Sometimes a contract calls for naming a party as an additional insured. On other occasions, it requests additional named insured status. So, what’s the difference and what are the advantages and disadvantages to the parties?
Any agency that deals with commercial lines is familiar with the daunting
task of processing and explaining additional insured endorsements and
certificates. Every now and then, though, a request comes in to name a
party as an additional named insured. Just what is the difference between
a “regular” additional insured status and that of an additional named insured?
In general, being a named insured gives that party greater rights under
the policy. However, there are also downsides in that there are also
greater responsibilities. Even more important, from the insured’s and the
insurer’s perspective, additional named insured status is something to be
avoided unless absolutely necessary.
Below, faculty member Charles Comiskey points out the general advantages
and disadvantages of AI status, along with some compelling reasons why
additional named insured status is usually not a good idea.
An additional named insured is essentially the same as the policyholder.
Think of an additional named insured as a subsidiary or similar firm.
There is much more than a contractual relationship (excepting some
management contracts). Under these circumstances, this status is probably
appropriate, but it rarely is under the circumstances in which agents are
too often asked to name a party as a named AI.
An additional insured is where two arms-length parties have agreed
contractually that one party is to be added to the other’s insurance. That
party usually cannot be added to a liability policy as an additional named
insured. It should be noted that this does not apply to various property
coverages, most notably builder’s risk. When such requests are received
from arms-length parties, it most often occurs because the requestor
doesn’t understand the signficance of named AI status.
There are numerous advantages and disadvantages of additional insured
status.
Advantages include, but are not limited to:
1. To the degree that coverage is provided, there is no question of
enforceability as is so often the case with indemnification.
2. The additional insured has direct rights to defense from the named
insured’s insurance carrier, and must be provided a separate defense.
Defense of an additional insured is paid in addition to the limits of
liability.
3. The additional insured may, in fact, have broader coverage than the
named insured under certain circumstances. There may be restrictive
coverage conditions that would apply to a named insured (including an
additional named insured) that wouldn’t apply to the additional insured
since he/she is not a party to the contract.
4. The additional insured obtains personal injury coverage that is
usually excluded by a contractual assumption.
5. Depending upon the jurisdiction, the additional insured may be
provided coverage for its sole negligence if it has any causal
relationship with the named insured. ISO’s new AI endorsements seek to
restrict that as many states currently do by law.
Disadvantages include, but are not limited to:
1. There are over 30 ISO additional insured forms. In addition to that,
there are a seemingly limitless number of company-specific additional
insured forms, blanket and/or manuscript forms. So just saying “additional
insured” means almost nothing.
2. The additional insured endorsement provides only a limited amount of
coverage. The endorsement must be read to determine how limited it is.
Many forms are becoming increasingly limited. At least one carrier has
changed their form three times in the past year. Any guess as to how many
of those changes were in the additional insured’s favor? And if
unfavorable for the additional insured, what does that do to the named
insured who may find himself/herself in breach of contract?
3. Unless requested otherwise, the additional insured does not extend to
officers, directors, employees, etc. of the additional insured. Contrast
that with additional named insured status where that could happen. Ask
yourself, as the insurer or even the purchaser of the policy…do you want
to broadly enlarge the scope of “Who Is An Insured” under you policy?
4. Unless handled carefully, additional insured status could trigger the
other insurance clause.
5. The limits provided by the policy on which the additional insured is
added could be eroded or exhausted by claims, or that carrier could have
become insolvent, or the policy could have been cancelled with no notice
to the additional insured (currently being litigated in some
jurisdictions). The same could be true if there is an umbrella policy.
6. An additional insured usually receives a certificate of insurance as
“proof” of coverage. This is an unenforceable document.
