Whether you own or lease your business property, use expensive equipment, operate company vehicles, or are pursuing a Small Business Administration (SBA) loan, you will likely need to designate a loss payee on your business insurance policy. Loss payees are the ones who get money when a claim is filed, so it is important to understand who they are and how to make sure your policy designates them appropriately.
A loss payee is the first person or entity legally entitled to an insurance claims payment. As far as small businesses are concerned, this pertains mainly to cases of property damage or loss.
So, why does the listed “loss payee” have first rights to claim payouts rather than the insurance policyholder? A loss payee is often included in policies that insure for property damage on leased or rented equipment and transactions where collateral is necessary to secure a loan, or when a loan taken out to buy property is not paid off yet.
For lenders such as banks and financial institutions, the loss payee clause in the declaration page of an insurance contract minimizes the risk exposure. For example, a financial institution would be the loss payee on a loan that a business owner receives from a bank to fund property, plant and equipment (PP&E) purchases that are covered under the business’s property insurance. If the equipment incurs damage due to an unforeseen event, the bank listed as the loss payee on the insurance policy would receive the approved claim payment from the insurer.
This is similar to situations when a business finances a vehicle to use for its daily operations. If the financed business vehicle is totaled in an accident, the bank listed as the loss payee on the auto insurance policy would receive payment.
Your insurance policy will stipulate the loss payee. For instance, a loss payee is listed on a commercial property insurance or commercial auto insurance policy’s declaration page. Be sure to find out the requirements for your particular insurance policy. Under its construction insurance policy, The Hartford’s equipment coverage includes a blanket loss payee provision without the need to add an endorsement to the existing policy.
“If your vehicle or property is financed, the financial institution may request that it be added as a loss payee on your certificate of insurance and policy,” The Hartford’s policy states. “In this case, if the certificate holder is requesting to be added as a loss payee, its interest in your vehicle or property will be included in the payment of the claim.”
You should list the bank or company you borrowed from as the loss payee on your commercial property or commercial auto insurance policy. This means that if there is a loss, the lending party will get its money back from the insurance company.
As another example, when you seek an SBA loan, you sign either a loss payee endorsement or a loss payable endorsement, both of which protect the lender if you don’t pay off the loans and there is an unforeseen loss. This minimizes the lender’s risk.
If your collateral is a building or land, the SBA may require a loss payee endorsement, or clause. The loss payee clause is different from a loss payable clause because, under a loss payee clause, the lender loses their protections on your collateral if your insurance policy lapses. In a loss payable clause, your lender is reimbursed alongside you for any damages to your collateral, and the provisions of the loss payable clause remain valid even if your insurance policy lapses.
Although additional insureds also can receive payouts from a claim, the loss payee will get paid first.
A loss payee can also be listed as an additional insured. The difference is that an additional insured endorsement specifies who is covered under the insurance policy, adding coverage to entities or people who were not initially included in the insurance policy.
Also, an additional insured can receive coverage under another company’s insurance policy in a lawsuit, and they can file a claim under the named insured’s policy if sued. Typically, loss payees are limited to property damage coverage and additional insureds are limited to liability coverage.
For example, according to The Hartford, you may be asked to provide coverage for a customer by adding them to your insurance policy as an additional insured (“a third party”). The Hartford notes that, in the case of adding a third-party municipal entity or general contractor, your insurance policy may need to be endorsed for them to be an additional insured. There may be an additional premium for this change.
The main difference between a loss payee and an additional insured is that the loss payee receives payment first. The loss payee can also be an additional insured.
A loss payee, such as a bank, can also be a lienholder. A lienholder retains ownership of the property until it is paid off, so this is the financial entity to which the small business would make installment payments, such as in the case of a business automobile loan or financed PP&E.
The main difference is that a loss payee needs to have an insurable (financial) interest in the property to receive a payout, while a lienholder would no longer have an insurable interest in the property once the borrower pays off the loan.
Not all insurance policies allow the addition of a loss payee, so contact your account representative or insurance agent for more information. In general, follow these steps to add a loss payee:
If you have a lender, don’t forget to call your insurance agent or your policy’s account manager to add your lender as a loss payee. Otherwise, the lender can put “force-placed insurance” on your collateral – which you would want to avoid, since this type of insurance has higher rates and often more limited coverage.
According to the National Association of Insurance Commissioners, force-placed insurance has been a common occurrence in recent years, and the practice has raised some questions. For example, these policies generally do not cover personal items or owner liability, the NAIC warns.
The insured – i.e., the business or business owner who holds the policy – is the only one who can submit a claim. The insured is responsible for filing a claim in the event of a loss, but if they don’t do it within what the insurance company deems a reasonable amount of time, the loss payee can then file the claim to receive the payment.
Some policies list multiple loss payees. In those cases, an order of payment must be established. The first loss payee is the first party to receive reimbursement.
A loss payee doesn’t have to own the insured property, but they must have an “insurable interest” to receive the payout for any type of insurance policy. In other words, the loss payee needs to have a vested financial interest in or benefit from an insured property or entity.
If a claim is filed, the insurer may make separate payments to the insured party and the loss payees according to the established order. The first loss payees listed in the policy are the first to receive claim payments, before the policyholder.
For example, if a financed business vehicle incurs damage, the policy may stipulate that payment is either made to both the policyholder and the lender (loss payee) or directly to the shop doing the repair. It is best to refer to your insurance policy stipulations for the order of payment when multiple loss payees are involved.