When you’re searching for a new policy for your small business, it can be difficult to wrap your head around all the insurance jargon and terminology. One common area of confusion arises from the terms “additional insured” vs. “loss payee.” At first glance, it can seem these two are the same because you can add both entities to your business insurance and grant them the right to benefits. However, beyond this broad similarity, they’re actually quite different. Read on for a breakdown of additional insured vs. loss payee and their accompanying rights.
What Is an Additional Insured?
An additional insured covers a third party that can incur a liability exposure through a business partnership. It can be a person or a business entity that asks a business to be named as an additional insured in case they are directly pursued in a lawsuit. For instance, a cleaning company may ask a department store to include them as an additional insured on their general liability insurance or business owners policy. That way, if a visitor should become injured due to the negligence of the cleaning company, the property's business insurance will cover the legal fees of the cleaners.
What Is a Loss Payee?
A loss payee is also a third party listed on the declaration page of a business’s policy. However, they are granted first rights to insurance claim payments after a property loss. A loss payee comes first because they have an insurable interest in a property. For instance, if a baker takes out a loan to purchase a truck, the finance company will have the business put up the truck as collateral against the loan. To prevent the business from stopping their loan payments in the event of an accident—as it can’t be repossessed—the finance firm requires the business to name them as a loss payee on their commercial auto insurance.
What Rights Do Additional Insureds and Loss Payees Possess?
Both entities are entitled to insurance benefits alongside the named insured. Loss payees only receive property damage coverage, and additional insureds only receive liability protection. For instance, if a customer is injured in a part of the building that the cleaning service does not maintain, the additional insured cannot report a claim. Alternatively, loss payees only have the first right to the proceeds of any property damage involving their insurable interest. Despite these rights, these entities don’t carry full authority, meaning they can’t request policy changes, and only the policyholder can submit claims.
Can a Third Party Be Both an Additional Insured and Loss Payee?
Owners can name a third party as both an additional insured and a loss payee. For instance, if a property owner decides to sell their building and the buyer cannot secure the mortgage, the owner can agree to provide financing. In this case, the seller would ask to be named an additional insured and a loss payee in case someone becomes injured on the property while they’re still financing the purchase or a fire or hurricane destroys the building (their insurable interest).
Understanding the difference between additional insured vs. loss payee can help you with any future partnerships you pursue with your business. While ensuring third parties are protected from liability and property damage, it’s also wise to make sure you’re appropriately covered for the same.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.