Loss payee vs. additional insured: Understanding the key differences

Have you ever noticed those confusing terms in your insurance policy? Two that often trip people up are “loss payee” and “additional insured.” While they both involve adding another person or business to your policy, they work differently.

In this article, we’ll break down exactly what loss payee and additional insured endorsements are and discuss some of the key differences between them.

Loss payee and additional insured: Two types of third-party coverage

No matter what industry you’re in, there could come a time when your business will have to partner with another business to successfully achieve some strategic goal or another.

For instance, your construction company might not have a large enough workforce to finish a project before a deadline, so you may consider teaming up with a roofing contractor (that is, a “third party”) to help get the job done on time.

In such a scenario, it’s common for the third party to request to be added to the first company’s insurance policy. This ensures that they are protected from potential mistakes or claims for which they could be held responsible.

Adding a third party to an insurance policy is usually done by using an endorsement (a modification to your coverage terms). However, there are several types of endorsements, and choosing the wrong one could leave you unprotected and lead to financial losses if a claim is filed against you.

Loss payee and additional insured are the main endorsements that businesses use when adding a third party to their policy. While these two terms seem similar on the surface, in reality, they are quite different.

What is “additional insured”?

An additional insured endorsement extends your insurance protection to a person or entity that works with the primary insured party — in this case, your business. 

This protects them if they get sued for something related to your work together. Without an additional insured endorsement, the third party may not be covered for certain claims made against them; adding them to the policy allows them to share some of the liability protection.

This endorsement is generally addressed in business contracts. For instance, when a small distributor partners with a large manufacturer, they may be asked to add the manufacturer as an additional insured to secure the partnership. On the other hand, the distributor might request additional insured status to mitigate risks that could arise from working with the manufacturer. However, larger entities typically have more leverage over smaller ones, so in this example, the large manufacturer may not oblige the small distributor.

Whether you are becoming the additional insured or you’re naming an additional insured, you’re doing so because you believe that it will help you and your business partners effectively transfer a certain amount of risk associated with your business cooperation.

Benefits of additional insured

• Extends liability protection to third parties who may be exposed to risk through business relationships
• Helps fulfill contractual requirements in business partnerships
• Mitigates legal risks without requiring a separate insurance policy for the third party

Limitations of additional insured

• Coverage is limited to risks and liability directly linked to the actions of the named insured party
• The primary insured party will likely see an increase in their insurance premiums

When to use additional insured

Companies typically add an additional insured endorsement when they are working directly with a third party and they are exposed to liability because of the actions or operations of the other party. Here are a few situations in which it makes sense to add an additional insured endorsement:

• Contractual partnerships: If your business hires a contractor to perform services, it may be a good idea to have them list your business as an additional insured in their insurance policy — this will protect you from any liability that arises from the collaboration.

• Vendor agreements: When selling products through a retailer, the retailer may ask to be added as an additional insured to protect against liability for defective products.

• Lease agreements: If your business leases a property, the landlord may require you to name them as an additional insured party to avoid liability for claims that occur on the property.

What is “loss payee”?

A loss payee is another type of third-party endorsement — adding it to an insurance policy gives third parties the right to receive some (or all) insurance payments related to property damage.

Are you feeling lost? Don’t worry; it’s not as complicated as it sounds. This type of endorsement is requested most commonly when a third party is a part or full owner of physical property that is being used to perform a job. A loss payable clause is usually added to a commercial property or commercial auto insurance policy, especially when there are items involved in the work that are being leased or financed.

Here’s an example of how a loss payable clause works:

Let’s say you run a pizza restaurant and lease ovens from a supplier. If you add the supplier as a loss payee to your commercial property insurance, both you and the supplier are entitled to payments if a fire damages the ovens. This ensures the supplier’s financial interest in the property is prioritized in any insurance payouts.

If you are listed as a loss payee on your business partner’s policy, the named insured party must notify you of all claims filed or changes that are made to the policy that you are listed on.

An important thing to note is that loss payees have first rights on insurance claims payments, not the named insured, since the loss payee has an insurance interest in the property that needs to be protected first.

So, in the pizza restaurant example, the insurer would have to notify the oven supplier when the pizza restaurant files a damage claim. And when the insurer pays for repairing or replacing the damaged ovens, the check must be made out to both companies.

Benefits of loss payee

• Ensures the loss payee is informed about claims or policy changes
• Offers financial security for third parties with a stake in the insured property

Limitations of loss payee

• Loss payees cannot make changes to the policy or file claims directly
• Coverage only applies to the financial interest of loss payees in the insured property
• Payments are shared, which can complicate settlements

When to use loss payee

A loss payee endorsement is used when a third party has a financial stake in property insured under your policy. Here are some common scenarios where your business may use the clause:

• Leased equipment: If your business rents or leases equipment, such as vehicles, machinery, or specialized tools, the leasing company may request you to add them as a loss payee to your commercial property or auto policy.
• Financed property: Have you purchased expensive assets via a financing plan? The lender may require a loss payee clause in your insurance policy to ensure they are reimbursed for any losses.
• Shared ownership: If you co-own property or equipment with another business or entity, it’s good practice to add them as a loss payee to ensure both parties receive compensation in the event of damage.

Loss payee vs. additional insured: Key differences

While loss payee and additional insured are used in similar situations, they are distinct endorsements and have different uses in your policy.

Insurance benefits

The most obvious difference between loss payee and additional insured is in the insurance benefits they get. Additional insureds receive liability protection, while loss payees receive property damage coverage.

A loss payable endorsement will give the loss payee a share of the payment that is received from the insurer in the case that their insurable interest (the property that has been insured) has sustained any damage.

On the other hand, additional insured clauses are most commonly added to liability policies such as commercial general liability insurance. These clauses added to the policy extend coverage to a third party that could be liable for the actions of the named insured.

Authority and limitations

Another important thing to note is that neither the additional insured nor the loss payee will ever have full authority over the policy. They can receive benefits from the policy, but they cannot submit claims under the policy, make changes to the policy, or cancel the policy. Only the named insured has full authority to make these types of decisions.

Cost differences

One other key difference between the two is that it’s usually free to add a loss payee while adding an additional insured carrier typically comes with extra charges. This is because a loss payee endorsement does not provide additional coverage; it simply splits the payment between the named insured and the loss payee. And while there may be a fee involved when adding an additional insured on your policy, you’re paying much less than you would pay to purchase a full additional policy for the third party.

Adding third parties to your policy

If you need to add a loss payee or additional insured to your policy, you should always consult your insurance agent or broker first. Then, ask yourself the following questions:

• Is adding a third party the right thing to do? Most businesses will want to add a third party because a business contract requires them to do so. However, a broker can analyze the contract in order to let you know if the request is reasonable and justified.
• Do you have enough coverage? Your broker will be able to assess whether your policy offers sufficient coverage for your level of risk, especially if third parties are being added to it.
• Which endorsements are available to you? There are certain policies that do not allow for loss payee or additional insured clauses. Your agent or broker will know which endorsements are possible and which are not.

To discover the right coverage for your business, check out Embroker’s digital insurance platform today.