Loss Payee vs. Lender’s Loss Payable
The loss payee designation, or standard loss payable provision, is added to a property insurance policy to protect a lender when that property is used as collateral on a business loan. This designation offers the lender the same protection under the policy as you, the named insured—whereas the lender’s loss payable endorsement grants the lender greater protection—they’re protected even if you invalidate the insurance policy.
When you’re applying for a small business loan, the process can be intimidating, complicated, and a little overwhelming. In particular, if you’re offering up collateral to secure your loan, you’ll find that there are often more steps involved than you might think.
For example, your lender will likely require that you have an insurance policy to protect your collateral—and, in many cases, they’ll ask that you add a loss payee provision or a lender’s loss payable endorsement.
If these terms are unfamiliar, you’re not alone—and we’re here to walk you through them.
In this guide, we’ll break down everything you need to know about loss payees, lender’s loss payable, and the difference between these two types of commercial insurance endorsements. Plus, we’ll explain how these endorsements might apply to your business loan agreement, especially those for SBA loans.
What Is a Loss Payee?
First, let’s start out with the basics.
A loss payee is an insurance term that refers to a person or entity (typically a commercial lender) that has an interest in property held by someone else—in this case, the someone else would be you, the business owner.
When you offer up collateral to secure a business loan, as we mentioned above, the lender will likely ask that you acquire an insurance policy to protect the collateral—whether equipment, machinery, real estate, or some other type of property. Then, on your property insurance policy, the lender might ask to be added as a loss payee.
In adding the lender to your policy with the loss payee designation, you’re first and foremost stating that the lender has an interest in this property. Not only this, however, the loss payee endorsement also protects the lender—they then become entitled to payment in the case of a covered loss on the collateral.
Loss Payee Example
Let’s break down an example:
Say you’re taking out a secured business loan from Lender A and putting up your car as collateral. In this case, Lender A will require you to have an insurance policy on that vehicle and that on the policy, they’re listed as the loss payee. If something happens to your car and the insurance company pays you for the damages, Lender A will also be paid.
It’s important to note, however, that a loss payee designation is not a separate agreement between the insurance company and the loss payee (the lender). Instead, adding a loss payee endorsement to your policy simply gives the lender the same rights that you have, as the named insured.
Therefore, if there is a covered loss on your collateral, as we explained in the example above, the lender is also compensated. If, however, there is a loss on your collateral that is not covered by your insurance—in other words, you, the named insured, are not compensated for the loss—the lender, as a loss payee, would not receive compensation either.
Loss Payable Provisions
All of this being said, a lender is typically added to your insurance policy as a loss payee with a standard endorsement called “loss payable provisions.” As you’ll see in the image below, this provision asks for the name and address of the loss payee, as well as a description or details of the property they have an interest in.
To this point, one of the reasons that these business insurance terms can be so confusing is that although the term “loss payee” namely refers to the person (aka the lender), it’s sometimes also used to refer to the physical provision that’s added to your policy.
You’ll often see one of these provisions referred to as a loss payee endorsement, loss payable endorsement, or loss payable provisions—in this case, all of which refer to the actual insurance document (shown below).
Ultimately, when it comes to business loans, the loss payee designation, or loss payable provision, serves to protect the lender and reduce unpaid loans.
Therefore, if you don’t comply with a lender’s request to be added as a loss payee on your collateral insurance policy, the lender may put force-placed insurance on your collateral.
What Is Lender’s Loss Payable?
At this point, you should have a better understanding of what a loss payee is and why a lender would ask you to add a loss payable provision to your collateral insurance policy.
This being said, there are actually multiple types of loss payable provisions. The example we discussed above is the standard provision, in which a lender is added as a loss payee and receives the same coverage as you (the named insured).
On the other hand, however, a lender’s loss payable endorsement grants the lender much more protection under the insurance policy. With this endorsement, sometimes simply referred to as lender’s loss payable, the lender is still added as a loss payee, but, in this case, their coverage is not equal to yours.
Instead, a lender’s loss payable provision allows the lender to recover losses even when your acts, as the named insured, invalidate your coverage or your policy.
In other words, in the event that you default on your business loan, violate the terms of your insurance policy, or cancel your insurance policy, the lender is still protected under the lender’s loss payable endorsement.
Lender’s Loss Payable Example
Let’s take the example we used above to explain further.
Once again, say you’re taking out a business loan from Lender A and putting up your car as collateral. This time, however, the lender asks that they’re added as a lender’s loss payee—and that you add a lender’s loss payable provision to your policy.
You add the provision, but fail to make your annual premium payments on the policy. After this happens, your car is damaged.
Even though you, as the named insured, won’t receive coverage on the policy because you’ve failed to pay your premium (i.e. violated your insurance agreement), your lender would still be eligible for payment from the insurance company.
