Additional Insured Coverage - What is it?

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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 pitfalls to watch out for when seeking additional insured coverage, or when providing it to another company.

Risk of Lawsuits

Many companies engage in business relationships with other firms. These relationships can create a risk of lawsuits.

Negligence committed by one company may trigger a lawsuit against the other. Here are some examples:

  • Premier Properties owns several apartment buildings. Premier hires Crafty Concrete, a paving contractor, to install a new concrete parking lot at one of Premier's buildings. Crafty Concrete leaves tools and equipment strewn around the work area. Jim, an apartment tenant, trips over a shovel and injures his leg. Jim seeks compensation from both Crafty Concrete and Premier Properties.
  • Fancy Foods operates a grocery store in retail space it rents from Buildings, Inc. Lisa, a grocery store customer, is injured at the store when a ceiling tile falls on her head. Lisa sues both the store and the landlord (Buildings Inc.) for bodily injury.
  • Able Appliances distributes refrigerators made 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 three examples, negligence committed by one company triggers an accident that results in a claim against the other company. Premier Properties, Buildings, Inc. and Able Appliance can 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 specific. They cover the person or company listed in the endorsement. No one else is covered. Other endorsements apply on a blanket basis. They cover anyone who meets the description contained in the endorsement.

    Additional insured endorsements limit coverage to specific types of parties. Some protect landlords while others cover contractors. Still others are used to cover state or local governments. Endorsements may vary in scope. Two endorsements may both cover landlords as additional insureds, but one may provide broader coverage than the other.

    The coverage afforded to you by an additional insured endorsement should apply on a primary basis. If a claim is covered by the endorsement, the endorsement should pay first. You should not have to file the claim under your own liability policy unless 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.

    Contracts

    If you are engaged in a business relationship with another company whose negligence may generate lawsuits against your firm, you should require that company to cover you as an additional insured. The additional insured requirement 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, 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 independent contractors, 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, do you need to buy liability insurance? The answer is yes! An additional insured is not afforded the broad scope of coverage provided to a named insured. As an additional insured, you are typically covered for claims arising from the other party's negligence (or your joint negligence). You may have no coverage for claims attributable to your negligence alone.

    Moreover, an additional insured is covered only with regard to the premises, project, product, equipment etc. described in the additional insured endorsement. You are not an insured for any other activities. To fully protect your company from liability claims, you need to purchase liability insurance.

     

    Article edited by Marianne Bonner

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