Additional insured and loss payee are similar concepts—they both allow another business or individual to benefit from a policyholder’s insurance—but they refer to two distinct concepts and it’s important to understand the difference between them.

Is a loss payee the same as an additional insured?

A loss payee is not the same as an additional insured. Although both terms refer to entities that are entitled to coverage under another company’s insurance policy, the difference between the two lies in which insurance policy will respond to a loss.

An additional insured can receive coverage under another company’s liability insurance policy in the event of a lawsuit. In contrast, a loss payee has a financial interest in a property and can receive benefits from another company’s property insurance policy if the property is damaged or destroyed. 

What is an additional insured?

An additional insured is a business or individual that is able to receive some coverage under another company’s liability insurance policy. Entering into business relationships with other companies can bring additional risk exposures. 

For example, if you hire a contractor who then causes someone else an injury or damages property, both you and the contractor could be sued. Additional insured status is a way to protect yourself in these circumstances. It extends some of the policyholder’s coverage to another company or person that could be held liable for the policyholder’s activities.  

Example:

• You rent a studio where you teach yoga and fitness classes. The landlord may require you to add them as an additional insured under your general liability policy. If a student slips and falls at your yoga studio, sustains an injury, and names both you and your landlord in a lawsuit, your landlord could file a claim under your general liability policy, which would cover their legal fees and any resulting settlements.

When should I request additional insured status?

It’s common for companies to add additional insureds on general liability and commercial auto policies. Often, landlords will require that tenants add them as additional insureds. Companies that hire contractors and contractors that hire subcontractors also commonly request this coverage to protect them from any issues caused by the contractor or subcontractor. You can add an additional insured to your policy by endorsement. The cost to add an additional insured is usually fairly low.

Example:

• A general contractor has hired your roofing company to install new roof tiles on a house. You’re required to add the general contractor as an additional insured. If one of your employees accidentally injures a third party or causes property damage, both you and the general contractor could be sued. In that situation, your insurance would handle the general contractor’s legal expenses. 

How does coverage work for additional insureds?

When a business hires another company, it’s common for the hiring company to request that the other company add it as an additional insured to help reduce liability risks. If the company that is hired causes an accident or lawsuit, the hiring company could be sued. If the hiring company was added as an additional insured, it would be able to handle the claim through the other company’s insurance policy, which will provide funds for legal defense and settlements. This is beneficial for the company with additional insured status because it will have fewer claims on its own insurance record. 

It’s important to note that additional insureds cannot receive coverage in situations where the policyholder is not directly involved. If a landlord is listed as an additional insured on a tenant’s general liability policy and a third party with no business relationship to the tenant is injured in the landlord’s offices, the tenant’s policy would not provide any coverage because the tenant was not involved in the incident. 

What is a loss payee?

A loss payee is a party or entity that is entitled to receive payments from the policyholder’s property insurance in the event of a claim. A loss payee must have a financial or insurable interest in a company’s property—which means the loss payee must be at risk of financial loss if the property is damaged or destroyed. 

This situation usually arises when you have financed property, such as a car loan or mortgage. Typically, you must list your lender as a loss payee on your commercial auto policy or commercial property policy, although a loss payee can be added to other policies that cover property as well. This concept also arises when you lease equipment or other items—you’ll usually need to list the company you leased the item from as a loss payee.

Example:

• You financed a truck purchased for your plumbing business. Because you still owe money on the truck, it could be repossessed if you fall behind on payments. The lender required you to list it as a loss payee on your commercial auto insurance policy. In the event the truck is in an accident and is totaled, the lender would receive funds from the insurance company to repay the loan. 

When is it necessary to add a loss payee to a policy?

It’s usually necessary to add loss payees to your property policies if you lease property or have financed property. When you owe money on property, the entity to whom you owe the money has a financial interest in it. Otherwise, if the item is destroyed, you could stop making payments and keep the insurance money, rather than making repairs, and the lender would not be able to recoup its costs. 

A landlord would typically want to be an additional insured on a tenant’s general liability insurance policy, but would not need to be listed on a commercial property policy for the tenant’s business personal property, since the landlord has no financial stake in that property. However, if the tenant’s policy covers the building itself, the landlord would need to be added as a loss payee. Otherwise, the landlord would lose money if the building is damaged. 

How does coverage work for loss payees? 

When you add a loss payee to your insurance policy, the loss payee will be able to claim insurance payments first, before the policyholder, in the event that the property is damaged or destroyed. When a policy has a loss payee listed, the insurance company will notify the loss payee about any claims filed by the policyholder and issue payments to the loss payee. The loss payee may then return funds to the policyholder for repairs, replacement, or rebuilding.

You can ask your insurer to add a loss payee to your policy. There is typically no charge to add a loss payee. Insurers will usually notify any listed loss payees of any changes, cancellations, or missed payments on your policy.

Can someone be both a loss payee and an additional insured?

In some cases, a company may want to be listed as both a loss payee and an additional insured. For example, if you rent an office building from a landlord, they’ll likely want to be added as an additional insured on your general liability policy. If you also purchase a commercial property insurance policy that covers the building itself, your landlord will likely need to be listed as a loss payee on that policy as well. 

Final Word

When you operate a business, you may work with other companies, which can result in increased liability risks. Additional insured endorsements can be added to various types of liability insurance to address these risks. It’s also common for companies to finance or lease property, which means that the lender or lessor has a financial interest in the property. In this situation, loss payee status can protect the lender’s interest. If you’re required to add another company as an additional insured or loss payee, it’s essential that you understand what these terms mean, how they differ, and how they affect your insurance if a claim occurs.