What Is a Loss Payee on a Car Insurance Policy?

Last Updated on March 9, 2021

When reading through your car insurance policy, you’ll likely notice a number of unique terms that you may not have seen before. If you have a loan out on your car or are renting a car from someone else, you may see a loss payee clause on your policy. This clause essentially defines who will get an insurance payout if you get into an accident. Here’s what you need to know about loss payee clauses.

What Is a Loss Payee on a Car Insurance Policy?

What Is a Loss Payee?

Your loss payee is the person or entity who will receive a payout from the insurance company should you file a claim. This clause is necessary to legally define where the money should go. Car insurance policies aren’t the only type of insurance to use loss payee clauses in their paperwork. These clauses are very common for homeowner’s insurance and commercial property insurance as well. In most cases, your bank or financial institution will require you to submit a copy of your car insurance policy specifying that they are the loss payee in order for the loan to continue.

Many banks actually require that you carry a specific amount of car insurance as well, often much more than your state legally requires. This is to ensure that you have enough money to pay off the loan if your car is totaled. In the event that your insurance does not cover the total remaining amount of your loan, you will be expected to pay the difference. Many insurance companies offer gap insurance to remedy this situation. If your car is totaled and you haven’t finished paying off your loan, gap coverage will pay the difference.

In addition to getting a payout if your car is totaled, your loss payee will also be entitled to certain information from your insurance company regarding your policy. For example, they will be notified if you decide to make any changes to your coverage or if you cancel the policy altogether. If either of these things happens, your lender could penalize you for breaking the initial agreement. Your insurer will also be notified of any late or missed payments, which could affect your standing with the insurance company.

Who Qualifies as a Loss Payee?

In most cases, loss payees are banks, credit unions, or other financial institutions that provide car loans. Since they technically own the car, they will receive the money when you file a car insurance claim. You may also have a loss payee clause on your car if you are temporarily leasing a vehicle, or if you are on a rent-to-own plan. You will not need a loss payee clause if you own your car outright.

Are There Any Exceptions to Loss Payee Clauses?

There are some notable exceptions to loss payee clauses that you should be aware of. In many cases, a loss payee clause will only apply if your car is totaled. If your car is damaged but still driveable, your insurer will likely direct the payout to you so you can make the necessary repairs. However, this isn’t true in all cases, so be sure to clarify with your lender and your insurance company before finalizing your policy. In some cases, the loss payee clause may direct the payment directly to a specified repair shop instead.

Loss payee clauses will usually also provide coverage to your lender for denied claims. Most car insurance policies specify certain exemptions for car insurance payouts – for example, you might be denied a payout if you did not report the incident in a timely manner, or if you were inebriated while driving. In these cases, your loss payee will still receive a payout to cover their damages, but the money will not go directly to you as the driver.

How Can I Add a Loss Payee to My Insurance Policy?

When taking out a car loan, it’s important to get specific information from your lender regarding their requirements for insurance coverage. You will need to obtain their correct address for the insurance contract. It’s important to ask your lender for their address directly instead of looking it up online, as many large lending companies have multiple addresses. You should also confirm their insurance requirements, as many lenders require their drivers to have a specific type or amount of coverage beyond what the state legally requires.

Once you have this information, it’s fairly easy to add a loss payee to your existing policy. You will just need to call your insurer’s customer service agent or go see your local agent. If you are getting a new car, be sure to update your policy to reflect this. After your insurance policy has been updated, you will need to send proof of your updated insurance coverage to your lender. You will need to send the full insurance declarations page so that the lender can confirm the policy details. Typically they will receive a notification directly from your insurance company as well. Once you have completely paid down your loan, you can remove your loss payee from your insurance policy.

What Happens If I Don’t Add a Loss Payee Clause to My Insurance Policy?

If you have a lease on your car and you do not add the loss payee clause to your policy, you could end up with serious repercussions from your lender. If you do not list your lender properly on your car insurance policy, they can take out forced placed insurance instead. This is a type of insurance policy that is designed to protect their assets in lieu of a proper loss payee clause. Although your lender would be the one to take out this type of insurance, you will be responsible for paying for it. It’s very pricey and doesn’t provide much coverage, so this is something you’ll want to avoid.

If you’re unsure of whether you have the right loss payee clause in your insurance policy, don’t hesitate to contact your insurance company for help. Your insurance agent will be happy to help you confirm the status of your policy, and make any necessary adjustments to ensure that the proper legal clauses are in place.

James Shaffer
James Shaffer James Shaffer is a writer for InsurancePanda.com and a well-seasoned auto insurance industry veteran. He has a deep knowledge of insurance rules and regulations and is passionate about helping drivers save money on auto insurance. He is responsible for researching and writing about anything auto insurance-related. He holds a bachelor's degree from Bentley University and his work has been quoted by NBC News, CNN, and The Washington Post.
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