Who's Covered Under My Liability Policy?
If you have purchased a general liability policy on behalf of your firm, you should understand who is covered by your policy. Most general liability policies provide, at a minimum, the same coverage as the standard ISO policy. Some policies provide broader coverage. This article describes the parties insured under the ISO form.
Who Is An Insured?
In a liability policy, the term insured means a person or organization that qualifies as such under the section entitled Who is an Insured.
This section describes two basic 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
Besides named insureds and automatic insureds, a policy may cover parties described in an endorsement.
A general liability policy covers the legal entity listed in the declarations. That entity may be an individual (sole proprietor), a partnership, a limited liability company, a corporation, or a trust.
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, suppose that ABC Inc. operates a small chain of shoe stores. ABC Inc. insures its retail operations under a liability policy that runs from January 1, 2016 to January 1, 2017.
ABC Inc. decides to diversify its operations. On April 15, 2016 the company begins manufacturing a line of shoes. Because of the broad coverage afforded by the liability policy, ABC's new manufacturing operations are automatically covered by the policy. To maintain a good relationship with its insurer, ABC should notify its insurer about the new operations as soon as possible.
A liability policy may include two or more named insureds as long as 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. Because they have common ownership, both entities may be listed as named insureds under 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 owner of Jones Marketing Inc. Jane is the only shareholder of her corporation. Because Jane is a majority owner, her liability policy may include both Jane Jones Inc. and Jane Jones, the individual, as named insureds.
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.
Newly Acquired Organizations
Organizations that your company acquires or forms during the policy period are covered automatically as named insureds.
This automatic coverage is temporary. It ends 90 days from the date you acquire or form the new organization. This short-term coverage is provided if all of the following conditions are satisfied:
- You (the company named on your 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.
Suppose that ABC Inc. operates a chain of shoe stores. The company 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 policy expires before the 90 days have passed, the coverage ends on the policy expiration date.
You can continue coverage for a new organization after the 90-day period by notifying your insurer of the new company. Your insurer will add the new entity to your policy. It may charge you an additional premium to insure the new company.
A liability policy automatically includes, as insureds, various parties that have a business relationship with the named insured. These parties are automatically covered without being listed by name:
- 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 named on the policy. Also, covered are members of a joint venture listed on the policy. For example, suppose that the "Benson and Jenson, a partnership" appears in the declarations of a liability policy as the named insured. Each of the partners (Bob Benson and Jill Jenson) is automatically an insured.
- Members and managers of a limited liability company (LLC) that is 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 and of a person or entity listed in the declarations. Executive officers are not covered as employees since they are included in item 4 above. The same is true of members and managers of a LLC.
- Person or entity that is the named insured's real estate manager. For example, suppose that your company, Prime Properties Inc., owns several commercial buildings. If you hire Ace Management to oversee the properties, Ace is automatically an insured under your company's liability policy.
- Temporary custodian of your property in event of your death (if you are a sole proprietor). For example, suppose that after your death, your daughter temporarily takes control of an apartment building you owned. 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.
It is important to note that all of the parties cited above are insureds only while performing their duties on behalf of the named insured's business. This means that employees are insureds only while they are serving as employees 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
A liability policy also covers parties added by an endorsement after the policy inception date. In many cases, an insured is added to fulfill a contractual requirement. For instance, suppose you own an electrical contracting company that has been hired to work on a particular job by a general contractor. Your contract with the general contractor requires you to include the general contractor under your liability policy as an additional insured. Your insurer adds an endorsement to your policy that lists the GC as an additional insured. The CG is an insured under your policy subject to the restrictions outlined in the endorsement.