Loss Payee Insurance

July 7, 2021

Two terms that often confuse risk teams are “loss payee” and “additional insured.” While both can collect benefits from an insurance policy, they have different uses. In the real estate industry, too many landlords and property managers ask for loss payee status on a tenant’s general liability insurance policy when that does not best serve their financial interests. In this article, we explain how loss payee and additional insured endorsements differ and who they should cover.

The insurance industry can get complicated fast, especially with the number of complex terms floating around. In this installment of our Certificates of Insurance 101 series, we’re diving into loss payees: what they mean, who can be one, and, of course, how they pertain to COIs.

What Is a Loss Payee in Insurance?

In many cases of insurance coverage, the policyholder (also known as the insured) is not the only party affected by risk. A loss payee in insurance is a party that is not the insured but is designated on a policy as having a financial interest in the insured property. This is important because, in the event of a covered loss or damage to the insured property, the insurance provider administering the policy will have to make claim payments to both the policyholder and the loss payee. A loss payee is designated in a lessee’s insurance policy as part of the loss payable clause (also called the loss payee clause).

What Is the Purpose of a Loss Payee?

The purpose of naming a loss payee in an insurance policy is to protect the financial interests of parties other than the one that purchased the policy. This can mean anyone with a legal or financial stake in the property. Ultimately, the concept of a loss payee exists to protect the interests of more parties and reduce risks and the likelihood of disputes related to an insured property.

Who Can Be Listed as a Loss Payee?

A loss payee can be any party or entity that has a financial interest in an insured property. Let’s cover some common examples of entities that can be listed as a loss payee on an insurance policy:

  • Lenders: Auto loan providers and mortgage lenders are commonly listed as loss payees when a borrower purchases a vehicle or finances a home. This is to ensure that the lender’s financial interest is protected in the event of damage or loss to the collateral, such as in the case of a vehicular accident or property damage.

  • Leasing companies: Similarly, parties who lease out equipment, such as vehicles, construction machinery, or other high-value items, are often named as a loss payee to protect their financial interest in the leased assets.
  • Landlords: In commercial real estate, landlords can take on a lot of financial risk. Therefore, it is prudent for them to request to be designated as loss payees on their tenants’ insurance policies to protect their interests in the structure of the building. 
  • Property management companies: Companies responsible for the maintenance and upkeep of properties can be listed as loss payees to ensure that in the case of claims, insurance money will come back to them to be used for the repair and restoration of the property.
  • Additional insured parties: Sometimes, parties with a specific insurable interest in a property, such as a contractor or an architect on a project, may be named as a loss payee to ensure coverage of their interests in it.

  • Government agencies: In cases where government agencies have a financial interest in an insured property, such as for disaster recovery initiatives, they can be listed as a loss payee. 
  • Anyone with insurable interests: Essentially, anyone with a financial stake in a property can be designated as a loss payee to safeguard their financial interests. This can include entities like investors, co-owners, or parties with contractual rights to the property.

What Is the Difference Between a Loss Payee and a Lienholder?

A loss payee and a lienholder are related insurance terms, especially in situations where an entity has a financial interest in an insured property. However, there are important differences between the two. A lienholder is an entity that has an active legal claim or “lien” against a property until a loan or debt associated with it is fully paid. Typically, a lienholder will have provided financing for the purchase of the property, such as a bank, finance company, or mortgage lender helping an individual purchase a home. 

To reiterate, a loss payee is concerned with the insurance proceeds in the event of a covered loss, whereas a lienholder is concerned with the financial aspects of a property, such as the outstanding loan balance. The roles of a loss payee and a lienholder can, however, overlap in certain situations, such as the aforementioned mortgage lender lienholder, who could also be designated as a loss payee on a homeowner’s insurance policy to protect their financial interest in the property. 

What Is the Difference Between Loss Payee and Additional Insured?

Additional insured is an entity added to a named insured’s policy that benefits from an extension of the policyholder’s liability coverage. Additional insured endorsements protect affiliated parties from the named insured’s conduct by providing them with the same insurance coverage funded through the policyholder’s premiums.

Let’s compare the two. A loss payee is entitled to all or a portion of the check an insurance company issues from a claim filed by the named insured. Additional insureds do not receive a portion of that check. Rather, they have the option to file a claim directly against the named insured’s policy. Therefore, additional insureds gain more coverage against claims, but no rights in receiving money from the named insured’s policy when the loss lacks a direct connection to the relationship. Landlords and property managers often require tenants add them as additional insureds.

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What Is an Example of a Loss Payee on a COI?

