Adding an Additional Insured? There are some things you should know!

by Curtis M. Pearsall, CPCU, CPIA
Special Consultant to the Utica National E&O Program

At the 2010 edition of the BIG Event in Massachusetts, my good friend and associate Jim Scamby, of Tucker, Heifetz & Saltzman, LLP in Boston, and I presented an E&O loss control class on ten E&O hotspots to be on the lookout for. One of those hotspots we discussed was the issue of Additional Insureds. The matter of Additional Insureds is causing its share of E&O claims and requires definite attention to detail.

The following is an example of a request your agency might receive for one of your customers:

“The policy shall be endorsed to add _______as additional insureds with respect to liability for bodily injury, property damage, or personal or advertising injury caused in whole or in part by the acts or omissions of you or any of the additional insureds. The policy shall be primary and non-contributory to any valid and collectible policies maintained by _________. Any policies maintained by or in our name on our own behalf, by _________ or on its behalf, shall be excess only over any valid and collectible insurance maintained by you on your own behalf and on behalf of us and our customers.

 There are several key terms in this clause that need to be reviewed in detail.

To begin, just what is an “Additional Insured?” They are commonly referred to a person or organization provided the status of “insured” by endorsement. Oftentimes, an endorsement is necessary that specifically requires identification of the entity. Upon pulling the file, you note that Blanket Additional Insured coverage is provided, so you presume you are all set and nothing further is necessary. Maybe not!

Review the policy form in detail, most notably the “Who is an Insured” definition. Typically, the following language is included: “Who is an Insured” is amended to include as an additional insured any person or organization when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured.

Thus, without a written contract, the Blanket Additional Insured coverage does not afford additional insured status. This is a common “error” by agencies, especially in the handling of Certificates of Insurance. Please note that merely checking the box on the Certificate does not afford Additional Insured status.

Highly recommended

It is highly recommended you always check your customer’s written agreement before issuing a Certificate of Insurance to ensure you are indicating the proper coverage. Plus, as cited by the following claim, if you need to indicate coverage for an Additional Insured on a Certificate, verify with the carrier in writing that they will provide such coverage.

This is a case where the agency's client, XYZ Service Installation, requested a general contractor be added to their GL policy as an additional insured. The agent issued a certificate stating they were an additional insured, but never sent the request to the carrier. The agent had no binding authority for additional insured requests under a contractor's policy with the carrier. An employee of the client fell from a ladder at a work site and died. The estate sued the general contractor, which demanded defense and indemnity from the client’s carrier, which denied coverage to the general contractor as it was not an additional insured. The general contractor, in turn, sued the client under the theories of: 1) breach of contract for failing to procure coverage for them as an additional insured, and 2) indemnity.

The GL policy would not respond to the claim for indemnity, as it contained a substandard definition of "insured contract," which did not include construction contracts. Both the client and the general contractor made claims against the agency. The liability claim against the general contractor by the estate appeared defensible, but the exposure to the agent was for defense costs by both the client and the general contractor, and any settlement monies incurred for the death. The claim against the agent was eventually settled for $175,000.

An important distinction

It will be necessary for your agency to determine, among other things, the degree of liability for which the Additional Insured is covered, a/k/a Breadth of Coverage. As cited in a recent National Alliance webinar on this topic, hosted by Craig Stanovich of Austin & Stanovich Risk Managers LLC, this generally falls into a few categories:

• Coverage for the sole negligence of the additional insured.
• Coverage for the additional insured’s negligence, but only if the named insured shares in the negligence.
• Coverage for the additional insured for vicarious liability due to the negligence of the named Insured.

In the claim example cited above, the agency client was sued under the theories of: 1) breach of contract for failing to procure coverage for them as an additional insured, and 2) indemnity. The right of indemnification, referred to as a contractual right granted by a non-insurance contract, is not the same as insurance. This is an important distinction.

If the policy has been endorsed to provide coverage for an Additional Insured (or coverage has been afforded due to a written contract), with the exception of policy limits, the policy applies to each insured as if the insured is the only insured. So, the policy exclusions that apply to the Named Insured also apply to the Additional Insured or, for that matter, any insured.

What if the Additional Insured also has their own coverage? If the “other insurance” wording is ISO on both policies, when an insured has been added to the CGL of another, they are afforded primary coverage and their own policy would then be considered excess. This presumes they have been added as an additional insured by attachment of an endorsement.

As cited earlier, what if the request to add a person or organization as an additional insured states the coverage be primary and non-contributory? What are the implications of this? Typically, if an insurer pays more than their proportionate share of a loss, they are entitled to a right of contribution from other insurers that have paid part of that loss for that insured. Non-contributory is commonly understood to mean the insurer providing the coverage for the additional Insured will not seek contribution from the Additional Insured’s own insurer. They will not ask that insurer to contribute.

Attention to detail

One additional area to be on the lookout for is the difference between some company Additional Insured forms and ISO. Some of the specific carrier forms are very narrow in coverage and thus could result in your insured not being in compliance with the requirement.

Additional Insureds are not as easy as you may think. They require strong attention to detail. If your staff needs some further education in this area, I strongly suggest you review the recent webinar conducted by the National Alliance. Speaker Craig Stanovich (www.austinstanovich.com) did an excellent job. Moreover, this session is a solid tool for anyone looking for further training on this topic, which is also a great topic for a staff meeting.