Additional insured requests related to general liability or commercial package policies are a daily occurrence. While most entities require they be an additional insured, most of our customer's don't truly understand what an additional insured is and how that can create problems for them if a claim arises.
According to The Additional Insured Book, 7th Edition, published by International Risk Management Institute, Inc.:
- An “Additional Insured…is intended to signify those persons or organizations that generally are not automatically included as insureds under the liability policy of another, but for whom the named insured desires or is required to provide a certain degree of protection under its liability policies.”
Essentially this means, that when you request that an individual or entity be an additional insured on your business policy, they are then entitled to certain coverages on your own policy in regards to work you do for them.
For example, Concrete ABC names Brand New Homes, LLC as an additional insured on their general liability policy because it was required by contract in order for Concrete ABC to work on projects for Brand New Homes, LLC. During the construction of one of the homes, Concrete ABC unknowingly made an error pouring the foundation of the home. Fast forward 5 years and the homeowner is suing Brand New Homes, LLC, for issues related to the structure of their home. Due to being listed as an additional insured on the GL policy for Concrete ABC, Brand New Homes, LLC turns around and files a claim on the policy for Concrete ABC requesting legal representation and reimbursement for legal fees related to the homeowner's lawsuit.
This is one of many examples of what can happen when an entity is an additional insured. This example then leads me to a number of questions that we are asked about WHY someone wants to be an additional insured. Below are some reasons:
- Provides additional safety/protection for the entity or individual
- Gives the entity or individual direct rights to additional insurance coverage
- May provide higher total coverage limits to the entity or individual
- May reduce direct costs to an entity or individual if they can file on a policy not their own
The above reasons are all very beneficial to the additional insured party, but not beneficial to the actual policyholder. Many issues can arise when adding an additional insured that insureds need to be aware of including:
- The more additional insureds there are on a policy, the more potential there is that your policy limits will be met very quickly within the one year term
- The additional insured actually gets more coverage on the named insureds policy than they may have otherwise
- The defense the named insureds policy has to provide to the additional insured may conflict with the defense the named insured's defense
The explanation of an additional insured is meant to educate business owners and policyholders. In most cases additional insured status is required to even obtain a contract, however, we strongly encourage business owners to ask the entity “why?” do they want to be an additional insured. Is it actually necessary? Is it truly required by contract? We want our policy holders to be advocates for themselves and not provide coverage to people or entities that don't need it. And more importantly insurance agents need to ask their customers questions about the additional insured. Agents also need to ask for copies of the contract requirements to ensure it is actually required for the insured to add a specific additional insured onto their policy.
Additional insured status is a necessary part of doing business, however, it is important for all parties to understand the ramifications of the endorsement and ensure the additional insured status is an essential part of the contract and scope of work.