Insured, Named Insured and Additional Insured

Image courtesy of [Jacquie Boyd] / Getty Images. Image courtesy of [Jacquie Boyd] / Getty Images

Liability insurance contracts use various words or phrases to designate the people or entities that are covered under the policy. These include named insured, insured, and additional insured. Like many policyholders, you may find these terms confusing. This article will explain what they mean.

Named Insured

The named insured is the person or entity listed in the policy declarations. The named insured may be a corporation, partnership, sole proprietorship or other type of entity.

This party is afforded a broader scope of coverage than other insureds. Many policies refer to the named insured as you.

Most small businesses consist of one company only. For example, suppose that Smith Manufacturing Inc. is a private corporation owned by five members of the Smith family. Smith Manufacturing Inc. is the legal name of the business. Thus, the corporation is listed as the named insured on the firm's general liability, commercial auto and umbrella policies.

Multiple Named Insureds

Some businesses consist of multiple entities. Most liability insurers will list multiple entities on a single policy if one entity holds a majority interest (at least 51% ownership) in the others. For instance, suppose that the owners of Smith Manufacturing Inc. own a second company called Smith Sales Inc. Smith Sales sells products made by Smith Manufacturing. Because the two corporations have common ownership, they may be insured under the same liability, auto and umbrella policies.

Duties of Named Insured

Many liability and auto policies impose specific obligations on the named insured. For instance, a liability policy may require you to report claims or occurrences to the insurer. Similarly, a commercial auto policy may stipulate that you must notify the police if an auto has been stolen.

Liability policies often assign certain duties to the entity listed first in the declarations (if the policy includes more than one named insured). This entity is called the first named insured. In many policies the first named insured is assigned duties related to the annual audit. For instance, the first named insured may be required to provide the insurer sales and payroll information so that the insurer can calculate the final premium.

Insured

The term insured is a generic word used to describe any person or entity that qualifies for coverage under a policy. A named insured is an insured.

Most liability policies afford insured status automatically to certain types of parties. Examples are employees, partners and executive officers. However, the coverage provided to these parties is limited. For example, employees are insureds only while performing their duties as employees for the business named on the policy. Likewise, partners of a partnership named on the policy are insureds but only while acting as partners of that organization.

Commercial auto policies also provide automatic coverage for various insureds. For instance, most policies extend auto liability coverage to permissive users of covered autos owned or hired by the named insured.

Additional Insured

Liability policies often include additional insureds. These parties are usually added to the policy via an endorsement (hence the named additional insured). To qualify for coverage as an additional insured a party must have a business relationship with the named insured. Moreover, the named insured's business activities must create a risk of third-party lawsuits against that party.

For example, suppose a general contractor (GC) hires a subcontractor to do plumbing work on a construction project. The plumbing contractor could inadvertently cause an accident at the job site, injuring a bystander.

The bystander might sue both the plumbing contractor and the GC for bodily injury. Consequently, a contract between a GC and a subcontractor often requires the subcontractor to include the GC as an additional insured under the subcontractor's general liability policy.

Additional insured endorsements provide limited coverage. Coverage is tied to the business relationship between the additional insured and the named insured. For instance, a general contractor is typically covered only for claims arising from negligent acts committed by the named insured (subcontractor) while performing work for the GC. To be covered, claims must generally involve negligence on the part of the named insured.