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More than you ever wanted to know about ''additional insureds''
Posted by Arnie Bell - Montebello, CA - USA - on February 04, 2002 at 16:37:57:

It turns out that the subject of additional insureds is fairly complex; there is at least one 500 page book on the subject. The following is mostly based on California law, but the exact language of your policy can make a big difference. Talk with your agent for details on your particular policy.

Insurance Basics

An insurance policy is a contract. The insured promises to pay the premium, and the insurance company promises to do two things. First, the insurer agrees to pay any damages (up to the policy limits) that the insured becomes legally obligated to pay, if the cause is covered by the policy. Second and perhaps more important, the insurer agrees to provide a defense against claims that are covered by the policy. The insurance policy usually gives the insurer the right to settle a claim even if the insured doesn’t want to, because it’s the insurer’s money that’s on the line. Note that the suit is filed against the insured, not against the insurance company, even though we talk about “turning the claim over to the insurance company.”

An insurance company has no duty to defend a claim that cannot possibly be covered by its policy. However, when a lawsuit is filed, it will often contain several different “causes of action,” which means different legal theories under which the defendant might be liable. Some of these causes of action might be covered by the insurance policy, but others might not. Insurance companies sometimes wanted to defend only those claims that were covered by their policy.

The California courts have decided not to allow insurance companies to do that. An insurance company only has to pay a judgment if the claim is covered by the policy, but it has to provide the insured with a defense against all claims if there is any possibility that any of the claims are covered under the policy. Often it isn’t clear at the beginning of a suit which claims are covered and which are not, therefore the courts have said the only way an insurer can provide an effective defense is to defend against all claims.

However, it could turn out later that the insurance company spent a ton of money defending against a claim that wasn’t covered by the policy. If that happens, the insurer gets to recover its costs for defending those claims from the insured. The insurance company can only collect costs that can be traced directly to the non-covered claim. It can’t recover money it would have spent anyway defending a claim that was covered under the policy.

Certificates of Insurance

A certificate is a piece of paper supplied by your insurance agent as proof that you have insurance as of the date the certificate was issued. It has very little, if any legal effect. The certificate usually says it does not extend or modify the insurance policy, and it only promises to try and notify the certificate holder if the policy is cancelled. A certificate does not give the certificate holder any rights under your policy.

Named Insureds, Additional Insureds, and Additional Named Insureds

The “named insured” is the person named on the policy who is responsible for paying the premiums. Policies often cover other people without specifically naming them, such as employees who are acting within the scope of their employment. These people are called “additional insureds.” The term “additional named insured” refers to a specific person or company that is added to the policy by an endorsement, although sometimes they are also called “additional insureds.” If an additional insured is sued for something the policy covers, he can give the suit to the insurance company and receive a defense, just like the person who paid for the policy.

The additional named insured’s coverage cannot be cancelled for any reason, including nonpayment of premium, until the additional insured has been notified of the cancellation. Notifying the person who bought the policy is not good enough. By contrast, the holder of a certificate of insurance has no protection at all against cancellation.

You can see where it is reasonable for the insurer to charge extra for additional named insureds, because the insurer might have to provide them with a legal defense and pay off a judgment against them. Issuing a certificate, on the other hand, is just a matter of filling out a form without assuming any additional obligations.

Policy Limits and Additional Insureds

Adding an additional named insured does not increase your coverage. In fact, it reduces it. Your policy limits used to apply to you alone. Once you put additional insureds on your policy, the maximum your insurer will pay remains the same, only now that amount is divided among all the insureds. For example, suppose you have a policy with a limit of $500,000 and both you and one of your customers get sued. You and your customer are each found 50% liable, and the jury awards $600,000. If you have named your customer as an additional insured, the $500,000 in coverage is split between the two of you, and you and your customer will each owe an additional $50,000. Your customer will probably get his own insurer to pay his share, however your coverage will be exhausted. On the other hand, if you had not named the customer as an additional insured, the full $500,000 would have been available to pay your share of the damages.

This is not to say that naming someone as an additional insured is always a bad thing. But you should consider whether your coverage is sufficient to pay two or more judgments instead of one.

