Two terms that often confuse risk teams are “loss payee” and “additional insured.” While both can collect benefits from an insurance policy, they have different uses. In the real estate industry, too many landlords and property managers ask for loss payee status on a tenant’s general liability insurance policy when that does not best serve their financial interests. In this article, we explain how loss payee and additional insured endorsements differ and who they should cover.
Let’s Start with the Definitions:
- Loss payee is the party entitled to all or some of the proceeds that an insurance provider pays out in the event of a loss, even when the loss payee is not the policyholder. To be listed as a loss payee, the entity must have an insured or financial interest in the property, such as a mortgage. Property investors or banks typically request they be included as loss payees.
- Additional insured is an entity added to a named insured’s policy that benefits from an extension of the policyholder’s liability coverage. Additional insured endorsements protect affiliated parties from the named insured’s conduct by providing them with the same insurance coverage funded through the policyholder’s premiums. Additional insureds gain more coverage against claims, but no rights in receiving money from the named insured’s policy when a loss lacks a direct connection to the relationship. Landlords and property managers often require tenants add them as additional insureds.
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When to Use Loss Payee vs. Additional Insured
Adding a loss payee to a named insured’s policy is necessary when collateral has been used to secure a loan, the loan is not fully paid, or there is an insurable interest and financial stake in the property. The loss payee is the rightful recipient of an insurance reimbursement because it has the greatest financial interest in the property.
Let’s say that Ready Real Estate financed their multi-tenant mall through Billionaire Bank on a 15-year loan. The loan contract requires Ready Real Estate list Billionaire Bank as the loss payee on its insurance policy. When a fire occurs, the insurance company notifies Billionaire Bank as the loss payee and issues the bank a check for the loss. Billionaire Bank then can endorse the payment to Ready Real Estate to complete the repairs.
Additional insured status is ideal when working with a third party increases liability exposure. The additional insured endorsement reduces that liability by keeping the risk closest to the party most likely to create it – the named insured.
Going back to Ready Real Estate, they lease space in their mall to Real Good Restaurant. The lease agreement requires the tenant list Ready Real Estate as an additional insured. The restaurant causes a fire that creates significant damage to the property. Ready Real Estate files a claim against the restaurant’s insurance policy as an additional insured and receives protection against litigation from the patrons injured in the fire.
Property Owners as Loss Payees and Additional Insureds
For landlords, there are two scenarios to consider regarding tenant insurance and what should be included in the policies:
- Scenario #1: Tenant is only insuring their own business personal property
In this scenario, the landlord should require an additional insured endorsement on the general liability policy. Because the landlord has no financial interest in the tenant’s personal property, there is no need for loss payee status.
- Scenario #2: Tenant is insuring the property or structure
Here the landlord has a financial interest in the property as its owner. The tenant’s general liability insurance policy should include an additional insured endorsement for the landlord as well as citing them on the declarations page as a loss payee. This gives the tenant’s policy priority in paying for claims in which the tenant is at least partially responsible. It also ensures the landlord receives compensation should the tenant cause a loss because the property owner stands to lose their investment.
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