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A loss payee is a person or entity who will receive a payment on an insurance policy in the event of a loss. Loss payees are third parties, rather than being the party directly insured. A classic example of a situation where a loss payee is used is when a financial institution has offered a loan to finance the purchase a car. To ensure complete repayment of the loan, the financial institution will insist on being named as the loss payee on the insurance policy for the car so that if the car is totaled, the loan will be paid in full.
Loss payees are usually individuals with a financial interest in the item being insured, such as a home, a vehicle, a boat, or a valuable object. This system is also used for certain types of shipping insurance. Being named as a loss payee reduces the risk that someone will abandon a loan or other obligation in the event of a loss, as the loss payee will be paid in full after the loss.
If losses, thefts, or damages occur, the insurance company will investigate and usually offer to settle based on the value of the policy and the property. The settlement is sent directly to the loss payee and the insured party does not receive any money from the insurance company. Once the amount of any outstanding debt is settled, the remainder can be returned to the insured party.
Once the financial interest is ended, as when a lien on a property is lifted because a loan is repaid, the third party can be removed from the insurance policy as a loss payee so that any payments will go directly to the insured. When people are finished paying off loans on insured possessions it is important to make sure that a new title is issued without a lender's lien, and that the lender is taken off the insurance policy and other documents relating to the property. This will reduce the risk of confusion if there are losses, damages, or thefts.
A related term is “additional insured.” In some cases, a party may be named as a loss payee and an additional insured. This party is added to an insurance policy to receive coverage in the event of a suit. In a simple example, when people lease vehicles and get into accidents, it is possible for both the driver and the leasing company to be sued. By requiring drivers to name them as additional insureds on the policy, leasing companies can have insurance to protect themselves if there is a suit.