BASIC (03-07)

PR 07115.035 New York

A. PR 07-070 Representative Payee - Fee for Service Request Lifetime Support Inc. ("Lifetime")

DATE: February 15, 2007

1. SYLLABUS

This opinion settles an inquiry whether an insurance policy, which notes the Social Security Administration (SSA) as a "joint loss payable," will guarantee payment to SSA in the event of a loss due to employee dishonesty and whether a state document indicating that an organization is tax-exempt, is sufficient proof for providing tax-exemption. The opinion offers dialogue concerning two distinct insurance industry terms, "joint insured" and "joint loss payable," depicting that neither term afford the protection SSA requires in the event of a loss. POMS GN 00506.105C.2. states that SSA should not be listed as a "joint insured" on an fee for service's organization's insurance contract since it does not afford protection of benefits the organization receives and maintains as representative payee. Joint loss payable is defined as, "a standard loss payable clause stipulating loss payment involving certain described property to be made to both the named insured and to a designated outside party jointly. No payment is made to only the name insured. No independent rights or benefits are afforded to the loss payee, as the payment to the loss payee rides upon the merits of the named insured's claim." Thus, this policy provides that in the event of employee theft, the loss would be payable to the named insured and the designated loss payee (SSA). However, SSA would not be afforded protection under the carrier's policy, in the event a legal dispute arose between the parties regarding the payment, after funds are paid by the carrier.

The opinion concluded that SSA is not guaranteed payment in the event of employee dishonesty as a "joint loss payee."

In addition, current policy states an organization that is not a state or local government agency must provide proof of tax-exempt status in accordance with Section 501© of the Internal Revenue Code (IRS). Agencies granted tax-exempt status will have a ruling or determination letter from the Internal Revenue Service (IRS) for such proof. A certificate of incorporation is not the proof of tax-exempt status for this requirement.

2. OPINION

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


To Link to this section - Use this URL:
http://policy.ssa.gov/poms.nsf/lnx/1507115035
PR 07115.035 - New York - 03/19/2007
Batch run: 01/27/2009
Rev:03/19/2007