Named Insured vs. Additional Insured vs. Additional Interest vs. Loss Payee vs. Mortgagee – What’s the Difference?

by Kelly Troy on August 13th, 2011

Dazed and ConfusedAs someone who writes prolifically about real estate and insurance, this article, as compared to others I have written, is relatively short, however, given some of the recent conversations I have had with investors and some of the recent classes I have taught, I feel it is necessary.  

Unfortunately, insurance as a whole is normally viewed by consumers as a commodity or a ‘necessary evil’ that must be obtained when purchasing property and it is usually quoted and purchased with little or no actual knowledge of the policy itself on either the part of the buyer or even the agent providing it.  

Because of this, as well as the nature of insurance law, the lack of professional knowledge had by many agents, and the many confusing semantics used within the insurance industry, there is a great deal of confusion between such terms as “Additional Insured”, “Additional Interest”, “Mortgagee”, “Loss Payee”, and “Named Insured” and they are used interchangeably as if they all mean the same thing – BUT THEY DON’T!  Unfortunately, this confusion can result in unintended financial loss and unnecessary litigation far into the future and long after the policy has been first issued.  All it takes is one claim or loss for the parties in the policy to find out how they really are, or are not, protected and that words actually matter

For example, when working with investors and non-standard types of insurance situations, it is inevitable that the party requesting the insurance coverage asks to have someone else (usually the seller in a seller-financed transaction) inappropriately listed as an “Additional Insured” on the policy without understanding what he or she is really asking for.  What the purchaser (and “Additional Insured Party”) fails to realize is that this provides absolutely no protection whatsoever for the party listed as the “Additional Insured” with regards to the physical property in the event of a physical or financial loss.   

The purpose of this article is to finally, in real-life language, explain the difference in these terms so that you, the real estate professional and/or investor, are able to appropriately protect yourself and your interest in any property being insured, whether via wrap-around mortgage, traditional lending, or any other purchase scenario.   

NAMED INSURED   

The term “Named Insured” refers to the owner of the insurance policy and it is the party listed on the Declaration’s Page. The “Named Insured” is the only party that has authority to make any policy changes, file claims, receive refunds and claim payments, cancel the policy, or make any other such modifications.   

In addition, the Named Insured MUST have a primary insurable interest in the property and be the titled owner.   

ADDITIONAL INSURED   

This is probably the single most misunderstood insurance term that is misused and misapplied on a regular basis. An “Additional Insured” is a party listed on an insurance policy that has some type of liability interest in the property.  The “Additional Insured” has absolutely no right or authority to make any policy changes or to cancel the policy.  Also, contrary to popular belief, an “Additional Insured” is ONLY afforded liability protection under the liability portion of the policy and there is no coverage whatsoever for physical losses resulting from such things as vandalism, theft, fire, wind and hail, and so on.   

For example, with regards to residential property, if a property were seller-financed and the seller was actually carrying back a mortgage note and they were listed as an “Additional Insured” on the policy instead of as a mortgagee (described further below), then in the event of a physical loss (the home burned to the ground), the seller would have absolutely no legal right whatsoever under the policy to receive claim funds to pay off the mortgage debt and/or there would be no control of managing claim funds to ensure repairs.   

However, if there was litigation involving the property or its use and the “Additional Insured” was named in the suit for any reason, the policy provides liability protection for legal and defense costs for the “Additional Insured” and the insurance company issuing the coverage would have a ‘duty to defend’ any and all “Additional Insured parties” listed in the policy.  The most common example of this actually involves commercial policies, such as general liability, whereby a general contractor, for instance, may be listed as an “Additional Insured” on a subcontractor’s insurance so that in the event of a liability claim caused by the subcontractor (such as faulty work, property damage, or bodily injury) where the general contractor is also listed in the suit or claim, he or she receives coverage for legal and defense costs from the subcontractor’s policy.   

Many buyers and sellers in a wrap-around mortgage transaction prefer to have the seller listed as an “Additional Insured” rather than as a “Mortgagee” simply because they don’t want to blatantly alert the underlying lender that there has been a transfer of the property.  The unintended consequence of this, however, is that the coverages and protections afforded to the seller (who is technically a second mortgagee) are greatly reduced and limited now to liability protection only.   

ADDITIONAL INTEREST   

An “Additional Interest” is nothing like the “Additional Insured” though they sound similar.  An “Additional Interest” is a party listed in an insurance policy that has an “interest” in being notified whenever a policy cancels or has a major change made to it. In other words, this party is simply being made aware of the change – nothing elseThere is absolutely no coverage whatsoever afforded to an Additional Interest.  An example of a party who may need to be listed as an “Additional Interest” is a loan servicing company who is managing the loan for a seller-financed transaction. The servicing company has no insurable interest in the property and has no coverage under the terms of the policy, but it does have an interest in being notified if or when the policy is canceled so that it may contact the mortgagee and either have the policy reinstated or request updated proof of any new replacement policy.   

It is important to understand that Mortgaee’s and Additional Insured’s automatically get notifications of all policy cancellations and/or major changes and that only other parties associated with the loan in some capacity (but have no insurable interest) should be listed as “Additional Interests”.   

LOSS PAYEE   

The “Loss Payee” is another very misunderstood term which is most often associated with automobile loans – though it is very applicable to commercial and residential property as well.  In regards to insurance, a “Loss Payee” (which automatically includes any mortgagee) is the party (or parties) to which any payment being made under the policy in relation to a claim or loss will be made before being released directly to the Named Insured.   

