What is Loss Payee on an Auto Insurance Policy?
A loss payee on an auto insurance policy is the first person or entity that will receive claim payments should something happen to the insured vehicle. Despite not being the primary person covered under the policy, also known as the named insured, loss payees are entitled to reimbursement from the insurance carrier because they have a financial stake in the vehicle. Common examples of loss payees include auto loan lenders or vehicle leasing companies.
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Ensuring All Parties Are Covered in the Event of a Loss
Car accidents happen all the time. More than 54,000 car crashes occurred in 2020, and collision claims made up a significant portion of these accidents, with an average of 4.26 claims per 100 years of insured vehicle coverage.
To safeguard against financial loss, lenders will typically require you to maintain insurance on the car and designate them as the loss payee on the policy. This way, if you damage the vehicle in an accident, the auto loan lender could recover losses by being the first to receive payment from the insurance company.
By understanding what loss payees are and how to add a one to your insurance policy, you’ll ensure that all parties are adequately covered if an accident happens.
How Designating a Loss Payee Works
Because loss payees like auto loan lenders are typically the vehicle owner until the loan is paid off, they’ll ask you to provide proof of insurance during the loan application process to ensure the vehicle is covered. Auto insurance policies generally include a loss payable clause on the declarations page specifying that any loss covered by the insurer would be first paid to the loss payee. In this case, it would be the lender or any party with a financial interest in the vehicle.
So, if you total your vehicle that’s not yet paid off, the loss payable clause ensures that your insurance claim’s reimbursement goes directly to your auto loan lender since the vehicle is still their property. If you fail to list your lender, the lender could order insurance coverage at your expense to protect their financial interest in the vehicle.
When applying for an auto loan, the lender will ask you to provide proof of insurance by showing them your policy’s declarations page. The declarations page includes information such as the policy effective dates, vehicle coverage, VIN of the vehicle, and the loss payees. The lender will want to see that you’ve listed them so that they’re compensated for any potential losses.
What Happens If You Forget To Add a Loss Payee?
If you forget to add a loss payee to your insurance policy or input incorrect information, the auto loan lender could step in and purchase forced-placed insurance on your behalf. This is known as forced placed insurance and has significant negative repercussions.
Forced placed insurance is typically much more expensive than the auto insurance you could find when shopping on your own. You also would not have a say over coverage choices and limits. The good news is that it’s not permanent. The lender must legally cancel the forced-place policy within 15 days once you provide proof of insurance and have listed the lender as a loss payee.
How to Add a Loss Payee to Policy
Forced-placed insurance can make it more expensive to finance a car, so it’s important to immediately add a loss payee to your policy after buying it. Here’s a step-by-step guide on how to add a one to your auto insurance policy.
1. Confirm Lender’s Information
The first step of adding a loss payee to your policy is to confirm your lender’s information, including their name and address. Providing the wrong information could put you at risk of forced-placed insurance, leaving you with less control over your insurance policy and paying expensive premiums. So be sure to check with your lender if you’re unsure about any details.
2. Reach Out To Insurance Agent or Carrier
Once you’ve confirmed your lender’s information, contact your insurance agent or carrier to add the loss payee to the policy. You can contact most auto insurance agents or carriers over the phone, online, or in person.
3. Status Shared With Lender
Once your lender is added to the loss payee section of your auto insurance policy, they’ll receive regular updates on your insurance policy’s status. For example, your insurer may notify your lender if you miss a payment, change your coverage amount, or cancel your policy.
When Can A Loss Payee Be Removed From a Policy?
Once you’ve paid off your auto loan, you can remove your lender as a loss payee since the vehicle is no longer considered collateral. Similar to adding one to your policy, you’ll need to contact your insurance agent or carrier to remove your lender from the pertinent section. If you do not do so after paying off your loan, you may be asked to provide proof of the loan payoff if you need to file a claim, which can be a hassle.
Loss Payee vs. Additional Insured
While both the loss payee and the additional insured are third-party entities or persons eligible to receive insurance benefits, their roles in the policy vary. The key difference between the two is that the former is paid first following an insurance claim, while an additional insured is not. On the other hand, the additional insured shares in the named insured’s liability coverage, while the former does not. Essentially, an additional insured is someone liable for the property being insured, such as the co-signer of your car loan.
Note that adding an additional insured to your auto insurance policy could cause your premiums to increase since you’re extending coverage to another party, whereas adding a loss payee is free since it does not provide additional coverage.
|Loss Payee||Additional Insured|
|Relationship||Varies; usually a lender||Varies; usually a business relationship|
|Coverage Type||Property damage||Liability|
|Owns The Insured Property||Sometimes||No|
|Gets Paid First After Covered Loss||Yes||No|
|Additional Premium Costs||No||Yes|
Loss Payee vs. Lienholder
A lienholder is a financial institution, bank, or other type of lender that holds your auto loan, while a loss payee is a person or entity that gets paid first on a claim due to their financial interest in the insured property.
Though both loss payees and lienholders have a vested interest in the vehicle that’s being insured, the former do not always have ownership of the car. Instead, they simply have a financial stake in it. On the other hand, lienholders always own the vehicle until it’s paid off.
In many cases, the lienholder is also the loss payee. For example, the bank that loans you money to purchase your vehicle is typically both the lienholder and the loss payee on your auto insurance policy.
|Relationship||Varies; usually a lender||Varies; usually a lender|
|Coverage Type||Property damage||Property damage|
|Owns The Insured Property||Sometimes||Yes|
|Gets Paid First After Covered Loss||Yes||No|
|Have Financial Interest In The Property||Yes||Yes|
See It In Action
John decides to purchase a used car and obtains financing from a bank to cover the cost. He also has a close friend, Lisa, who helps him with a significant down payment. To protect both their interests, John includes the bank as the lienholder and Lisa as the loss payee on his auto insurance policy.
In this example, the bank acts as the lienholder since they provided the car loan, while Lisa is listed as the loss payee due to her financial contribution towards the car’s purchase. Despite not being directly involved in the loan, Lisa’s financial interest in the vehicle entitles her to a portion of an insurance payout should the car become damaged.
What This Means For You
If you’re considering taking out an auto loan, know that your lender will most likely require you to carry insurance on the vehicle and list them as the loss payee on your policy. Doing so provides a financial safety net for your lender if you were to damage the vehicle. By understanding who this figure is and how to add them to your policy, you can save yourself from any future hassle and costly forced-place insurance. If you need help adding one to your policy, speak with a licensed agent who can guide you in the right direction.