Who Is Covered Under My Liability Policy?
Named Insureds Are Afforded Broader Coverage Than Other Insureds
Most businesses protect themselves against third-party claims by purchasing a general liability policy. The policy covers claims filed against the named insured and various other parties that qualify as insureds.
Who Is An Insured?
The standard the ISO commercial general liability (CGL) policy covers damages the insured becomes legally obligated to pay because of bodily injury, property damage, or personal and advertising injury. In its introduction, the CGL 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 insured parties:
- The named insured, meaning the party listed in the policy declarations
- 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. The named insured is typically a corporation, an individual (sole proprietor), a partnership, or a limited liability company.
May Include Multiple Entities
A liability policy may include more than one named insured. Two or more parties may be covered under a single policy 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 Toothsome Treats, a subsidiary that 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, Jane Jones Inc. and Jane Jones, the individual, are both named insureds on the company's liability policy.
Named Insureds are Afforded Broad Coverage
Named insureds are covered for their vicarious liability for negligence committed by others acting on their behalf. That is, the person or company named on the policy is covered for claims arising from the negligence of the firm's employees, partners or other individuals while performing their duties.
While most insured parties are afforded limited coverage, named insureds 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 that are insured under a CGL policy. ABC Inc. purchases a factory located near its company headquarters. ABC is automatically covered for any claims that arise from the shoe manufacturing operation. Even so, ABC should notify its liability insurer about the new facility before the acquisition takes place. This will ensure ABC maintains a good relationship with its insurer.
New Organizations Covered as Named Insureds
If the named insured acquires or forms another organization during the policy period, the new company automatically qualifies as a named insured. However, this coverage ends 90 days from the date the new organization is acquired or formed, or the end of the policy period, whichever comes first. The 90-day coverage is 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.
- 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 wholly-owned subsidiary called 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 issue an endorsement adding the new entity to your policy.
Besides the named insured, a CGL policy automatically covers any person or entity that fits one of nine categories described below.
- 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 an insured.
- Partners of a partnership or members of a joint venture listed on the policy. For example, if the named insured is "Benson and Jenson, a partnership," both of the partners (Bob Benson and Jill Jenson) are insureds.
- 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 named insured. Note that executive officers are not considered employees as they are already covered in conjunction with directors and stockholders.
- The named insured's real estate manager. For example, if Prime Properties Inc. hires Ace Management to oversee properties Prime owns, 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, you own an apartment building. If you die and your daughter takes control of the building temporarily, she is an insured as long as the building remains under her control.
- Your legal representative in event of your death (if you are a sole proprietor). If you have designated a person or company to serve as your legal representative after you die, that party is an insured.
The parties cited above are insureds only while performing their duties on behalf of the named insured. This means that employees are insureds only while performing their jobs for the employer listed in the declarations. Likewise, directors are insureds only while serving as directors of the named insured corporation.
Insureds Covered By Endorsement
If certain people or entities don't qualify for coverage under Section II, they can be added to the policy via an endorsement. Additional insureds are often added to fulfill a contractual requirement. For example, 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 endorses AAA's policy to cover Best Buildings as an additional insured.