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There are so many legal terms associated with insurance that sometimes people get overwhelmed. Loss payee can be a confusing term if you don’t know what it means. Once you understand this concept, however, it won’t feel so mysterious.
Think of this kind of insurance protection as a means of protecting anyone who is connected with your work or property. This is just a person who has a financial interest in your property, not some complex and scary legal concept you won’t ever understand.
Let’s Break it Down
One of the classic ways that you can easily have the loss payee position in any contract explained to you, is through the example of buying a car. When you purchase a car, your lender will be the loss payee on the loan. That is because the bank still has an interest in the car while it is being paid on. When the loan is paid off, the loss payee will no longer be needed.
This is a step that is done for financial protection for businesses of all shapes and sizes. It’s not just banks that might be a loss payee. Here are some examples of the people or entities that might be listed as loss payees on your insurance policy:
· A bank or a lender
· A leasing company
· A vendor
· A landlord
When a claim is filed on your insurance policy that has a loss payee on it, the compensation for the loss will be sent to the loss payee in most cases. Depending on the situation, you and the loss payee might receive a payout.
What is an Additional Insured?
Many people confuse a loss payee with the additional insured position on their insurance. Additional insureds are people or businesses with a liability interest. This is different from monetary investment. These entities or people need to be protected from being sued due to work or actions that might cause harm or damage.
As an example, your client needs to be an additional insured on your liability policy if you are working on their property doing improvements. This is to protect them from damages and legal actions taken against them as a result of your work on-site.
These are two different endorsements and do not function the same way.
When Will You Need to Add a Loss Payee?
Loss payees will be added when you rent property. They will also be added when you finance, lease, or buy a vehicle. Any contract with a lender involved will require one.
Equipment rental companies will require this consideration, as will building owners that you are working with to find a space for your company to work from. You will need to provide a certificate of insurance to these loss payees as well, so don’t forget this important step in the process.
Many people actually forget to provide these documents when they are engaging in these kinds of business relationships, and this can lead to major confusion and trouble down the road.
How Can I Add a Loss Payee to my Policy?
This is a really simple process. You will just need to contact your insurance company or agent and let them know that you need to add an endorsement to your policy. This endorsement can usually be done over the phone, or you might have a form that is sent to you to be filled out and returned.
When the process of adding a loss payee is completed, you will be sent a new certificate of insurance to provide to your business partners and the loss payee that was added to the policy. This should only take a few hours in most cases.
Make sure that you get the name and address of the loss payee right. When it comes time to file a claim for damages of any kind, if this information is wrong, it can cause slowdowns and frustrations.
Lenders have the most complex names to sort out, so be sure that you ask them to provide you with the specific way that they are to be added to the policy in question. Businesses with DBAs or multiple business entity names will also need to give you specific information to be added to the policy.
What Happens if a Claim is Filed?
When a claim is filed, the loss payee will be the party that is involved in collecting the loss payment. If there is an amount left over after they are compensated, you will receive this amount. If you are leading a property or a machine, the money involved in the claim will always go to the loss payee.
This is a process that allows the true owner of the item or property to be compensated while you are borrowing the item or working to pay it off.
As an example, let’s say that you own a business and you financed $50,000 for a new vehicle for the company. Your employee gets into an accident and totals the vehicle. The payout will go to the bank that is lending you the money for the purchase to make them whole.
These kinds of claims are most common on commercial auto insurance policies, inland marine policies, commercial property insurance, and business owner’s insurance policies.
If there is a tangible asset that is not fully owned by the business, a loss payee will be paid for damages and losses associated with a claim.
Other Ways to Think About This
It can be useful to think of the relationships between everyone involved in this kind of policy as a triangle. You as the business owner are the policyholder. The insurance company is the provider. The loss payee is the one with the financial tie in the middle of the triangle.
You will remove the loss payee when you pay off the item in question. If you are not buying the item and are only leasing it, you will always have to be in this kind of triangular relationship between the three parties involved in the policy.
When a loss payee needs to be removed, you will just ask your insurance company to remove the endorsement. You will need to supply proof that the relationship has ended or that payments have been completed for the item in question. When cars are paid off, the loss payee is removed at the time of the last payment being completed.
Things to Remember
The loss payee isn’t something that is hard to understand or grapple with. This essential addendum to your insurance is a big part of business operations, so you need to be familiar with how this kind of policy endorsement works. Whether you are leasing property, financing vehicles, or leasing equipment, loss payees will be involved.
At USA Business Insurance, we understand how complex insurance can be. We work hard to break things down so that policyholders and company owners can feel confident in their decisions and commitments. We treat our insureds like our family and we make it simple to tackle endorsements, quotes, and so much more.
