Additional insured coverage: Additional insured requirements demand that one party agree to designate another party as an “additional insured.” The additional-insured gains the right to be treated as if it purchased an insurance policy, even though it paid no premiums.
While most glass companies are familiar with the risk found in indemnity clauses, there is another contract term that can present equal risk to glaziers: additional insured coverage. Often thought of as a simple paperwork formality, the risk posed by these terms are becoming more pronounced for those in the construction industry as the insurance market shifts toward higher deductibles and retentions. This affects glazing manufacturers and installers alike.
Usually found near the insurance section of contracts, additional insured requirements demand that one party agree to designate another party as an “additional insured.” By that, the additional-insured gains the right to be treated as if it purchased an insurance policy, even though it paid no premiums. The additional-insured can tender a claim, demand a defense and seek payments for damages from the insurance policy of another. Often the additional-insured gets these protections separate from, and broader than, whatever indemnity rights might exist.
For the “named-insured”—the one who paid for the policy and agreed to protect the additional-insured—the designation often allows the party the opportunity to avoid an indemnity obligation, because any necessary defense and payment comes from its insurer. And while that can be important, there are downsides. For example, the additional-insured’s claim can erode policy limits without any wrongdoing on the part of the named-insured. Such claims can also require the named-insured pay for deductibles or self-insured retentions on behalf of the additional-insured. Higher renewal premiums must also be recognized because the additional insured’s claim will drive up loss frequency and experience.
The designation of an additional-insured is a matter of coverage between the named-insured and their insurance carrier and is not simply a document provided by a broker. It is a modification of the underlying insurance policy. If the named-insured’s carrier will not accept additional-insureds or the policy does not provide the potential for coverage, it will not exist, regardless of what other documents exist.
Many general liability carriers offer endorsements addressing additional-insured status. These endorsements typically modify the underlying policy in circumstances where additional-insured status is regularly demanded, for example, in construction, vendor and other service agreements. But having the endorsement alone is not necessarily enough to secure additional-insured status. These policy modifications, and how they are interpreted between the insured(s) and the carrier have been the subject of countless lawsuits throughout the country.
As a repeated subject of litigation, it is easy to anticipate that the rules regarding additional insured coverage vary state-by-state. Despite those differences, there are some general risk management guidelines to consider whether you are trying to get, or must give, additional insured coverage.
- Know the policy.
Knowing the terms in a company’s policy, or the policy of someone granting the company additional-insured status, is crucial to ensuring the coverage exists. There are many types of additional insured endorsements and sections of policy language that can affect whether such status is available. Some differ by only a few words. Company owners or managers should educate themselves, or consult an expert, to clarify what these terms mean before agreeing to offer, or accept, a guarantee of additional-insured status. - Know the contract.
Whether additional insured coverage is available often depends on the contract. The scope of the contract should match the policy endorsements to secure additional insured coverage. Also, good contracts address what happens when a carrier refuses to grant coverage, offers a limited response, and the consequences for both. Add to that, certain states have anti-indemnity statutes that affect the scope of additional insured obligations, and it is easy to see that clarity of the contractual insurance obligations is essential. - Watch for length.
The period available for additional insured coverage can vary. The endorsement and contract language will determine whether a request to be named as an additional-insured is proper. Where the policy is occurrence based, and completed operations are covered within the endorsement, an additional insured demand can come years after a project is completed. It is important to understand the prospect for tail-liability. - Confirm scope and availability of coverage.
Failing to understand how policies react to an additional-insured can prove costly. Additional-insured status simply grants whatever coverage might be available to the named-insured. Large deductibles or retention amounts will need to be satisfied. Limits to legal defense, wasting limits, or cost-caps are also applicable to an additional-insured. Assuming that additional-insured status provides full protection is unwise. - Document properly.
While contacting a broker is a good start to securing additional insured coverage, it might not be enough. Documenting requests to the carrier itself for additional insured coverage is a best practice. And while it is important to secure evidence of additional insured coverage in the form of accord certificates, securing independent confirmation from the carrier itself is the only way to be sure. Trust, but verify.
