Loss payee vs. additional insured

When it comes to insurance endorsements, understanding the difference between a loss payee and additional insured is crucial, especially if you're financing certain assets, leasing a property, or trying to manage commercial risks. These two terms will appear often in your insurance documents and contracts. But what many Canadians don't know is that these terms serve two completely different purposes.

Quick snapshot

Loss payee vs. additional insured—at a glance:

• Loss payee = Property protection

• Additional insured = Liability protection

A loss payee usually represents a financial stakeholder, like a lending or leasing company, that has a legal interest in an insured property. In the event a loss should occur, such as theft or fire damage, the insurance company ensures that the loss payee is fairly compensated to protect their investment.

On the other hand, an additional insured is a third party added to an insurance policy to receive liability protection. This is commonly used in business transactions and ensures the party is protected against certain claims or lawsuits. So, why exactly does this distinction matter? Simply put, the type of endorsement you choose will affect how your insurance claims are handled, how you manage risks, and your overall insurance coverage. Whether you're a small business owner, landlord, or leasing agency, getting this right ensures you and other parties are protected should the unexpected occur.

What is a loss payee?

A loss payee is a party with a financial interest in an insured property who is entitled to compensation if that property is damaged or lost. This endorsement ensures that lenders, landlords, and other financial institutions have their interests protected in the event an insurance claim arises. Let's look at some different scenarios below:

• Auto loan payments: Auto loan providers will often be listed as a loss payee so they can recoup their losses if the car is written off following an accident.

• Leased equipment: Construction companies that lease equipment and machines to others are also listed as loss payees to ensure they are compensated should anything happen to their equipment.

• Commercial property loans: Mortgage lenders require that they be listed as a loss payee to protect their financial interest in the commercial building.

One thing to note is that loss payees do not have legal control over the insurance policy itself and are not entitled to the entire compensation amount that may arise from an insurance settlement. Instead, they are reimbursed based on the extent of their financial stake.

Beneficiary rights and responsibilities

Let’s take a closer look at beneficiary rights and responsibilities:

• Loss payees have the right to receive payments for physical property damages or losses.

• They do not have the authority to change the policy or cancel the policy. Only the policyholder can do so.

• They do not receive insurance benefits like liability protection from lawsuits.

• They may be required by contract or a lease agreement.

Why does this matter? In 2024 alone, catastrophic commercial property losses in Canada exceeded $1.7 billion due to natural disasters and other claims. Therefore, lenders are becoming increasingly cautious with those they lend money to and will require loss payee endorsements to be added to an insurance policy to counteract these growing risks. In contrast, for the insured party, listing a loss payee satisfies potential financing agreements and ensures a smooth claims process following a major loss or damage.

What is an additional insured endorsement?

An additional insured is a third party, such as a person or an organization, that is added to an insurance policy for them to receive liability coverage. Additional insured status is usually given in construction or other commercial spaces where contracts take place, where one party wants to limit its liability exposure by transferring some of the risk to another party's insurance. Again, let's look at some scenarios of this below:

• Contractors and subcontractors: General contractors may ask subcontractors to name them as additional insured on their liability policies.

• Commercial tenants: Commercial landlords may ask their tenants to add them as an additional insured to their general liability insurance coverage to reduce their liability exposure to injuries or property damages.

• Business partners: Vendors or franchise businesses are often added as additional insured status to shared liability protection.

Coverage provided to third parties

Let's take a look at what third parties receive in terms of coverage:

• Legal defence and settlement costs from third-party claims.

• Bodily injuries and property damage liabilities that may arise from the operations of the named insured (policyholder).

• Protection while performing duties under the agreed contract.

Key characteristics

Important features to note:

• The additional insured does not have a direct financial interest in the insured property.

• The additional insured is only covered for certain liabilities that may arise from the actions of the named insured.

• They do not have the ability to make changes to the insurance policy or have any legal claim to insurance payments.

According to Willis Towers Watson (WTW), general liability claims continue to rise, especially in industries like real estate and construction, which has prompted more and more businesses to require additional insured status in contractors to proactively manage risks. Ultimately, adding an additional insured endorsement is a smart way to form trust in your business relationships, mitigate shared liabilities, and ensure all parties are protected if something unexpected happens.

Loss payee and additional insured: A side-by-side comparison

If you're still having some difficulties differentiating these two terms, take a look at our side-by-side comparison for more information:

Key differences to remember

Here's a summary of important comparisons made between loss payees and additional insureds:

• A loss payee is mainly focused on protecting their financial interest in a physical item, whether it be a car or property.

• An additional insured is mainly concerned with sharing liability and legal risk in case a lawsuit or injury claim is filed against them.

• Loss payees only receive benefits (like payouts) when a loss occurs, whereas additional insureds receive benefits only when legal action arises.

You can think of a loss payee as someone protected an asset they have loaned to another party, while an additional insured is someone who wants to avoid being named in a lawsuit. While both are essential, they deal with different problems. So, when you're deciding which to choose, you'll want to think about what the nature and scope of your relationship is with the other party. Is it strictly financial (loss payee)? Or is it legal-based (additional insured)? When in doubt, you can always reach out to your insurance company directly or speak with a BrokerLink advisor for assistance.

