additionally, a loss payee is limited to property damage compensation. While this can include both a place of business or equipment, this doesn’t include other types of liability. Meanwhile, an additional insured can’t demand funds received from a property damage claim.

Adding third parties to your policy

Not all business insurance policies will allow you to add a third party. So, it’s always best to speak with your insurance agent before making such a change. They can assist with:

• Determining which endorsements are possible with your policy
• Which designation is best not just for your policy but the business relationship you’re establishing?
• Whether you need additional coverage to provide enough protection

Adding an additional insured to your policy will make your premiums increase. By contrast, typically adding a loss payee doesn’t increase your premiums.

Find the right endorsements for your business insurance

Everyone wants to grow, but you want your business to do so safely and with as minimal risk exposure as possible. Sometimes this involves adding another entity to your insurance policy, either as an additional insured or a loss payee. The right designation is going to depend on the specifics of your business arrangement.

Evident is a third-party risk and automated insurance verification service that can assist you with determining which endorsement is best. Additionally, our service is designed to help streamline your insurance vetting and compliance process so you can spend your time focusing on your key business objectives.

If you’re wondering whether you should be added to a potential partner’s policy as either a loss payee or an additional insured, talk with us today.

FAQs

What is a loss payee?
A loss payee is a party listed on an insurance policy who is entitled to receive payment if a covered loss occurs. The loss payee meaning typically applies to lenders or financing companies with a financial interest in insured property, such as a vehicle or equipment. Their inclusion helps ensure they’re reimbursed in case of damage or loss.

How does loss payee work?
A loss payee works by being named in the loss payable clause of an insurance policy. If the insured property is damaged or totaled, the insurance company will pay the loss payee directly, either fully or in part, depending on their financial interest. This provides protection for the lender or leasing company who has a stake in the asset.

Who does a loss payee clause protect?
The loss payable clause protects the loss payee, typically a lender, lessor, or other party with a financial interest in insured property. It ensures that if a claim is paid out, the loss payee receives compensation before or alongside the policyholder, reducing the risk of financial loss to the creditor.

Is loss payee the same as additional insured?
No, loss payee vs additional insured highlights two different roles. A loss payee has a financial interest in property and is entitled to insurance payments related to property damage. An additional insured, on the other hand, is added to a liability policy to receive protection against third-party claims. The two serve different purposes in insurance coverage.

Is loss payee the same as lien holder?
Not exactly, but they’re closely related. A lienholder is a lender with a legal claim on property until a loan is repaid, while a loss payee is the entity listed in the loss payable clause to receive insurance payouts. So in many cases, the loss payee vs lienholder comparison reveals they are the same party, but with different legal designations.