Additional Insured Coverage - What is it?
Many contracts used in business require one party to cover another as an additional insured. This article will explain the purpose of additional insured coverage. It will also describe some things to consider when seeking this coverage, or when providing it to another company.
Risk of Lawsuits
Many companies engage in business relationships with other firms. While these relationships can be beneficial, they also create a risk of lawsuits.
One company may negligently cause an accident that injures a third party. The injured party my then sue one or both companies for damages. Here are some examples:
- Regal Realty owns Apex Apartments, an apartment complex. Regal hires Prime Painting, a painting contractor, to paint the exterior of the complex. A Premier employee is cleaning paint brushes when he accidentally drops a cigarette into a bucket of paint thinner. The paint thinner ignites, causing a fire. The tenant of a nearby apartment is injured by the smoke. He sues both Premier Painting and Regal Realty for bodily injury.
- Fancy Foods operates a grocery store in retail space it rents from Buildings, Inc. Lisa is shopping at the store when a ceiling tile falls on her head. Lisa is injured and sues both Fancy Foods and Buildings Inc. for compensation.
- Able Appliances distributes refrigerators manufactured by Handy Home Products. An Able salesperson is demonstrating a refrigerator feature to a customer when a panel snaps off the front door. Steve, the customer, is injured by the flying panel. He sues both the vendor (Able Appliance) and the Handy Home Products for bodily injury.
In each of the above examples, negligence committed by one company has triggered an accident that resulted in a claim against the other. Regal Realty, Buildings, Inc. and Able Appliances could protect themselves against such claims by demanding coverage as an additional insured under the other company's general liability policy.
Additional Insured Endorsements
Additional insured coverage is typically provided via an endorsement. Some endorsements are very specific. They cover the person or company listed in the endorsement only. Others provide blanket coverage. They cover anyone who meets the definition of additional insured in the endorsement.
Most additional insured endorsements are designed to cover certain types of parties. For instance, some are designed for landlords, while others cover state or local governments that have issued a license or permit. Still others are intended to cover project owners or general contractors for which policyholders are performing work.
Some insurers utilize standard additional insured endorsements created by ISO. Others use endorsements they have developed themselves. Thus, endorsements may vary in scope. Two endorsements may both cover landlords as additional insureds, but one may provide broader coverage than the other.
Any coverage afforded to your company under an additional insured endorsement should apply on a primary basis. That is, if a claim is filed against you that is covered by the endorsement, the policyholder's insurer should pay first. You should not have to rely on your own liability policy to cover the claim unless and until your additional insured coverage has been used up.
Some liability policies contain wording that automatically covers certain parties, such as landlords or contractors, as additional insureds. When this wording is included in the policy, no endorsements are needed to cover those parties.
Like many businesses, your firm may have engaged in a business relationship with another company. For example, you may have hired a contractor to perform work, leased a building to a tenant, or rented machinery to a customer. Because such relationships may result in lawsuits against your firm, you should require the other company to cover your business as an additional insured.
The requirement for additional insured coverage should be clearly stated in your contract. This is important for two reasons. First, the contract will provide written verification of the other company's obligation to you.
Secondly, some additional insured wording provides coverage only if additional insured status is required by a written contract. When this wording is included in the endorsement, your firm may not be provided additional insured coverage unless the contract specifically requires it.
Some business relationships may require your firm to insure another company as an additional insured. Be sure to read the contract carefully so you understand your obligations. The contract shouldn't afford broader coverage to the additional insured than is provided by your policy. You should also check the limits on your policy to ensure they are adequate. If a claim is filed against you and an additional insured, any damages assessed against the additional insured may reduce the limits available to your firm.
Proof of Insurance
If your company hires an independent contractor, be sure to verify that the contractor has purchased liability insurance. Insist that the contractor provide evidence of coverage in the form of a certificate of liability insurance. Call the agent or broker (or the insurers) listed on the certificate to verify that the policies exist.
If your contract requires another company to cover you as an additional insured, demand a copy of the additional insured endorsement. Ask your agent or broker to review the endorsement to ensure it meets the requirements specified in your contract. Ask your attorney to review the endorsement as well.
Your Liability Insurance
If your firm is covered under another company's liability policy as an additional insured, can you forgo liability insurance? The answer is no! An endorsement is not equivalent to a general liability policy. It generally covers the additional insured only with regard to the premises, project, product, equipment etc. described in the endorsement. It does not cover the additional insured for any other activities.
As an additional insured, moreover, you are typically covered for claims arising from the named insured's negligence or from negligence committed jointly by you and the named insured. An additional insured endorsement may provide no coverage for claims that are attributable to your negligence alone. To protect your company against such claims, you need to purchase a liability policy.
Article edited by Marianne Bonner