Hypothetical examples

Let's look at some hypothetical examples of how loss payee and additional insured endorsements may play out in the real world:

Scenario 1: Leasing a delivery van (loss payee)

Let's say you lease a fleet of vehicles from a dealership for your delivery business. The fleet leasing company adds itself as a loss payee to your business insurance, as they have an insurable interest in their vehicles. If one of their vans is damaged in a collision, your insurance provider will pay the leasing company directly following your claim. This secures the leasing company's financial interest, especially given that the van is still technically theirs until your lease term ends.

Scenario 2: General contractor and subcontractor (additional insured)

Let's say a general contractor hires an electrician to wire a building they are working on. The contractor requests to be listed as an additional insured on the electrician’s policy. During the project, a short circuit caused damage to one of the rooms in the commercial building. The contractor is sued for damages. Because they’re listed as an additional insured, the electrician’s insurance policy helps cover the contractor's legal defence and any damages that occur.

Scenario 3: Mixed use property (loss payee and additional insured)

Finally, let's say you're building a property that will have mixed uses. Your mortgage lender, who has an insurable interest in your mixed-use property, requests that they be added as a loss payee to protect their loan. Meanwhile, the project manager you are working with requests that they be added as an additional insured on your general liability insurance. This protects the lender's assets and your project manager's liability risk at the same time.

Ultimately, familiarizing yourself with examples like these and the key differences between the two terms will help you prevent future disputes, protect your assets, and ensure the project you're working on is completed without a hitch.

How to add a loss payee and add an additional insured to your insurance policy

Whether you need to add a loss payee or additional insured to your insurance policy, the steps are relatively easy. Here's a step-by-step of what you need to do:

1. Contact an insurance broker

An insurance broker from BrokerLink 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.

2. Determine which endorsement you need

Certain insurance policies may prohibit you from requesting additional insured status or loss payee status. An insurance agent or broker can tell you exactly what endorsements are possible.

3. Discuss whether it's 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.

Documents you need

At your appointment, you'll need to provide the following documents before a loss payee or additional insured endorsement is added to your existing coverage:

• Full legal name of the business entity.

• Type of relationship (finance firm, contractor, tenant, etc.)

• Type of endorsement needed.

• Insurance documents (if applicable).

Common pitfalls to avoid

Here are important things to be aware of:

• Assuming both additional insured and loss payees can be used interchangeably.

• Not reviewing your insurance policy limits when adding more than one insured name to your plan.

• Forgetting to update your insurance company if contractual obligations change.

Our team at BrokerLink can help you understand which parties need protection and help you streamline the process from start to finish. Give us a call today!

Benefits and things to consider

As you now know, loss payee and additional insured clauses serve different purposes. Choosing the right one, or both, ultimately depends on the legal agreements at hand, your finances, and the nature of your operations. Here's what you need to know about these concepts:

Benefits of loss payee

• Guarantees financial control for lenders or landlords.

• Ensures a faster claims payment process to third parties.

• Helps secure loans or leases for commercial properties.

Benefits of additional insured

• Protects against liability exposure without the need for a separate insurance policy.

• Ensures compliance with contractual agreements.

• Reduces legal risk during shared operations as a business owner.

Things to consider

• Cost: Loss payee endorsements are free to add to your current coverage. Additional insured endorsements are also usually free, but you may be charged a small fee by your insurance company. It depends on who your provider is.

• Policy control: Neither party will get full control over the insurance policy, but they do collect benefits depending on the endorsement.

• Documentation: A copy of the actual contract or agreement is often required to justify the endorsement before any insurer will add an additional insured or loss payable endorsement to your coverage.

When to choose which?

• Use a loss payee when you're financing or leasing a property.

• Use an additional insured when you're sharing liability with other people or entities in contracts.

• Use both when the situation involves financial property rights and legal risk sharing. For example, a construction project with leased equipment is being used.

Industry and legal context

Remember, endorsements like loss payee and additional insured aren’t just personal preferences; they are often legal or regulatory requirements across different industries in Canada. Below, we’ll highlight important provincial regulations:

Provincial regulations quick guide

Here’s a look at the relevant regulations by province:

• Ontario: The Ontario Construction Act requires both a loss payee clause and an additional insured clause in all construction contracts.

• British Columbia: The BC Builders Lien Act often requires both endorsements as well.

• Quebec: Leases and service agreements often include loss payee clauses.

So, how can you confirm that your contract includes either of these endorsements? Common phrases you need to specifically look for include:

• "[Lender] shall be listed as a Loss Payee."

• "[Party B] shall be added as an Additional Insured Party on all relevant policies."

Learn more with BrokerLink

Understanding the difference between loss payee vs. additional insured is key to protecting your property, your business, and your interests. Although each has a different role, both are essential in their own way.

Whether you’re leasing, lending money, subcontracting, or collaborating with others, don’t leave your coverage outdated. Connect with BrokerLink today to add the right endorsement to your policy and get expert advice on your coverage. You can contact us over the phone or by email to speak with a broker directly or get a free quote using our online quote tool any time!

FAQ

Can someone be both a loss payee and an additional insured?

Yes, in complex business contracts, you can be both.

Is there a cost to adding an additional insured to my insurance policy?

Sometimes, a small fee will apply when adding this to your insurance policy.

Do loss payees receive claim payments directly?

Yes. If they’re listed on the policy, insurers typically issue claim payments directly to them.

If you have any questions, contact one of our local branches.