Published July 21, 2020 • 2 minute read
What Is a Loss Payee Clause?
In an insurance policy or contract, the loss payee is the party to be paid out first when a claim is filed. This may be the insured, or a third party entitled to payment. The distinction of loss payee simply means the named party can expect reimbursement from the insurance carrier if there’s a loss. This concept is most often used in auto and real-estate policies but can be incorporated into virtually any policy covering property that is vulnerable to damage.
When Does the Title of Loss Payee Matter?
Using real estate as an example, there are two scenarios landlords must consider:
- A tenant is insuring the property or structure itself and the landlord holds financial interest in it.
- A tenant is insuring the property or structure itself and the landlord does not hold financial interest in it.
As for what’s included in insurance policies, these two situations should be approached differently.
For commercial purposes, it’s logical for a party with insurance-related or financial risk attached to a property to request the title of loss payee on a policy. A common example of this is when a lender finances a property and would stand to take a loss if the property were to be damaged. Therefore, being listed as a loss payee mitigates some of the risk.
On the other hand, it’s not necessary for landlords and property managers to be listed as a loss payee if they don’t have any financial interest in the property itself, as described in the second scenario.
What Is a First Loss Payee?
A loss payee indicates that a party is entitled to reimbursement in the event of a claim. In some cases, though, this may not be specific enough. Some policies may list multiple loss payees. In those cases, an order must be established. The first loss payee, as the term suggests, is the first party to receive reimbursement.
Is the Loss Payee Responsible for Filing a Claim?
The insured is usually responsible for filing a claim in the event a loss occurs. However, if the insured party does not file a proof of damage or loss in a timely fashion, the loss payee adopts responsibility for filing the claim.
Note: The insurer may make separate payments to the insured party and the loss payee.
How Does a Loss Payee Differ From an Additional Insured?
A loss payee differs from an additional insured in that an additional insured stipulates which parties are covered under a certain insurance policy and, therefore, which party is responsible for responding to a claim. It does not make any indication as to who is able to expect reimbursement if property is lost.
However, a loss payee can also be an additional insured. Certain circumstances can make it beneficial for a party to request to be listed as both, but the two require separate processes.
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