Loss Payee vs. Additional Insured: What’s the Difference?
Though loss payees and additional insureds are both terms for third-party insurance, they have some vital differences.
Written by Claire Beaney
Reviewed by Bellina Gaskey
Loss payees and additional insureds are the two most typical kinds of third parties for insurance policies. Although they share some similarities at first glance, there are several crucial differences.
- A loss payee has an interest in the item being insured and can receive a payout in the event of an insurance claim.
- An additional insured incurs a liability risk by working with the primary policyholder and gains protection from the policyholder’s liability insurance.
- You can add a loss payee or additional insured through an endorsement on your insurance policy, but the option may not be available with every insurance company.
- A loss payee has an interest in the item being insured and can receive a payout in the event of an insurance claim.
- An additional insured incurs a liability risk by working with the primary policyholder and gains protection from the policyholder’s liability insurance.
- You can add a loss payee or additional insured through an endorsement on your insurance policy, but the option may not be available with every insurance company.
How do you know what kind of insurance policy endorsement you need to add a third party? If a claim is filed against you and you didn't get the right kind of endorsement, you could be on the hook for a significant amount of money.
Keep reading to find out what loss payees and additional insureds are, how they differ from one another, and how to include a third party in your
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4.7/5 rating on the App Store | Trusted by 5+ million customers and 7 million cars4.7/5 app rating | Trusted by 5M+ driversWhat is a loss payee?
A loss payee is a third-party person or organization that has a financial interest in the item or property being insured and has the first right to receive insurance claims payments for damages before the policyholder does. Insurance policies typically include a loss payable clause on the declarations page that specifies who will be compensated in the event of a loss.
Under this provision, the loss payee is entitled to receive all or a portion of the reimbursement. Adding a loss payee to a policy means that the policyholder expressly permits the insurance provider to make payments directly to the loss payee.
When a third party has complete or partial ownership of an insured item, like a car or piece of real estate, the policy usually includes that party as a loss payee. The loss payable provision in a commercial property insurance or commercial car insurance policy can protect the policyholder from financial loss if a leased or financed asset experiences a covered loss.
If a company leases a delivery van, for example, the leasing company might be named as a loss payee on the van’s commercial vehicle insurance policy. Each owner—the delivery company and lease company—has an insurable interest in the vehicle, meaning that if the car is broken into or stolen, they will both be compensated by the insurance company.
An insurance company also has an obligation to inform a loss payee of any claims or policy changes if the loss payee is named on the policy.
MORE: How to get a cosigner for a bad credit car loan
What is an additional insured?
The term additional insured describes a third party who has some sort of connection to the primary insured party.
The nature of this relationship creates some liability exposure for the third party, so that party will commonly request an additional insured endorsement on the liability policy of the primary insured.
Before entering into a business relationship, partners will often include a clause specifying this type of request. It’s in the best interests of both parties for the named insured to provide at least some liability coverage to the third party, as the third party is taking on some risk by working cooperatively with them.
You should always request additional insured status from another company if you have reason to believe that your legal liability is going up as a result of doing business with them.
For example, a large manufacturer may require you to add them as an additional insured on your policy if you're a small business owner hoping to work with them. However, if you asked the larger company to add your company to its business insurance policy, it may refuse.
Don't forget that a third party can make the same request of you regarding your liability insurance. You and your business partners are transferring some of the risk associated with your business partnership either by adding you as an additional insured or naming someone else as an additional insured.
Loss payee vs. additional insured: what are the differences?
Even though loss payees and additional insureds are third parties added to a policy (whether individuals, businesses, or government agencies), that's about all they have in common.
Here’s a breakdown of the key differences between the two:
Insurance coverage
Loss payees are eligible for compensation in the event that an insured item, such as a vehicle, experiences property loss.
On the other hand, additional insured are eligible for liability protection in the event that a claim or lawsuit is filed against the policyholder as a result of their actions.
Terms of payment
Adding a loss payable endorsement to a policy ensures that the loss payee will receive a portion of any payout from the insurer in the event of property damage to the insured item.
Additional insured endorsements usually require you to modify an existing liability policy, like commercial general liability insurance. This expands the policy's liability protections to include any third parties who might suffer harm as a result of the policyholder's actions.
Cost to add
Adding a loss payee to an insurance policy typically does not cost anything, while adding an additional insured does.
This is because a loss payable endorsement does not extend coverage in any way. Instead, it reroutes the coverage so that the insured and the loss payee share the payment.
In contrast, adding an additional insured to your policy will likely result in a premium increase. Still, the cost is usually much less than what you'd pay for a brand-new policy on someone else's behalf.
How to add a loss payee or additional insured to your car insurance policy
Not sure where to begin when looking into adding a loss payee or additional insured to your existing car insurance policy? Here’s all you need to do:
- Get in touch with your car insurance company. Find out if a loss payable endorsement or additional insured is available for your auto insurance policy, how much it will cost to include a third party, and how long it will take to implement. Try calling a reliable broker in addition to your insurance company to see options from other companies.
- Find out what endorsements are available from third parties. Loss payee and additional insured clauses may be invalid under the terms of some car insurance policies. To learn more about the various endorsements available, consult a licensed insurance agent or broker.
- Figure out whether it's a good idea to add someone to your policy. Some contracts may require that you add a third-party company as an additional insured to your policy. You should determine if this requirement makes sense and find an unbiased opinion on whether you should add someone to your policy.
- Choose the coverage you want. If you need to include a third party on your policy to fulfill contractual obligations, the terms of your agreement should specify the minimum level of coverage you must carry. You can decide whether your current level of car insurance coverage is adequate and whether you would benefit from purchasing additional insurance.
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FAQs
Is a lienholder a loss payee or additional insured?
A lienholder is not a loss payee or an additional insured, but it is most similar to a loss payee. A loss payee technically doesn’t have to own the insured property, but a lienholder owns the property until it is paid off and is thus included on the insurance.
A lienholder is usually the bank or lender that issued your loan.
Can you be both loss payee and additional insured?
Yes, you can. Here’s an example. Say a business owner wants to sell his building, but the person who wants to buy it can't get a standard mortgage. To get the deal done, the owner agrees to put up more money.
The seller then asks to be added as an additional insured to the buyer's general liability policy. This protects the seller from being sued if someone gets hurt on the property and sues the seller.
But if the building caught on fire, an additional insured would not have a legal right to the money from the insurance claim to pay off the loan first. For that, they would need to be on the buyer's commercial property insurance as a loss payee. In this case, the owner could ask to be named as both an additional insured and a loss payee.
