Additional Insured vs. Loss Payee: Understanding the Key DifferencesInsurance Explained
No matter what industry you’re in, there often comes a time when your business is going to have to partner with another business in order to successfully achieve some strategic goal or another.
Your construction company might not have enough employees available to finish a project before a deadline and could hire a third-party roofing contractor to help get the job done on time, for example.
In such a situation, it’s not uncommon for businesses to request that they be added to the insurance policy of the company that they are collaborating with, in order to protect themselves from potential mistakes for which they could be held responsible.
Adding a third party to an insurance policy is usually done by way of an endorsement, but what kind? Choosing the wrong endorsement type could leave you unprotected and facing serious financial consequences in the event that a claim is filed against you.
That’s why understanding insurance terminology is so important for small businesses seeking proper coverage. Two terms that seem similar on the surface but are, in reality, quite different are “additional insured” and “loss payee.”
Both are types of endorsements that extend the named insured’s coverage to a third party.
However, the scope of coverage that each provides is actually quite different.
When we talk about an additional insured, this refers to a person or entity that has a relationship with the named insured. Because of the nature of their relationship, a degree of liability exposure exists for this entity, which is why they will usually request an endorsement be added to the named insured’s liability policy.
Oftentimes, partners will stipulate this type of request in contract form before agreeing to a business relationship. Since this third party is being exposed to a certain level of risk by working with the named insured, that third party would also like to receive some degree of coverage for those liability exposures.
As is the case with most things in business, the larger corporate entity is the one with all the leverage when it comes to additional insured endorsements. For example, if you’re a small distributor and want to work with a large manufacturing company, there’s a good chance that they will ask you to list them as an additional insured. But if you asked the larger business to add your business to its liability policy, it might not oblige you.
Any time you believe that the level of your business’s legal liability is being increased as a result of working with another company, you should definitely request additional insured status from them.
But don’t forget that a third party can also ask you to add them to your liability insurance policy for the same reason. Whether you are becoming the additional insured or you’re naming an additional insured, you’re doing so because you believe that it will help you and your business partners effectively transfer a certain amount of risk associated with your business cooperation.
A loss payee is added to an insurance policy through something that is called a loss payable clause to the declarations page of the policy. This authorization can transfer all or some of an insurance payment to the loss payee, which is the third party that is entitled to payments for damage to items of insurable interest to that party.
Sounds confusing? It’s not. This type of endorsement is requested most commonly when a third party is a part or full owner of physical property that is being used to perform a job. A loss payable clause is usually added to a commercial property or commercial auto insurance policy, especially when there are items involved in the work that are being leased or financed.
If you are listed as a loss payee on your business partner’s policy, the named insurer must notify you of all claims filed or changes that are made to the policy that you are listed on.
Here’s an example of how a loss payable clause works:
Say you are running a pizza restaurant and you are renting out your pizza ovens from another company. If you add that company to your commercial property policy as a loss payee, both you and that company could receive payments if a fire breaks out in the restaurant and damages, among other things, the rented ovens. Both parties receive payments because both have insured interest in the property that was affected.
An important thing to note is that loss payees have first rights on insurance claims payments, not the named insured, since the loss payee has an insurance interest in the property that needs to be protected first.
So in the above-mentioned example of the pizza restaurant, the insurer would have to notify the loss payee when the pizza restaurant files a damage claim. And when the insurer makes a check out to pay for repairing or replacing the damaged ovens, the check must be made out to both companies.
Additional Insured vs. Loss Payee: Key Differences
The most obvious difference between additional insureds and loss payees is in the insurance benefits that they receive. Additional insureds receive liability protection while loss payees receive property damage coverage.
A loss payable endorsement will give the loss payee a share of the payment that is received from the insurer in the case that their insurable interest (the property that has been insured) has sustained any damage.
On the other hand, additional insured clauses are most commonly added to liability policies such as commercial general liability insurance. These clauses added to the policy extend coverage to a third party that could be liable for the actions of the named insured.
Another important thing to note is that neither the additional insured nor the loss payee will ever have full authority over the policy. They can receive benefits from the policy, but they cannot submit claims under the policy, make changes to the policy, or cancel the policy. Only the named insured has full authority to make these types of decisions.
One other key difference between the two is that it’s usually free to add a loss payee while adding an additional insured carries some type of charge most often. This is because a loss payee endorsement does not provide additional coverage, it simply splits the payment between the named insured and the loss payee. And while there usually is a fee involved when adding an additional insured on your policy, you’re paying much less than you would pay to purchase a full additional policy for the third party.
Adding Third Parties to Your Policy
If you need to add a loss payee or additional insured to your policy, you should always consult your insurance agent or broker first, in order to determine the following:
- Whether adding a third party is the right thing to do: Most businesses will want to add a third party because a business contract requires them to do so. However, a broker can analyze the contract in order to let you know if the request is reasonable and justified.
- Whether you have enough coverage: Your broker will be able to assess whether your policy offers sufficient coverage for your level of risk, especially if third parties are being added to it.
- Which endorsements are available: There are certain policies that do not allow for loss payee or additional insured clauses. Your agent or broker will know which endorsements are possible and which are not.
If you’d like to learn more about third-party endorsements or need someone to guide you through the process of obtaining one, feel free to reach out to one of our expert brokers at any time for a free consultation.
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