Who Is Covered Under My Liability Policy?
Most businesses purchase a general liability policy to protect the company from third-party claims. The standard liability policy covers claims against the business listed in the declarations. It also covers claims against various other parties that are described in a section entitled Who Is An Insured.
Who Is An Insured?
Most general liability policies provide coverage that is equivalent to (or broader than) the standard ISO commercial general liability (CGL) policy. In its introduction, the latter states that the term insured means a person or organization that qualifies as such under Section II, Who is an Insured. Section II describes two categories of insureds:
- The named insured, meaning the party listed in the policy declarations
- Automatic insureds, meaning individuals and companies that are covered automatically because they have a business relationship with the named insured
The named insured is the legal entity listed in the declarations. It may be an individual (sole proprietor), a partnership, a corporation, or some other type of entity.
Afforded Broad Coverage
Named insureds are afforded broad coverage under the policy. They are covered for virtually any business activity they undertake, subject to policy provisions and exclusions. For example, ABC Inc. operates a small chain of shoe stores. The company insures its retail operations under a CGL policy. ABC Inc. decides to diversify its business so it purchases a manufacturing facility located near its stores. ABC wants to maintain a good relationship with its liability insurer so it notifies the company before it makes the acquisition.
Now suppose that ABC buys the new facility without telling its insurer. Will the manufacturing facility be covered under ABC's CGL policy? The answer is yes. The CGL policy doesn't limit coverage to a specific location or type of business. ABC is the named insured so its new facility is automatically covered by the policy.
A named insured is covered for claims that arise out of its vicarious liability for negligence committed by someone acting on its behalf. Thus, a firm named on the policy is covered for claims by third parties for injuries caused by the negligence of the firm's employees.
May Include Multiple Entities
A liability policy may include two or more named insureds if the same person or entity holds a majority interest in all of them. For example, Sweets Unlimited is a corporation that manufactures and distributes candies. Sweets Unlimited owns 100% of a subsidiary called Toothsome Treats, which operates a retail candy store. The two entities have common ownership so both may be listed as named insureds on the same liability policy.
An individual may be listed on a liability policy if she or he is a sole proprietor. An individual may also be listed in conjunction with a corporation if the individual owns at least 51% of the company. For instance, Jane Jones is the sole shareholder of Jones Marketing Inc. Consequently, the company's liability policy lists Jane Jones Inc. and Jane Jones, the individual, as named insureds.
Newly Acquired Organizations
If the named insured acquires or forms another organization during the policy period, the new organization automatically qualifies as a named insured. However, the coverage afforded to the new company is temporary. It ends 90 days from the date the new organization is acquired or formed or the end of the policy period, whichever comes first. It is also subject to the following conditions, all of which must be satisfied:
- You (the company named on the policy) own 51% or more of the new organization;
- The new organization is not a joint venture, limited liability company or partnership; and
- There is no other liability coverage available to the new organization.
For example, suppose that ABC Inc. (the retail shoe chain cited above) creates a new wholly-owned subsidiary, XYZ, Inc., to manufacture shoes. ABC owns 100% of XYZ. Assuming XYZ Inc. has no other liability coverage, it will be covered under ABC's liability policy for 90 days from the date XYZ was created.
If your company acquires or forms a new entity, you should notify your insurer promptly. Your insurer will add the new entity to your policy. It may charge you an additional premium to insure the new company.
A CGL policy automatically includes, as insureds, the people or entities listed below. These parties are automatically covered because they have a business relationship with the named insured.
- The spouse of an individual named on the policy. If Bill Waters is listed as a sole proprietor on his liability policy, Bill's spouse is automatically covered as an insured.
- Partners of a partnership, or members of a joint venture, listed on the policy. For example, suppose that the "Benson and Jenson, a partnership" appears in the declarations. Because the named insured is a partnership, each of the partners (Bob Benson and Jill Jenson) automatically qualifies as an insured.
- Members and managers of a limited liability company (LLC) listed on the policy
- Directors, executive officers, and stockholders of a corporation named on the policy
- Trustees of a trust listed on the policy
- Employees of the person or entity listed in the declarations. Executive officers are covered in conjunction with directors and stockholders. Thus, they are not considered employees. The same is true of members and managers of an LLC.
- Person or entity that is the named insured's real estate manager. For example, Prime Properties Inc. owns several commercial buildings. If Prime hires Ace Management to oversee the properties, Ace is automatically an insured under Prime's liability policy.
- Temporary custodian of your property in event of your death (if you are a sole proprietor). For example, suppose that you own own apartment building. You die and your daughter temporarily takes control of the building. She is an insured with respect to any claims that arise out of the apartment building while it is under her control.
- Your legal representative in event of your death (if you are a sole proprietor). If you have designated someone to serve as your legal representative after you die, that person or entity is an insured.
The parties cited above are insureds only while performing their duties on behalf of the named insured. In other words, employees are insureds only while performing their duties for the employer listed in the declarations. Likewise, directors are insureds only while acting as directors of the named insured corporation.
Insureds Covered By Endorsement
Besides named insureds and automatic insureds, additional parties may be covered under a liability policy via an endorsement. In many cases, an additional insured is included to fulfill a contractual requirement. For instance, suppose that AAA Accounting rents office space from Best Buildings. AAA's lease requires it to include the landlord as an additional insured under AAA's liability policy. To satisfy the terms of the contract, AAA's insurer adds an endorsement to AAA's policy. The endorsement covers Best Building as an additional insured.