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What is a loss payee and how to add one to your insurance policy

What is a loss payee and how to add one to your insurance policy

By Ashley Henshaw
Aug 12, 2022
7 min read

When it comes to insurer payouts, money can get a little funny. Specifically when it comes to who gets the money from an insurance claim. 

There’s one option that allows the policyholder to send the reimbursement straight to a third party. That third-party is known as a “loss payee.”

But wait – why on earth would you send the payout to a third-party? Who is this “loss payee” and why are they involved in your insurance claim? 

Before you get too riled up, we’ve got you covered. Let’s break down how you would use a loss payee and how to incorporate it into your own insurance policy. 

In this handy little guide, your friends at NEXT will walk you through the basics and explain how and why a loss payee clause benefits your small business.

What is a loss payee in insurance?

A loss payee is someone who will receive the payment from an insurance claim should something happen to a property where they have an ownership stake. Loss payees are common with different types of property insurance, such as commercial property insurance.

Loss payees are frequently money lenders, who often require this designation before loaning money to an individual or small business. Since they technically own the property until it’s paid off, being the loss payee ensures that they’ll receive insurance money before anyone else should something happen to their property.

Adding a loss payee helps protect the lender and deters insurance fraud. Because they’re paid before the policyholder, loss payees reduce the risk of deliberate damage against property and fraud attempts. Fantasies about torching a new car and collecting a fat insurance check should be dunked in cold water right about now. 

It’s also good news for the policyholder — assigning a loss payee helps policyholders secure loans they need with no added cost to their insurance coverage.

When do you need a loss payee on your insurance?

There are several situations where you may need a loss payee on your insurance. For small business owners, it’s usually required in order to take out a small business loan. 

For example, you might need a loan to purchase property for your new bakery. Because you don’t own the property in full, the lender will probably require they be listed as the loss payee on your commercial property insurance policy.

So if something were to happen to your bakery, such as severe storm damage or a kitchen fire, your insurance claim’s reimbursement would go to the lender, because after all, it is still their property. 

The fancy term you might see for this is having “insurable interest” in the property, and it’s often included as part of a loan agreement.

What happens when you add a loss payee to an insurance policy?

Adding a loss payee to your insurance policy doesn’t affect your insurance costs. That’s because this addition doesn’t change your coverage. Instead, it just provides directions for who should receive insurance claim reimbursements.

If you add a loss payee, your insurer will provide them with information about the policy and any important updates or alerts. This includes late or missed payments and any changes made to the policy, like adjustments to the limits or coverages.

Loss payee vs. additional insured

When you add an additional insured to an insurance policy, you’re extending insurance coverage to that party. Unlike a loss payee, an additional insured doesn’t have the first rights to any insurance claim reimbursements, that still belongs to you.

Adding an additional insured could cause your premium to increase, but the amount is typically quite small. Adding a loss payee is free since it does not provide additional coverage but simply redirects where the insurance payment should go. 

Loss payee vs. lienholder

Another word you might see: “lienholder.” A lienholder is an entity or lender that holds your loan. They can be a bank, financial institution or other types of lender.

While there are some similarities between a lienholder and a loss payee, here’s what makes them different: 

  • Loss payees: Don’t always own the property that is being insured — although they do most of the time.
  • Lienholders: Always own the property until it is paid off.

Lienholders may require you to have specific coverage to protect their asset. For example, the bank who gave you a car loan might be a lienholder for your car and could require you to get comprehensive coverage and collision coverage. However, since they’re not the loss payee, should something happen to the car, the insurance payment goes to you.

So, loss payees are who the insurance money goes to first, while lienholders own the property and can require certain actions from you. 

What might be confusing is that in many cases, a lienholder is also a loss payee. 

For example, the bank that loans you money for your small business property is both the lienholder and the loss payee on your insurance policy.

Of course, once your loan is paid off completely, a lienholder can no longer require anything of you, and the loss payee may be removed from your policy so that you will recieve any insurance reimbursements going forward.

How to add a loss payee to your business insurance

If you need to add a loss payee to your business insurance, follow these steps:

  1. Contact your insurance company to ask which policies are eligible for a loss payee endorsement. 
  2. Make sure the coverage you have meets any requirements set by the loss payee.
  3. Provide the loss payee’s name and contact information to your insurance policy. If you’re unsure about these details, ask the lender what to include.
  4. Get an updated certificate of insurance (COI) that reflects the changes you’ve made.

How NEXT Insurance makes it easy to manage insurance

At NEXT, we make it easy for current and new customers to add a loss payee to their commercial property insurance.

You can simply go online to update your policy and get a custom certificate of insurance (COI) that reflects the change. You can even send the COI to your lender directly through our online customer portal. Easy peasy. 

Instead of taking hours or days, which is common with other insurance providers, this process only takes a few minutes to complete thanks to our convenient online services. 

Plus, there are no fees to add a loss payee to your policy, and we’ll keep your lender informed about all coverage updates.

Get started with your free online quote today.

What is a loss payee and how to add one to your insurance policy

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About the author
Ashley Henshaw is a contributing writer at NEXT Insurance and a writer and editor at BrainBoost Media. She specializes in small business topics, covering everything from insurance and branding to web hosting and cryptocurrency. Her work is focused on helping independent business owners and entrepreneurs access the tools they need to succeed.
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