The Difference Between Loss Payee & Additional Insured
Loss Payees and Additional Insureds may sound similar and lead to confusion because both options extend the named insured’s coverage to a third party. Below the surface, is where the parallels between these two coverage options end.
The two concepts are quite different in their scope and coverage. In this article, we are going over what Loss Payees and Additional Insureds are, the coverage associated, and the costs of each one of them.
Loss Payee vs. Additional Insured
So, what is the difference between a Loss Payee & an Additional Insured? In general terms, Loss Payees have first rights on claim payments for property losses. Instead, Additional Insureds share in the maned insured’s liability coverage.
It is essential to understand both payment types to recognize their main differences.
What is a Loss Payee?
A Loss Payee is a third-party entitled to insurance payments. They receive a payment according to the insurance policy when there is a loss.
This loss usually covers damage to items of insurable interest and this is obtained by adding a loss payable clause to a policy. The person who needs reimbursement for a loss should be a Loss Payee on the insurance policy covering the loss.
Commercial property insurance and commercial vehicle insurance often carry these clauses to cover items that are leased and/or financed.
- For property insurance, Loss Payable endorsements are most common when a third party owns or partially owns the physical property in question. When a Loss Payee is listed on the policy, the insurer must also notify them of claims and/or changes to the policy.
- This type of coverage is especially common on Auto and Real Estate Policies. The perfect example is the situation where many people hold “ownership” in a car and would benefit from coverage. For example, if you lease a car, your lender will want to be a Loss Payee on your auto insurance policy. They hold ownership in the vehicle, so if anything happens to it and you cannot continue making payments to them, they will be the first ones to receive payment from your insurance policy to make up for the lost payments.
So, a Loss Payee is the first person to receive payouts from an insurance policy. In the case that more than one Loss Payee is listed, their names will appear in the order of who receives payment first. If there are three Loss Payees, for example, whoever’s name is first on the policy will receive the payment before the others. If there is money left over, it goes to whoever is next, and so on.
What is an Additional Insured?
An Additional Insured is a third party, it could be either a person or a business entity, that has liability exposure in a business relationship. To reduce risks, this is the perfect coverage when working with a third party that could increase your business’s legal liability.
The third party is added to an insurance policy through an endorsement. Being an Additional Insured means you can make a claim on the insurance policy when there is a loss.
For instance, contractors often request their subcontractors add them as Additional Insureds on their insurance policy. This way, if the subcontractor makes a mistake, the contractor has protection for their project under the subcontractor’s insurance policy.
According to IRMI Glossary, “in liability insurance, additional insured status is commonly used in conjunction with an indemnity agreement between the named insured (the indemnitor) and the party requesting additional insured status (the indemnitee).”
Instead, for property insurance, Additional Insured status is most often used in conjunction with a premise of agreements.
What is the Difference Between Loss Payee & Additional Insured?
Both options provide insurance coverage and protection to third parties who are entitled to receive insurance benefits along with the named insured.
The main difference is that Additional Insureds receive only liability protection whereas Loss Payees receive only property damage coverage.
What are the Coverage Differences?
- Loss Payees are part of an insurance policy where there are property-related losses to cover. This means that when there is a property loss, the Loss Payee has coverage. In summary, the insurance policy pays to cover the loss. For example, a bakery leases a commercial oven and adds the party from which it leases the oven as a Loss Payee to its commercial property policy. If a fire breaks out in the kitchen and damages the oven, both parties would receive payment based on their individual interest in the affected property.
- Additional Insureds are exposed to liability from a third party that they need coverage for. This means an Additional Insured can only receive coverage if they are directly involved in the loss. For example, imagine another fire situation, this time in a construction zone. The subcontractor working on the project is an additional insured on the contractor’s insurance policy. If the fire causes loss, and the subcontractor is not responsible, they do not receive any coverage. Instead, if the subcontractor is the one to cause the fire, then coverage kicks in since they are directly involved in the loss.
What are the Cost Differences?
It is important to note that though both Additional Insureds and Loss Payees can receive benefits, they lack the full authority of the named insured. The named insured is the only person or entity that can request changes to the policy, submit claims under it, or cancel it.
Also, for the named insured, adding a Loss Payee to their policy is usually free since there is no additional coverage in the policy, it is just a redirect of payments.
Another key difference is that Additional Insureds cannot receive payments for other liability claims involving the property, only materials in which they have a direct interest. Instead, an Additional Insured involves adding more coverage, so there is a cost associated with this option.
How Do I Know Where I Have Each of These Coverages?
To keep track of all your Loss Payee and Additional Insured Endorsements, you need a Certificate of Insurance (COI) tracking and management software. Any time you add a Loss Payee or an Additional Insured to your insurance policy, request a new COI to reflect the change.
Sign up for a free product demo to see how SmartCompliance will help you keep track of all your insurance policies and endorsements.