Loss Payee vs. Lender’s Loss Payable
As you can see, the difference between loss payee vs. lender’s loss payable—in other words, a standard loss payable endorsement vs. a lender’s loss payable endorsement—is the amount of protection that’s awarded to the loss payee, aka your small business lender.
In this way, it’s to the lender’s benefit to ask for a lender’s loss payable as opposed to simply being added as a standard loss payee—as the lender’s loss payable endorsement ensures that they get paid, regardless of what happens to your insurance policy.
This being said, another difference between a loss payee clause and lender’s loss payable is that a standard loss payable provision is often used when the collateral is personal property—equipment, machinery, vehicles—whereas lender’s loss payable is often used when the collateral is real property—building or land.
In this case, where a lender’s loss payable provision is added to an insurance policy on real property, it’s akin to a mortgagee clause—in which the mortgagee (like a financial institution) receives coverage under the policy regardless of the actions of the policyholder.
So—with all of this information in mind, you might be wondering: Why is this difference important?
Although these two designations will not have any day-to-day effect on you, personally, or your business, the distinction between a loss payee and lender’s loss payable endorsement will be extremely important when you’re applying for financing, especially SBA loans.
Loss Payable Endorsements and Business Loans
As we’ve mentioned throughout this guide, loss payable endorsements—including a standard loss payee designation as well as the lender’s loss payable endorsement—will likely be relevant to your business when you apply for financing.
Once again, if you apply for a loan and put up collateral to secure that loan, it’s likely that your lender will ask that you acquire an insurance policy for the collateral, as well as add a loss payable endorsement to the policy.
This being said, in most cases, a standard loss payee designation with a loss payable endorsement on your insurance policy will suffice—especially if the collateral you’re offering up is personal property.
On the other hand, however, when it comes to SBA loans, the SBA requires that all approved SBA loan applicants must designate lender’s loss payable on their insurance policy when their business property is used as collateral for the loan.
In these instances, the lender’s loss payable endorsement is specifically reserved for loans that use personal property (valued at over $5,000) as collateral. In this case, personal property can include business equipment, machinery, and any type of collateral other than real property (land and buildings).
In essence, due to the competitiveness of SBA loans and the risk that the SBA takes on by working with small business owners, they require the lender’s loss payable endorsement to protect their investment and mitigate risk.
Overall, although this requirement is most commonly seen when working with the SBA, you might also see other lenders who require this designation as well.
How Do I Get a Loss Payable or Lender’s Loss Payable Endorsement?
If you find yourself working with a lender who asks for one of these endorsements, you’ll want to ensure that you comply in order to secure your financing. To this point, however, it’s important to note that getting a loss payable or lender’s loss payable isn’t part of the initial application process.
Instead, it’s likely that you’ll complete and submit your application—and after receiving initial approval, you’ll then add the loss payee or lender’s loss payee designation to your insurance policy—before the loan is closed.
With an SBA loan specifically, you’ll need to add the lender’s loss payable designation to your insurance policy before the bank or local lender takes the final steps to ensure your business loan application meets all the guidelines set out by the SBA.
This being said, to get one of these endorsements, you’ll need to contact the agency that insures the property you’re using as collateral on your loan. The insurance agency is the only one that can make the loss payee or lender’s loss payable designation on your insurance policy.
Typically, however, most insurance agencies will actually designate a loss payee automatically when you’re taking out a policy on collateral to secure a loan. To this point, it’s important to note that if you ask to add a loss payee to your policy, most insurance agents automatically choose the standard loss payable provision.
Therefore, if you’re borrowing from the SBA, you’ll need to make sure that the insurance agent submits a lender’s loss payable endorsement instead.
Once you’ve requested to add a loss payable endorsement to your policy, you’ll need to request a new copy of your certificate of insurance to prove to the lender that the designation has been added.
At the end of the day, if you plan on applying for financing and securing the loan with collateral, it’s important to understand the loss payee designation, as well as how this standard loss payable provision differs from a lender’s loss payable endorsement.
In particular, the lender’s loss payable endorsement will be essential when applying for an SBA loan—as the SBA requires this designation for all loans that are secured by personal property.
This being said, navigating the loan application process—especially when dealing with collateral and insurance policies—can be difficult, so you should always reach out to your lender, business insurance company, or another financial advisor to ask questions and receive help through the process.
Meredith Turits is a contributing writer for Fundera.
Meredith has worked as a writer and editor for more than a decade. Drawing on her background in small business and startups, she writes on lending, business finance, and entrepreneurship for Fundera. Her writing has also appeared in the New Republic, BBC, Time Inc, The Paris Review Daily, JPMorgan Chase, and more.