As a CFO or Credit Manager of a company that finances the sale of equipment or other personal property to a customer, you should make sure that your company’s interest in that property is insured by your customer for the length of the financing and that your company is properly designated in the policy. The applicable contractual documents with your customer should require that your company be named on the customer’s insurance policy as an “additional insured” and/or the correct type of “loss payee.” There is much confusion associated with the insurance industry “loss payee” term and, depending on the situation, may not be the appropriate designation to protect your company’s interest in the property. Indeed, many times both the company and the customer will confuse the “loss payee” term with the other insurance term, “additional insured.” The two terms are very different. Confusing one with the other or being designated improperly in the policy could be a real problem if the property is damaged or destroyed during the term of the lease/loan.
A “loss payee” is an entity that will be paid if there is a “loss” as defined under the customer’s applicable insurance policy. However, a covered “loss” may not include a loss caused by the customer. The company leasing/loaning the property will want to be paid by the insurance company regardless of any acts or omissions by the customer under the terms of the policy and no matter what the situation may be between the customer and its insurance company. That is where the proper designation of your company under the policy is of critical importance.
As the seller/financier of the property, the insurance proceeds that you think rightfully belong to you as a result of a “loss” may not, depending on whether your company has in fact been named a “loss payee” – not an “additional insured” – and the correct type of “loss payee.” “Additional insured” status is different from a “loss payee.” In many instances, you will want to be designated as both an “additional insured” and a “loss payee.” As an “additional insured,” your company would have coverage under the policy for injuries to a third-person caused by the property. However, being named an “additional insured” will not protect your company where the property is damaged or destroyed as a result of a fire, Act of God, or other covered peril. Instead, depending on the situation, the proper “loss payee” designation would be required. It is important for the CFO/Credit Manager to follow up with the customer to make sure that the company is named as a loss payee and under the correct category, usually entitled the “lender loss payee,” for the applicable policy, so that the conduct of the customer is not taken into consideration, or is not a condition precedent to your company being paid proceeds under the policy by the insurer. It would be advisable to check with counsel to assist you in this rather tedious and confusing process.