The loss payee on any insurance policy is an entity or individual that is eligible to receive proceeds from a claim due to a financial interest in the insured vehicle or property. Here’s what you need to know about the loss payee on your car insurance policy.

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What is a loss payee on a car insurance policy?

Lenders and leasing companies are the most common loss payees on car insurance policies. However, others with a financial interest in your vehicle can require you to name them as a loss payee. This protects the person or entity’s financial interest if the vehicle is damaged, destroyed or stolen.

How does a loss payable clause work?

If the insurance company issues a check to settle a vehicle damage or theft claim, the payment will be made out to you and the loss payee. The loss payee reviews the claim and decides how to disburse the funds.

Lenders and leasing companies usually approve repairs because they want the vehicle to retain its value. Since insurance companies often settle vehicle damage claims through a direct payment to a repair shop, it would be rare for you to ever have to negotiate a check with your loss payee.

A couple of notable exceptions, however, are if the car is totaled or stolen. In either scenario, a lender has a legal right to any insurance funds needed to cover the loan balance. You’re entitled to any funds remaining after that. But if the loan balance is greater than the insurance check, you would owe the difference to your lender, out of your own pocket or through gap insurance.

If a leased vehicle is totaled or stolen, the leasing company, which owns the car, keeps the insurance proceeds. If the insurance settlement is less than your lease’s early termination fee, you would be responsible for the difference. Leases often include or require gap coverage to protect against this type of shortfall.

What is a loss payee vs. a lienholder?

A lienholder is an entity or individual that secures a debt against your vehicle. A loss payee is an entity or individual with a right to an insurance claim due to any type of financial interest in the car. This commonly includes lenders, but it can include others, such as a leasing company.

To put it another way: almost all lienholders are loss payees, but not all loss payees are lienholders.

What is a loss payee vs. an additional insured?

For car insurance, an additional insured is an individual or entity that is covered by the policy, usually due to an ownership stake in the vehicle. Since the leasing company owns your car, it requires you to list it as an additional insured.

Your lender, on the other hand, is essentially using your vehicle as collateral on a loan and usually won’t require you to list it as an additional insured, just a loss payee.

More simply: an additional insured is likely to be a loss payee, but not all loss payees are additional insureds.

How do I add a loss payee to my car insurance policy?

The easiest way to add a loss payee to your car insurance policy is to provide your loan or lease details to your agent when you initiate your policy. 

The insurance company usually needs the following information about your loss payee:

  • Name of the institution, company or individual
  • Mailing address
  • Your loan or account number

The insurance company will send your proof of coverage and/or your policy’s declaration page to the loss payee. You can usually access a digital copy sooner if you need it to close a transaction.

Once the policy is in effect, the insurance company will also notify your loss payee of any subsequent changes, including a lapse or cancellation.

If you are switching carriers with a loan or lease already in effect, you’ll need to provide your loss payee’s details to your new insurance company.

What will my loss payee do if I cancel or change my policy?

If you cancel your policy, allow it to lapse or fail to promptly provide documentation of your new policy, your loss payee will most likely obtain collateral protection insurance, also known as force-placed insurance. Force-placed insurance tends to be considerably more expensive than a policy you buy yourself, but you still have to pay the premiums.

Once a force-placed policy takes effect, you can remove it by:

  • Reinstating the canceled or lapsed policy.
  • Providing the loss payee with documentation showing you already obtained new coverage that satisfies the loss payee’s requirements.
  • Obtain a new policy that meets your loss payee’s requirements.

What types of insurance coverage does a loss payee require?

A lender and a leasing company are primarily interested in making sure that you carry collision and comprehensive coverage, which pay to repair or replace a vehicle after an accident and most other causes.

Leasing companies also often require liability limits that exceed minimum state requirements and gap coverage.

You'll also need to meet your state’s insurance requirements to drive legally. But a loss payee usually won’t require you to purchase medical payments coverage, personal injury protection or other coverages not related to its interests.

When should I remove a loss payee from my policy?

For a financed vehicle, you can remove your lender from your insurance policy after you pay off the loan, and you should not wait too long to do so. If you file a claim after you retire the loan, having a check issued to both you and the lender could delay your access to the funds.

Your contractual obligation to insure a leased vehicle ends when your lease expires. However, if you plan to lease another vehicle or buy one after your current lease ends, you’ll need to place it on your policy, along with the new loss payee you might have.

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