A common term in the insurance industry, a loss payee is essentially any recipient entitled to a reimbursement. While the phrase may seem technical, it is actually really common. If you’ve ever gotten a car loan, you may be surprised to learn that you probably already have a loss payee on your loan. Even though it doesn’t get discussed much, if you have any kind of loan with collateral, it’s really important to understand the specifics of loss payees.
What is a Loss Payee?
A party who is to be paid the claim amount from a loss is termed as a loss payee. Anyone who is reimbursed during a claim, whether that be a company or an individual, is a loss payee. There are certain caveats to this definition. For one, what is deemed as a first loss payee is a party (whether business or individual) that is paid in the event of a debtor defaulting on a payment arrangement.
A loss payee is required for insurance policies when collateral secures the loan. Since all car loans have that collateral, and insurance is mandatory, the insurance company becomes the loss payee on your file.
Additional Insured vs. Loss Payee
There are differences between a loss payee and those additionally insured, though they can be tricky to understand.
- Loss payee: A business or person who, after a loss, receives a payment. It’s important to note that this references only those who are entitled to and receive, a payment in the event of a loss.
- Additionally Insured: Unlike a loss payee, those additionally insured are entitled to all the liability protections offered by the insurance policy in question. This includes coverage for expenses as well. While someone who is additionally insured may also end up a loss payee, they are not the same.
What Happens When You Add a Lender as a First Loss Payee?
Adding a lender as a loss payee is a requirement for the vast majority of policies where collateral secures the loan. It is stipulated to ensure that the business providing the loan service is able to make themselves whole in the event of a loss. There are some important things to understand about this, including:
- Loss Payee is part of Lender Requirements: In order to execute your loan agreement, naming the lender as a loss payee is required. This is to ensure that, in the event of a default on the account, the lender can recuperate their investment.
- How Does it Work? When you add a lender to your insurance policy as a first loss payee, it means that the lender gets paid out first in the event of a total loss. The insurance company pays the lender; and, if there is a remainder owing, you are held liable for that amount. The GAP insurance industry thrives on this principle since it is insurance protection that covers the above-noted remainder.
Forced Placed Insurance
If you refuse to list your lender as a loss payee on your insurance agreement, the lender is likely to place what is effectively a lien on your collateral. This is called forced placed insurance. Since the lender is entitled to protection against loss of the collateral (its legal property), the lender can get forced placed insurance.
This type of coverage only protects against damage to the vehicle and it is very costly. The borrower is responsible for paying for insurance. In order to avoid your lender getting forced placed insurance, simply name them as a loss payee on your file.
How do You Add a Lender to Your Insurance Policy?
Adding a loss payee to your account is fairly simple, so long as you have all of the necessary information. The key is to have the correct address for the lender. Most financial companies have multiple addresses. A good example is a major bank. Consider how many branches and offices RBC and BMO have across the country. Think about the number of dealerships Honda or Dodge has throughout Canada.
Gather Information
Typically businesses will have a separate address for dealing with customers than it will for accounts receivable and payable. The larger the company, the more arms they are likely to have. In order to make sure that you have the correct location, consult the lender directly. Have your policy in hand and contact them with your account number. Inform the customer service representative of your intentions to add the lender as a loss payee to your file.
Be Precise
Consider all aspects of the address, including the name and location. Be sure that your spelling and terminology is correct. Also, check that you have the exact address of the company to make sure you can complete the process with your insurance company. Write it down and repeat it to the agent to be sure. Once you are certain that you have the proper information, you can move onto the next step.
Contact Your Insurance
The final step is to contact your insurance company directly. Inform them that you want to add your lender as a loss payee to the collateral on your loan. Provide them with the address and name you got directly from the lender. The final step is to check if there is forced placed insurance on your file. Since having the lender named as the first loss payee is the step you need to take to avoid forced placed insurance, if it is there, it can now be removed.
Check if there is a waiting period and ensure that you have taken all steps necessary. In the event that there was forced placed insurance, once you have confirmation of placing the lender as a loss payee, contact the lender directly. Inform them that you have named the lender as a loss payee for the collateral. Consult with customer service to see if there are any other steps you need to take. Otherwise, simply continue making your payments on time and in full until the loan is paid off.
What Happens When You Pay off the Loan?
Paying out your loan means that the vehicle in question is yours free and clear. There are no more liens against the vehicle and it is completely and fully yours. Because of this, your lender being a loss payee on your insurance policy is not a permanent arrangement. It is merely a protection for the lender to ensure that, in the event of damage or loss, that they are paid what is owed. Once you complete your loan obligations, there is no need for the lender to be listed on your insurance. However, for the duration of your loan, it is very important that you list the lender, both for yourself and for them.
Why Loss Payees Are Important
Consider that, without a loss payee on file, the risk for the lender is exponential. An owner could simply damage the car, claim the insurance, take the payment, and default on the loan. Without the loss payee arrangement, the collateral would still be returned; but, with the damage, it wouldn’t be worth what the lender is owed. The loss payee arrangement is there to prevent this type of loss to the lender and ensure that they are repaid what is owed to them.
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When to Remove a Loss Payee
When the loan is paid off, the lender no longer has a legal entitlement to the collateral. At this point, you can remove the lender as a loss payee. While it may take a few steps, getting the loss payee removed from your file is definitely doable. The key is getting proof that your loan is paid in full. If you don’t remove the lender as a loss payee ahead of time, if you have to make a claim, it can be tedious to prove that they are no longer the first to be paid out.
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How to Remove a Loss Payee
In order to remove a loss payee from your file, you can contact the insurance company directly. They will guide you through the process and inform you of any additional steps you are required to take. If you are entitled to remove the loss payee from your file, it is usually a fairly expeditious process. Conversely, if you want to remove a loss payee early, requiring forced placed insurance to be put on your file, it will likely pose a larger challenge.
Final Thoughts
Now that you’re familiar with the nuances of loss payees, you can check your insurance policy. There is every chance that your lender is listed on your file. However, if the lender isn’t, the time to take action is now. Take all necessary steps to add the lender to your file. If you are concerned about the financial aspects of paying the differential in the event of a total loss, consider getting GAP coverage. There are a plethora of financial services available to consumers. By staying informed and planning ahead, you can reap the most benefits from these offerings.