When Can the Additional Insured File a Claim?

Since insurance policies are actually contracts, the answer depends on the exact language used in the endorsement that adds the additional insured to your policy. There are several different “standard” endorsements, plus some non-standard ones. This is something that you need to talk over with your insurance agent.

One of the standard endorsements says the additional insured is covered only for liability arising out of “your ongoing operations” at his premises. That language means he’s only covered while you are doing work at his premises. Another version just refers to “your work.” A minor difference? Not really! “Your work” means there can be coverage for your defective work years later, if it causes injury or property damage. In insurance-speak, this means the additional insured gets “completed operations” coverage under your policy.

Who Uses Additional Insured Endorsements?

Building owners will often want to be named as additional insureds on a general contractor’s insurance policy, since property owners will often get sued if an accident occurs on their property. General contractors also realize they are likely to get sued if one of their subcontractors causes injury or property damage, so the general contractor will want to be named on the subcontractor’s policy. The subcontractor is at the bottom of the food chain, so he can only build the cost into the job or walk away.

The whole idea behind additional insureds is that someone else might get sued because of something you did. The additional insured has no control over whether you drop a hammer on someone’s head, but if it happens on his property, he’s getting sued too. If he’s an additional insured and gets sued because of someone else’s work, he simply hands the suit to that person’s insurance company. If he’s not an additional insured, he has to give the suit to his own insurance company, who will have to pay the cost of defense and then hope to recover its costs from the other insurance company later on.

A surprisingly common situation where the property owner benefits from being an additional insured on a contractor’s policy is where the contractor’s employee gets injured. If the employee wants to sue his own company for his injury, he would probably have to settle for worker’s compensation benefits. But if the employee can find a way to blame the property owner, he can sue the property owner for damages. If the employee sues and the property owner is an additional insured, the owner simply hands the suit to the contractor’s insurance company: the employee ends up getting paid by his employer’s insurance company.

One drawback to being an additional insured is that you lose control over your own defense: it’s in the hands of someone else’s insurance company. There is also the risk that the named insured’s policy limits will be exhausted before the additional insured’s claim is paid. So, the additional insured should have his own liability insurance as well.

An additional insured will probably want a copy of your policy as well as the additional insured endorsement. That’s the only way he can tell exactly what’s covered and what isn’t. It also tells him who the insurance company is and when the policy expires.

Never Promise What You Don’t Deliver

If you promise a customer that you’ll put him on your policy, and then fail to do it, you could end up liable for any judgment against him plus the cost of his legal defense, if those costs would have been covered by the insurance. Watch for terms like that in purchase orders and other contracts with your customers.

So, What’s the Bottom Line?

One insurance guy put it this way: “Be listed as an additional insured on someone else’s policy whenever possible, and avoid listing other people as additional insureds on your policy unless it’s absolutely necessary.”

Ultimately, whether to add someone as an additional insured is a business decision. You will want to find out what your insurance company will charge to add someone as an additional insured, and you will also want to consider whether you need higher policy limits to protect yourself, or perhaps an “excess” or “umbrella”policy that kicks in only if your regular policy limits are exhausted. Remember, the more additional insureds you have on your policy, the greater the risk of exhausting your coverage.

You should also review the additional insured endorsement with your agent, so that you know under what conditions the additional insured is covered. Is it only while you are on the additional insured’s premises doing work? Or can the additional insured file a claim years later under your “completed operations” coverage? Be sure to review any contracts or purchase orders to see if you’ve agreed to assume liability or provide insurance.

You will also have to spend some of your time dealing with all of this. If this is for a regular customer, you will have to deal with the added time and expense every year when your policy is renewed. You won’t want to pay for an additional insured endorsement for a customer that is no longer doing business with you.

You might consider sending out a separate bill each year to those customers who require they be listed as additional insureds, politely explaining these things cost money. As an alternative, you can offer a free certificate of insurance, if you get certificates for free.

An additional insured endorsement that’s favorable for you will only cover the owner or contractor for liability arising out of “your continuing operations” while on his premises.