Covering an Additional Insured for Liability
Have you signed a contract that required you to add another business to your general liability policy as an additional insured? Such requirements are common in business agreements, such as building leases and construction contracts.
What is an Additional Insured?
An additional insured is a party who is covered under your liability policy because he or she has a business relationship with you, and that relationship makes him or her vulnerable to lawsuits. Actions you take, or fail to take, while operating your business may generate claims against him or her.
For example, Jim owns Optimum Organics, a company that manufactures organic fertilizer. Beth owns a garden supply company called Bountiful Blooms. Beth's firm is a major distributor of Optimum Organics' fertilizer. Beth knows that the fertilizer she sells could injure a customer or damage a customer's property. To protect her company from product liability claims, Beth requires Jim to insure her company for liability. Bountiful Blooms is an additional insured under Optimum Organics' general liability policy.
Endorsement May Be Needed
Some liability policies include language that automatically covers certain parties, such as landlords, as additional insureds. If your policy does not include this language, additional insureds may be added to your policy via an endorsement. The type of endorsement your insurer uses will depend on the relationship between you and the additional insured. If the additional insured is your landlord, your insurer will probably use an endorsement covering lessors of premises. If the additional insured is a vendor that sells your product, the insurer will use a vendors endorsement.
Endorsement Language Determines Coverage
The scope of coverage afforded to an additional insured under your policy depends on the language contained in the endorsement. Many insurers use standard additional insured endorsements provided by ISO. Others create their own endorsements. In either case, the endorsement will restrict coverage to claims stemming from your business operations with or for the additional insured. That is, the endorsement will limit coverage to claims that arise out of the property you are leasing, the product you are selling, or the job you are performing.
Suppose that you are the owner of Terrific Tax Services. You have just signed a contract to lease space in a commercial building. The contract requires you to add your new landlord, Buildings Inc., to your general liability policy as an additional insured. Buildings wants to make sure it will be covered under your policy if you accidentally harm someone or damage someone’s property while using your rental space, and Buildings is sued as a result.
Your insurer issues an endorsement adding Buildings Inc. to your policy. Because Buildings is your landlord, the endorsement limits coverage to claims against Buildings Inc. that arise out of the ownership, maintenance or use of use of the part of the building leased to you. Buildings Inc. is an insured only in its capacity as your landlord.
It is now one year later and Bill, a customer of yours, is visiting your office. Bill trips and falls on a loose piece of wall-to-wall carpet, breaking his leg. Bill subsequently learns that the carpet problem has existed for months. You notified Buildings of the problem but your landlord hadn't gotten around to fixing it. You didn’t take steps, such as covering the loose carpet with a piece of furniture, to prevent someone from tripping on it. Bill files a lawsuit seeking damages for bodily injury.
The suit names both you and Buildings Inc. as defendants.
Because the accident arose out your use of the leased office space, your liability policy should cover the claim. As an insured under your policy, Buildings Inc. should be covered for its share of the damages awarded to the Bill. Your insurer should also pay Buildings’ defense costs; these costs should not reduce your policy limit. Buildings Inc. is entitled to coverage as long as it fulfills the duties imposed on insureds under your policy. For example, Buildings Inc. must cooperate with your insurer when it investigates Bill’s claim.
Sharing Your Policy Limits
It is important to understand that Buildings Inc. and any other additional insured included in your policy will share the limits provided to you under your policy. Suppose that Bill’s lawsuit results in $25,000 in damages, and that the court requires you and Buildings to each pay $12,500. The $25,000 in damages will be subject to the “each occurrence” limit. It will also reduce your “general aggregate" limit. This limit represents the amount of insurance that remains to pay damages because of other injury or damage that occurs during your policy period.
In recent years, new restrictions have been added to additional insured endorsements. Many endorsements now limit coverage to claims alleging injury or damage caused wholly or partly by acts or omissions of the named insured. No coverage is provided for acts attributed solely to the additional insured.
For example, suppose that Buildings Inc. hires Peerless Piping, a plumbing contractor, to install new sewer pipes outside Buildings Inc.’s office complex. Buildings requires Peerless Piping to insure Buildings Inc. as an additional insured under Peerless’ liability policy. Peerless’ insurer adds an additional insured endorsement to Peerless’ liability policy. The endorsement contains the restriction cited above. Because of the restriction, Buildings is covered only if the claim results from something Peerless Plumbing did, or from something Peerless Plumbing and Buildings did jointly.
If Buildings is sued for something that only Buildings did, the claim will not be covered. This limitation is often referred to as a sole negligence exclusion. It excludes coverage for negligence attributed solely to the additional insured.
Finally, the additional insured endorsement that covers Buildings Inc. under Peerless Plumbing’s liability policy contains another restriction. It limits coverage to acts or omissions committed in the course of the plumbing contractor's ongoing operations for Buildings Inc. If Buildings Inc. is sued due to an accident that occurs after Peerless has finished the piping work, Buildings will not be covered under the additional insured endorsement.