Both additional insured and loss payee coverage extend insurance coverage beyond just the named insured. The coverage often extends to a third party because of a contractual agreement. The primary difference between a loss payee and an additional insured is that the loss payee has the right to collect payments from the insurance company in a claim where the additional insured is only extended coverage.
An additional insured is a person or organization that has increased exposure due to your business operations and is therefore extended coverage on your insurance policy. The additional insured is listed on the declarations page of the insurance policy and, while listed, is not a named insured who has the rights to make changes to the policy or get checks paid for claims disbursements.
Example of an Additional Insured
When you lease commercial property, the lease contract will likely specify how much insurance you must maintain and require you to list the property owner as an additional insured for the policy. The property owner is exposed to your liability for things like a slip-and-fall accident in your location but is requesting to be covered for these incidents through your policy. If someone sues, the building owner is defended by your policy. Commonly, this is seen in general liability and business owner’s policies (BOPs).
Additional Insured Rights
There are common rights that an additional insured gets when named on a business insurance policy. These rights include:
- Liability protections
- Insurance benefits
- Protections in liability claims only where they have a direct interest
The additional insured does not have full authority over the policy. This means they are unable to make policy changes, upgrade coverage, or cash claims checks. They are not listed as a loss payee on the policy, which means their name is not going to be on the check.
When to Add an Additional Insured
Generally speaking, you’ll add an additional insured when it is requested by a third party with whom you are engaged contractually. This may be a leasing company for your commercial space, or it may be another business that you are subcontracting for or doing a major project for.
It is important to note when you would want your business to be listed as an additional insured on another company’s insurance policy. If you are hiring subcontractors or allowing someone access to your space for business use, you’ll want to have them add you as an additional insured.
How to Add an Additional Insured
Your insurance carrier can add the additional insured with just a little bit of information about the third party. They’ll ask you for the party’s legal name, address, and phone number. They will note any contract number if there is one. While most insurance carriers don’t charge to add an additional insured, you’ll need to check with your provider to be sure.
What Is a Loss Payee?
A loss payee has more rights than an additional insured. The loss payee has the first right to claims over the named insured when it comes to property losses. This is because the loss payee maintains an insurable interest in the property where an additional insured is merely mitigating their own potential liabilities.
Example of a Loss Payee
An example of a loss payee is a mortgage company for your commercial property space. The mortgage company has the bigger loss exposure if something happens to the property, such as a fire. They will want to make sure that if a loss occurs, the funds are used to repair and rebuild the property, which is why they have the first right to the funds. If they didn’t, a frustrated business owner could take the claims money and abandon the property.
Loss Payee Rights
Even though the loss payee has the first rights to the property claim proceeds, they don’t have full authority over the policy, meaning they can’t change, cancel, or expand coverage. The rights that they do have as the loss payee include:
- Right to insurance benefits―first right to proceeds on any property claim where they have an insurable interest
- Right to property protections
Insurable Interest: An insurable interest means that a party has the potential for financial loss if a claim arises. Often, this is seen with property insurance.
When to Add a Loss Payee
A loss payee will request to be added when you purchase or lease commercial property like real estate property, machinery, and heavy equipment. You may also be requested to assign a loss payee to a bank furnishing you with a loan or line of credit.
How to Add a Loss Payee
Talk to your insurance carrier to add a loss payee. They’ll need all the pertinent details about the party, including their legal name, address, and contact information. Because a loss payee doesn’t change the underwriting of the policy, there is likely no charge, but it is best to confirm this with your insurance carrier.
Having the right third-party designations on your insurance policy makes sure everyone is protected properly. Most likely, the third party will tell you whether or not they should be an additional insured or loss payee. If they don’t, or ask for more rights than needed, remember that the loss payee has an insurable interest in your property, where an additional insured just needs to be absolved of liability.