For example, assume that you own a property for which “XYZ Bank” is the mortgagee.  A kitchen fire occurs in this property and a claim is filed for the damage, which is estimated to be at $85,000.  When the insurance company releases the $85,000 claim check, it should be made out to both you (the Named Insured policy owner) as well as XYZ Bank (as the mortgagee and loss payee).  This means that XYZ Bank must verify the claim and then endorse the check over to you – or the contractors performing repairs – before it may be cashed.  The reason for this is simple; XYZ Bank has a financial interest in the property via the mortgage loan and they want to make certain that they maintain control of the loss payment to ensure that the loan is either paid off (in the event that repairs are not performed) or that the money does in fact go towards repairing the property that is collateralizing their loan – and not to paying for your upcoming ‘around the world’ vacation.  

MORTGAGEE   

 So far we have described  the difference between an Named Insured, Additional Insured, Additional Interest, and a Loss Payee; now let’s discuss the true meaning of what a “Mortgagee” really is.   

A “Mortgagee” is the entity that actually originates and holds the Promissory Note and Mortgage loan on real property; otherwise known as the bank or the mortgage lender.  The Mortgagee extends financing to the “Mortgagor” – who is the homeowner or borrower in the transaction.   

By default, all Mortgagees listed in an insurance policy are also automatically considered as “Loss Payees”, meaning that, as in the section above, any claim payments should theoretically be made to both the Named Insured as well as every Mortgagee listed.  If a party who has made a mortgage loan to the Named Insured is not listed in the policy, whether intentionally or unintentionally, then that Mortgagee will not be afforded any rights or coverages under the terms of the policy itself.   

As you can see, there is a big legal difference between these terms and having an interest listed incorrectly can have unintended and far-reaching consequences in the event of a loss, default, or other such situation. Your agent should know the difference between these five terms, however, the reality is that the vast majority of licensed agents are salespeople with quotas to meet and they seldom, if ever, deal with investor-related transactions and therefore often don’t know the difference between these coverage position themselves.  If you have any questions or would like to discuss your own insurance needs, please feel free to call us at (800) 299-8994 or email us at info@insuranceforinvestors.com   



Kelly Troy

ABOUT THE AUTHOR: Kelly Troy is founder and President of InsuranceForInvestors.com as well as an active real estate investor himself, purchasing and ‘rehabbing’ both residential and commercial properties and actively engaging in non-traditional investing throughout the United States. As the founder of “STREETSMARTinvesting” as well as the developer of the “Riches in Rehabs” and “Riches in Rentals” investor programs; he has traveled extensively to host workshops and impart to other investors and real estate professionals the same principals and skills that he himself has learned regarding how to successfully profit from purchasing real estate. Kelly also established his own successful real-estate investor’s group and he is a frequent guest speaker at other REI groups and he often hosts local investing workshops in addition to teaching TREC-approved MCE courses for licensed real estate professionals. Kelly is also a combat veteran of the United States Army Infantry as well as an active member of his community, serving on several City and Regulatory Boards and having either Chaired or actively served on the Board of Directors for many professional and community organizations. In addition, after having spent several years as a traditional mortgage lender, he founded his own private-lending firm, Genesis Funding Solutions, and he was a hard-money lender underwriting and managing private loans to investors for projects of all types across the country. He is also extremely well-versed in all forms of seller-financing and in brokering privately-held mortgage notes. Prior to his investing career, Kelly was also a professional safety and risk consultant having developed many safety and risk management programs in various industries and he traveled frequently developing and implementing industrial and manufacturing processes, safety, and quality assurance programs throughout both the United States and Europe. He also worked for the Texas Worker’s Compensation Commission (TWCC) as well as the OSHA Consultation Program (OSHCON) as an Industrial Hygienist and he is; therefore, extremely familiar with risk management and loss mitigation, personal liability, worker’s compensation, and commercial risks. While having owned a previous agency with Farmer’s Insurance Group, he was chosen from over 150 agents as the President of the graduating class at the University of Farmers in Los Angeles, California and he was later recognized as one of the Top 25 commercial agents in Texas.

3 Responses to “Named Insured vs. Additional Insured vs. Additional Interest vs. Loss Payee vs. Mortgagee – What’s the Difference?”

  1. Jim keith says:

    I am the mortgagee on a single family residence in East Texas — do you sell or may I buy single interest insurance on said property. Approx balance $60,000. Presently occupied. Longview, TX

  2. Kelly R Troy says:

    There are a couple of things here… First, many companies issuing “renter’s insurance” will not list an apartment complex as an additional insured at all. They usually just refuse. The reason is because this type of policy is intended to cover the insured tenant’s personal belongings (in which the complex has no insurable interest) as well as any personal liability that he or she may incur. The complex itself has no interest in the tenant’s belongings NOR is there any interest in ‘personal’ liability such as libel, slander, or ‘personal’ injury, so the insuring companies won’t list the complex on the policy. There is no reason to. You mention that the complex wants to make sure that there is coverage “if there is <tenant-caused> damage to the complex” – but this is not the purpose or intent of renter’s insurance. A tenant’s renter’s policy is not going to provide any coverage whatsoever for the complex if the tenant leaves the unit is severe disrepair. The only recourse the complex has it to file suit against the tenant. The tenant may possibly file a liability claim under his or her policy for legal defense and settlement costs, but this is still doubtful and the policy itself isn’t going to pay for damage caused by the tenant just because he or she did damage. This would be considered intentional damage and no policy covers that. In short, I understand what you are asking and why, but the fact is that most complexes are trying to protect themselves against tenant property abuses by asking for insurance coverage that doesn’t exist from a policy that isn’t intended to provide it.

  3. Linda Tucker says:

    I am a property manager for the apartment complex. We are requiring that the residents who sign a lease to carry renters insurance and carry minimum $300,000.00 liability and list Heritage Apartments as Additionally Insured on the policy. this is cover the complex if there is damage done to unit. In the documents above I think that we just need to be listed as “loss payee”.

    Please clarify.
    thank you

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