You asked us whether an insurance policy, which notes SSA as a joint loss payable,
will guarantee payment to SSA in the event of a loss due to employee dishonesty. You
also asked us whether the terms "joint insured" and "joint loss payable" have different
meanings. You further asked us whether a state document indicating that a representative
payee is tax exempt is sufficient for proving tax-exemption under Section 501(c)(3).
Here, SSA is not guaranteed payment in the event of employee dishonesty as a joint
loss payee. Since Lifetime's insurance policy notes SSA as a joint loss payable, in
the event of employee theft, the loss would be payable to the name insured (Lifetime)
and the designated loss payee (SSA). However, as a joint payee, SSA would not be afforded
protection under Lifetime's insurance contract in the event Lifetime claimed it was
entitled to money from SSA after both parties were paid by the insurance carrier.
Thus, subsequent to the insurance carrier releasing the funds and being absolved of
its duty, legal issues concerning payment could potentially ensue between the payee
and SSA. In addition, a "joint loss payable" is a different term than "joint insured."
Lastly, the payee should provide documentation that its application for tax exemption
was granted in the form of a determination letter of Section 501(c)(3) status from
the IRS.
ANALYSIS
1. "Joint loss payable" versus "Joint Insured"
A joint loss payable is "a standard loss payable clause stipulating loss payment involving
certain described property to be made to both the name insured and to a designated
outside party jointly. No payment is made to only the named insured" "No independent
rights or benefits are afforded the loss payee, as the payment to the loss payee rides
upon the merits of the named insured's claim." A loss payee is a person or entity
named in an insurance policy (under a loss-payable clause) to be paid if the insured
property suffers a loss. A loss payable clause is an insurance-policy provision that
authorizes the payment of proceeds to someone other than the named insured, especially
to someone who has a security interest in the insured property. A name insured is
a person designated in an insurance policy as the one covered by the policy.
Here, while Lifetime's insurance policy provides that the name insured (Lifetime)
is covered in the event of employee theft, SSA is not guaranteed payment as a joint
loss payee in the event of employee theft. After speaking with a representative at
Banc of America Corp. Ins., Lifetime's insurance carrier, the undersigned was informed
that in the event of employee theft, one check would be issued from the carrier that
would be made out to both SSA and Lifetime. The check could not be cashed unless both
parties agreed to the amount of the check and executed said check. Thereafter, Banc
of America Corp. Ins. would be free of any responsibility it maintained regarding
payment. As such, in the event, Lifetime later became dissatisfied with the way the
monies were distributed, SSA would not be afforded any legal protection under the
original life insurance policy.
Thus, in order to guarantee payment to SSA in the event of a loss due to employee
dishonesty, we recommend that a bond be obtained that guarantees payment to SSA in
the event of employee theft. The representative at Banc of America Corp. Ins. suggested
that a fiduciary or fidelity bond would serve our interests.
Further, a "joint loss payable" is a different term than "joint insured." As noted
in POMS GN 00506.105 the insurance industry term "joint insured" means:
that in addition to the first name insured, eligible entities that meet certain conditions
may be included as "joint insured" under the same policy. Such conditions include
stock ownership, voting control, holdings, operation by contract, individual owners
and trustees, the existence of common officers, common premises, or the intermingling
of employees.
In contrast, the term "joint loss payable" deals specifically with loss of monies/funds
and means that a loss will be payable to both the named insured and designated loss
payee. Thus, the terms are not interchangeable.
(2) Tax Exempt Status
An organization that is not a state or local government agency and that is applying
to become a representative payee must provide "proof of tax-exempt status in accordance
with Sec. 501(c) of the Internal Revenue Code" (emphasis added). Here, the payee presented
its certificate of incorporation and noted that it was a nonprofit within the meaning
of Section 501(c)(3). However, an organization's expressed desire to comply with 501(c)(3)
tax-exemption in its certificate of incorporation does not automatically mean that
said status has been granted. This type of organization must apply to the IRS for
tax exempt status and be approved. See Internal Revenue Service, Instructions for
Form 1023 at 1; 26 C.F.R. § 301.6104(d)-1(b)(3). Thus, since the POMS requires proof
of federal tax-exemption status, the payee should provide documentation that it's
application for tax exemption was granted in the form of a determination letter of
Section 501(c)(3) status from the IRS.
CONCLUSION
Here, SSA is not guaranteed payment in the event of employee dishonesty as a joint
loss payee. Since Lifetime's insurance policy notes SSA as a joint loss payable, in
the event of employee theft, the loss would be payable to the name insured (Lifetime)
and the designated loss payee (SSA). However, as a joint payee, SSA would not be afforded
protection under Lifetime's insurance policy in the event a legal dispute arose between
the parties regarding the payment after both parties were paid by the carrier. Thus,
subsequent to the insurance carrier releasing the funds and being absolved of its
duty, legal issues concerning payment could potentially ensue between the payee and
SSA. Thus, in order to guarantee payment to SSA in the event of a loss due to employee
dishonesty, we recommend that a bond be obtained that guarantees payment to SSA in
the event of employee theft.
In addition, a "joint loss payable" is a different term than "joint insured." Lastly,
the payee should provide documentation that it's application for tax exemption was
granted in the form of a determination letter of Section 501(c)(3) status from the
IRS.
Barbara L. S~
By: s/ Kristina C~
Assistant Regional Counsel