Additional Insured and Loss Payee Roles in Insurance

The designations of Additional Insured (AI), Loss Payee, and Lender’s Loss Payee often cause confusion for those not well-versed in insurance. While these roles might not directly impact an investor’s day-to-day business, understanding each helps avoid potential complications in the claims process and ensures all involved parties are protected as intended.  

Additional Insured

An Additional Insured (AI) is any person or entity other than the policyholder that has an insurable interest in the property. This could include a business partner, property manager, or lender. Additional Insureds are added to policies to protect themselves in cases where they either have a financial stake (as with property policies) or some liability exposure (as with general liability policies).  

Each Additional Insured listed in a policy is entitled to the coverage available under that policy. This means Additional Insureds have the right to make claims on the policy when it concerns the insurable interest outlined in the contract. However, they are only listed on claim payments if they are also designated as a loss payee, which we’ll discuss later on.  

Changes in partnerships, mortgagees, or property management can lead to inaccuracies in Additional Insured listings. If a name or role is inaccurate, additional documentation must be provided to update the Evidence of Insurance. Without these updates, errors may occur in coverage or claim payments and could even delay claims settlements, potentially causing issues for both the policyholder (you, the investor) and the AI.   

Loss Payee

A Loss Payee is a third party with a direct financial interest in the property, most commonly a lender, but may also be a business partner or private investor. This designation ensures that if there is a covered property loss, the Loss Payee will receive payment alongside the insured. However, being named as Loss Payee does not grant any rights under the policy beyond the claim payout. The insurer is not obligated to provide coverage or settle a claim with the Loss Payee if the loss is denied to the insured.   

The insurer is not required to notify the Loss Payee that coverage is in force. Instead, the Loss Payee is simply included in any payment following a covered claim. Misunderstandings around these rights can be avoided by clarifying these distinctions early on in business dealings and in contracts.  

Lender’s Loss Payee

The Lender’s Loss Payee designation provides a higher level of protection for lenders by creating a direct contract, or “privity,” between the lender and the insurer. This protects the lender’s financial interests even if the policyholder does not meet their obligations or commits a wrongful act. With a Lender’s Loss Payee clause, the lender’s interest is protected, even in cases where the insured’s claim would otherwise be denied.  

The Lender’s Loss Payee designation is often favored by lenders because it includes additional benefits. For instance, if coverage is cancelled or not renewed, the insurer is required to notify the lender. This allows lenders to stay informed of any changes to the policy that might impact their financial interest.  

For example, if an investor’s policy lists the lender as a standard Loss Payee, the lender and the insured would both be listed on any payout check for a covered loss. But if a policy provision or non-compliance by the insured prevents payment, the lender would also forfeit the payout. Conversely, if the lender is named as a Lender’s Loss Payee, they may still be entitled to payment even if the insured is disqualified due to non-compliance or other policy provisions.  

Avoiding Potential Complications

Accurate designations of Additional Insureds, Loss Payees, and Lender’s Loss Payees keep claims processes smoother and ensure all parties have clear, documented roles in the event of a loss. Understanding each distinction helps investors navigate claims, avoid unnecessary disputes, and maintain transparent communication with lenders and partners. If you have additional questions about these roles, feel free to contact your Client Service Advisor!  

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