Adding a loss payee to a named insured’s policy is necessary when collateral has been used to secure a loan, and it’s not entirely paid off, or whenever an entity has an insurable interest and financial stake in the insured property. Let’s walk through an example of when a loss payee might show up on a COI or Business Certificate of Insurance

Say that you are a general contractor at Credible Construction overseeing a large construction project for a property owner working at Radical Realty. As part of the construction contract, Credible Construction is required to have general liability insurance coverage in place. Radical Realty asks to be named as an additional insured party to reduce their liability and so that they can also receive protection under Credible Construction’s policy (as the contractors are the ones more likely to cause damages). They also ask to be named as a loss payee, which will ensure that any insurance funds paid out can be used to cover damages to the property. 

After Credible Construction works with their insurance company to obtain a general liability insurance policy, they’ll also get a corresponding COI that acts as evidence of their coverage. On this COI, Radical Realty will be listed as an additional insured party, designated as a loss payee, and named as the certificate holder (to receive the certificate).

How Do You Apply Loss Payee to Insurance?

Adding a loss payee to a named insured’s policy is necessary when collateral has been used to secure a loan, the loan is not fully paid, or there is an insurable interest and financial stake in the property. The loss payee is the rightful recipient of an insurance reimbursement because it has the greatest financial interest in the property.

Let’s say that Ready Real Estate financed their multi-tenant mall through Billionaire Bank on a 15-year loan. The loan contract requires Ready Real Estate list Billionaire Bank as the loss payee on its insurance policy. When a fire occurs, the insurance company notifies Billionaire Bank as the loss payee and issues the bank a check for the loss. Billionaire Bank then can endorse the payment to Ready Real Estate to complete the repairs.

Additional insured status is ideal when working with a third party increases liability exposure. The additional insured endorsement reduces that liability by keeping the risk closest to the party most likely to create it – the named insured.

Going back to Ready Real Estate, they lease space in their mall to Real Good Restaurant. The lease agreement requires the tenant list Ready Real Estate as an additional insured. The restaurant causes a fire that creates significant damage to the property. Ready Real Estate files a claim against the restaurant’s insurance policy as an additional insured and receives protection against litigation from the patrons injured in the fire.

Who Is a Loss Payee? The Special Case for Property Owners

For landlords, there are two scenarios to consider regarding tenant insurance. What is covered under the tenant insurance policy dictates if loss payee status is required:

  • Scenario #1: Tenant is only insuring their own business personal property

In this scenario, the landlord should require an additional insured endorsement on the general liability policy. Because the landlord has no financial interest in the tenant’s personal property, there is no need for loss payee status.

  • Scenario #2: Tenant is insuring the property or structure

Here the landlord has a financial interest in the property as its owner. The tenant’s general liability insurance policy should include an additional insured endorsement for the landlord as well as citing them on the declarations page as a loss payee. This gives the tenant’s policy priority in paying for claims in which the tenant is at least partially responsible. It also ensures the landlord receives compensation should the tenant cause a loss because the property owner stands to lose their investment.

What Is a Lenders Loss Payee? 

All insurance policies come with a series of standard clauses. Insurers add loss payees to commercial property policies using a standard endorsement called Loss Payable Provisions. The endorsement includes four clauses representing each type of loss payee. Two are most common: the Loss Payable Clause and the Lender’s Loss Payable Clause.

The Loss Payable Clause provides the loss payee with the same coverage as the named insured. A Lender’s Loss Payable Clause grants more protections to the loss payee. The main difference is that a lender’s loss payable provision allows the loss payee to recover losses even when the acts of the named insured invalidate coverage under the policy. Should a named insured default on a loan, violate the terms of their insurance policy, or cancel their coverage, the lender still receives protection thanks to the lender’s loss payable endorsement.

The Lender’s Loss Payable Clause provides three important protections. First, the endorsement ensures the loss payee can receive financial reimbursement for a loss even if the entity has initiated foreclosure proceedings on a covered property. Second, the clause retains coverage for a loss payee even if a named insured commits an act that invalidates the insurance policy. For example, if authorities found that Real Good Restaurant committed arson, which would not be covered under the insurance policy, Billionaire Bank and Ready Real Estate would still be protected. Third, loss payees would receive advance notice if the insurance company intends to cancel coverage for the policyholder.

Understanding Insurance Terms Can Be Difficult; Managing COIs Doesn’t Have to Be 

myCOI is the best certificate of insurance tracking software—and team—for a reason. Find out how we can help you better understand the difference between loss payees, additional insureds, lienholders, and more, and ensure that your vendors are always compliant. Request a demo today.

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