Did you know that insurance coverage can be extended to a third party? In fact, sometimes doing so might be necessary. The two most common types of third parties are loss payees and additional insureds. On the surface, they may seem similar but there are several key distinctions between them that are important for policyholders to know.
Continue reading to learn more about loss payees, additional insureds, the primary differences between them, and how to add a third party to your insurance policy.
What is a loss payee?
A loss payee is a third party, such as a person or organization, that is entitled to receive claim payments for damages before the policyholder due to a financial interest in the insurable item or property. Loss payees are typically listed on the declarations page of the insurance policy under a loss payable clause.
This clause stipulates that some or all of the total payment will be transferred to the loss payee. When a loss payee is added to a policy, the policyholder essentially authorizes the insurance company to make payments directly to this third party.
Loss payees are commonly added to insurance policies when a third party has full or partial ownership over a physical item, such as a car, or property. Commercial property insurance and commercial vehicle insurance policies may include loss payable clauses to cover items that are leased or financed.
If a loss payee is listed on a policy, the insurance company is required to notify them of any claims or changes made to the policy.
For example, if a small business leases a delivery van, it may add the dealership from which it leases the vehicle as a loss payee to its commercial vehicle insurance policy. Should the vehicle be damaged or stolen, both parties would receive payment from the insurance company based on their shared insurable interest in the vehicle.
It must be noted that loss payees have first rights on insurance claims payments, not the policyholder. In essence, the loss payee’s financial interests are protected above the policyholder’s.
An additional insured, sometimes referred to as an additional interest, is another example of a third party that can be added to an insurance policy. However, additional insureds are usually a person or entity that has a relationship with the insured policyholder.
The policyholder typically has the option to include an additional insured under their third party liability policy in an effort to extend a certain degree of their coverage to that party. There are several reasons why someone would add an additional insured to their policy.
For example, it may be done to protect another person with whom you have a close personal relationship or it may be done to comply with your contractual obligations.
For instance, in business, one company may stipulate that it must be added as an additional insured before agreeing to acquire another company. (Typically, a larger entity with more power will make being added as an additional insured a condition of its deal with a small computer, as it is opening itself up to risk just working with the smaller company.)
As an example, a general contractor may ask a plumber who works for them to be listed as an additional insured on their policy. This way, if the plumber makes a mistake on the construction site, the general contractor’s interests will be protected as the insurance company will be required to pay both parties. In essence, anytime that a business’ legal liability is being increased by working with another business, it is wise to request additional insured status from them.
One final thing to note about additional insureds (and this applies to loss payees too), is that they will never have full authority over the policy. Since they are not the policyholder, they do not have the right to make changes to the policy, cancel the policy, or submit claims under the policy. Only the policyholder or named insured can make these decisions. However, they can receive benefits from the policy, such as extended coverage or a payout, as detailed above.
The differences between loss payee and additional insured
As mentioned above, while both loss payees and additional insureds as examples of third parties (people, organizations, or entities) being added to an insurance policy, that is where the similarities end.
One of the key differences between a loss payee and an additional insured is in the insurance coverage they receive. Loss payees receive compensation in the event of property damage to an insured item, such as a vehicle, whereas additional insured receive liability protection in the event that a claim or lawsuit is brought against the policyholder for their actions.
Further, the two statuses differ in terms of payment. When a loss payable endorsement is added to a policy, it guarantees the loss payee a share of any payment received from the insurance company if the insurable interest (car, property) is damaged. In contrast, additional insured clauses usually involve modifying an existing liability policy, such as commercial general liability insurance.
When such a clause is added, the policy’s liability coverage is extended to the third party that could be found liable for the policyholder’s actions.
Another distinction between loss payees and additional insureds is that it is usually free to add a loss payee to your insurance policy, whereas adding an additional insured comes with a fee. This is because a loss payable endorsement does not provide additional coverage. Rather, it redirects the existing coverage, splitting the payment between the insured and the loss payee. In contrast, adding an additional insured to your policy will likely carry a charge. That said, the fee is usually much smaller than if you purchased an entirely new insurance policy for a third party.
How to add a loss payee or additional insured to your policy
Are you interested in adding a loss payee or additional insurance to your insurance policy but don’t know where to start? Check out the step-by-step guide below.
1. Contact your insurance company and broker
Your insurance provider can provide you with pertinent information, such as whether your policy is eligible for a loss payable endorsement or additional insured, how much it will cost to add a third party to your policy (if anything), and how long it will take to do so. Beyond contacting your insurance company, we also recommend calling a trusted broker. For example, the advisors at BrokerLink are insurance experts who can answer any questions you may have and walk you through the pros and cons of both loss payees and additional insured.
2. Find out which third party endorsements are available
Certain insurance policies may prohibit loss payee or additional insured clauses. An insurance agent or broker can tell you exactly what endorsements are possible.
3. Discuss whether adding someone to your policy is the right decision
Some contracts, typically business contracts, may stipulate that adding a third party company to your policy as an additional insured is a requirement of the deal. An experienced insurance broker can help you determine whether this requirement is reasonable and give you their objective opinion on whether adding someone to your policy is the right decision.
4. Choose your preferred coverage
If you’re considering adding a third party to your policy due to contractual obligations, the contract will likely outline how much coverage you need to hold. An insurance broker can help you assess whether the required coverage is sufficient given your level of risk, or if it’s in your best interests to purchase additional coverage.
Consult with an insurance broker to add a third party to your insurance policy
Ultimately, if you need or want to add a loss payee or additional insured to your insurance policy, always contact an insurance broker first. An insurance broker can help you determine the following:
- Whether adding a third party will benefit you: Most businesses add a third party to their policy because a business contract requires them to do so. However, an experienced broker can review the contract to let you know if the request is reasonable and worthwhile, or whether it should be challenged.
- Whether you have enough insurance coverage: A trusted broker from BrokerLink can assess whether your current policy offers sufficient coverage as is, especially now that a third party is being added to it, or whether purchasing additional coverage is in your best interests.
- Which endorsements are available to you: Not all policies allow for loss payable endorsements or additional insured clauses. Find out if your policy is eligible for these clauses by contacting a broker.
- The cost of adding a third party to your policy: If you want to know how much adding a third party (especially in the case of an additional insured) will cost, contact BrokerLink. Our experts can explain all there is to know about third-party endorsements, including how much they cost, what the process is like, and what the impact will be.
Get in touch with BrokerLink for more information on loss payee and additional insured endorsements
Adding a third party like a loss payee or an additional insured to your insurance policy is a big decision. Plus, all this insurance jargon can be confusing. Luckily, BrokerLink is here to help you navigate the third party endorsement process.
Whether you have questions about the differences between loss payees and additional insureds or want to know if your policy is eligible for an endorsement, get in touch BrokerLink.
BrokerLink is also pleased to offer free insurance quotes to all. Our quotes are accurate, competitive, and obligation-free. Contact us today to get started.