As a small business owner, you have a lot on your plate. On top of managing a team and keeping your customers and clients happy, you also have to make sure your business is properly insured. While an insurance agent can help you get a plan and understand it, you might also want to look up some terms on your own (after all, being resourceful is most likely how you became a small business owner in the first place).
What’s one of those insurance terms you’ll definitely want to know about? Loss payee.
So, let’s dive in and learn what it means, and how it might apply to you.
Loss Payee: Defined
On an insurance policy, the loss payee is the person or business that gets paid on a property loss claim. Usually, the loss payee has a financial interest in the property but isn’t the main party on the policy.
So how is ‘loss payee’ different from the ‘named insured’?
The named insured is the main insured party, while the loss payee is added separately. The insured can list a loss payee on the declarations page of their insurance policy. A variety of parties can be named as loss payees, like the property owner, a lender, a buyer, or a lessor, among others.
Is a loss payee the same as a lienholder? Somewhat. The only difference is that a loss payee doesn't need to technically own the property being insured. A lienholder, however, owns the property until it’s paid off.
For example, if you get a loan from a bank to buy your car, the bank is the lienholder until you’ve repaid it in full. During this period, the auto insurance policy should list the bank as a loss payee because it’s the actual owner of the car at that point in time. So, if you get into an accident, your insurance actually owes the bank (loss payee) since technically it’s their property.
The Difference Between a Loss Payee and an Additional Insured
You can add both a loss payee and an additional insured to your insurance policy as recipients of proven claims. It may seem like these two terms mean the same thing, but that’s not actually the case.
An additional insured can be either an individual or a business whose liability has increased by working with someone else. They can request to be included on the other person or businesses’ insurance policy to reduce that liability. This is a common risk-transfer strategy.
Let’s say you’re a general contractor who hires an electrical business as a subcontractor. If the workers who provide the electrical services get injured in a workplace accident, they may decide to sue you as the general contractor. But if you are listed as an ‘additional insured’ on the subcontractor’s insurance policy, you will be protected.
In other words, being an ‘additional insured’ on another party’s insurance policy means you get liability protection. You’re protected through the main insured's extended insurance coverage. If you are sued, you can file a claim on their policy.
A loss payee, on the other hand, is a term that relates to property damage insurance rather than to liability insurance. As explained above, the loss payee is a party with interest in the property that has the legal right to get some of the claim proceeds. They’re paid out based on how much of that property they still own, along with the insured.
Let’s consider a common example of the loss payable clause. You’re a local grocer who buys a professional fridge system from the manufacturer. You have to pay for it in three installments over a period of three years.
Until you pay in full, the manufacturer still has a financial interest in it. They can ask to be included as a loss payee on your property damage insurance policy. If the fridge system is damaged in an accident, the insurance company will pay all parties based on their insurable interest in the property. In this case, the payout will go to your shop and the manufacturer, since you both own a part of the system.
Note: The Loss Payable Clause doesn’t afford the same rights to the loss payee as does the Lender's Loss Payable Clause (which is for creditors).
The Lender’s Loss Payable Clause
The loss payee clause can be specifically used to protect lenders (creditors with interest in the property).
Let’s say that instead of paying your shop’s fridge system in installments to the manufacturer, you got a bank loan to purchase it. In this case, you as the borrower may need to list the bank as a loss payee on the fridge’s property damage insurance policy.
In general, if the creditor’s interest in the property is set in a mortgage, warehouse receipt, bill of lading, or a similar official document, the Lender’s Loss Payable Clause can be invoked. This clause provides three types of protection:
1. In case of a foreclosure action on the property
Let’s say your shop is being foreclosed, but right before that a fire breaks out and the fridge is destroyed. Under this clause, the bank would still be paid out for the fridge by the insurer.
2. In case the insured acts in a way that makes the insurance company deny a claim
If your insurance claim is denied because you didn’t submit your proof of loss or communicate with the adjuster, the bank can still get paid out as long as they pay any outstanding premiums and provide any documents that you didn’t produce.
3. In case of a cancellation or non-renewal of the policy by the insurer
The insurer has to give the bank 10 days’ notice that it plans to cancel the policy if, for some reason, premiums aren’t being paid. The insurer has to give 30 days’ notice if it cancels the policy for any other reason, and if the insured decides not to renew the policy, the insurer will notify the loss payee 10 days before the policy expires.
Stay on Top of Your Insurance Policies
Now that you know what a loss payee is, you also know that if something happens to your property, your lenders or property owners will be covered (as long as they're named as loss payees!). And now all that's left to do? Focus on other important things—like how to grow your business and achieve those goals you’ve been eyeing. In the meantime, if you have any further questions about your insurance policy, we recommend getting in touch with your insurance agent.