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What’s In A “Named”?
The Additional Named Insured Versus Additional Insured Debate

By Gary D. McCollum
Parker, Poe, Adams & Bernstein L.L.P.

You are negotiating a contract for services, and the other side wants to be an “additional named insured” on your insurance policy. You have heard about “additional insured” status. What difference does it make if you are an additional named insured? The actual extent of the differences between these two terms can be summed up by the dreaded two-word legal axiom: It depends.

A named insured is a true owner of the policy. So, being an additional named insured essentially means two things. First, the administrative headaches that go along with owning an insurance policy will be a responsibility of the additional named insured in the event that the first named insured fails to live up to those responsibilities under the policy. For example, if the first named insured doesn’t pay the premiums, then an additional named insured could be left footing the bill.

Second, designation as a named party automatically grants full policy coverage, since “ownership” necessarily has its privileges. For example, an insurance policy can be worded to provide significantly less coverage to an “additional insured” than an “additional named insured.” Coverage can be limited in a variety of ways. The extent of the limitations will depend on the wording of any given insurance contract.

Do you want to allow your contractor to be an additional insured or additional named insured on your policy? What if you are the contractor? Do you want that status on your customer’s policy? By considering some of the major issues that arise between named insureds and additional insureds, you can become more informed and avoid unwarranted extensions or limitations of your insurance coverage, regardless of which side of the table you are on.

Additional insureds, instead of being “owners” of the policy, are parties to whom the policy holder has chosen to extend coverage. As an additional insured, a party should attempt to maximize coverage by trying to mirror the terms granted to the named insured as closely as possible. While negotiating for as much coverage as possible would be a primary goal, becoming an additional insured also avoids the costs and responsibilities that accompany “owning” an insurance policy.

Still, several pitfalls exist in the process of procuring “additional insured coverage,” and these traps are not always created by the parties. Below are some of the more frequent points of contention among parties seeking and granting “additional insured coverage.” Before becoming an additional insured or agreeing to allow another party to be an additional insured on your policy, consider:

  • First and foremost, whether seeking “additional named insured” or “additional insured” coverage, a party seeking to be included in a policy should demand certificate holder status. Under most insurance policies, a notice of cancellation is only provided to the “first named insured” or “named insured,” as the owner of the policy. To avoid being left out of the loop, additional parties should request certificate holder status at the time they are added to the policy. This language entitles you to receive notice of policy cancellation. Conversely, leaving this language out of the agreement easily could result in a disappearance of coverage without notice.

  • Additional insureds must share the aggregate policy limits with the policyholder. Both parties should consider this point when assessing the need for separate or supplemental policies on a project.

  • If you are looking to become an additional insured, two types of coverage usually come to mind. You may be seeking insurance for the policyholder’s indemnity obligation to you, or you may be seeking insurance coverage for claims resulting from your own involvement in the project. You may be seeking coverage for both. If an additional insured is looking for protection in both situations, be sure that the policy reflects that decision. Often times, insurance companies and policyholders will draft language into a contract that only allows the additional insured to recover policy proceeds in situations where the policyholder owes an indemnity obligation to the additional insured. If an additional insured was seeking general liability coverage for its own actions, this type of provision would probably result in a denial of coverage. Meanwhile, the named insured would continue to receive full insurance coverage under separate coverage provisions for “owners” of the policy.

  • Parties often enter service agreements specifying that a minimum amount of insurance is maintained by the named insured. An additional insured needs to be sure that neither the service agreement, or the policy, can be read to turn that minimum amount into the insurance company’s maximum extent of coverage to the added party.

  • An additional insured needs to be clear on the type of policy the named insured owns. If the named insured is utilizing a fronting policy or has high deductibles, an additional insured could be left out to dry if litigation arises. Fronting policies start with insurance policies issued by a major carrier (i.e., a front). The fronting policy is created when the carrier then sells off the risk associated with the policy to a company that typically would not be qualified to write an insurance policy on its own. A named insured will sometimes use these fronting policies as a method of obtaining legally required insurance paperwork, while at the same time becoming self-insured and accepting the accompanying risks. Consequently, an additional insured should make sure that a true primary liability policy, with a duty to defend both parties, exists.

  • In most cases, an additional insured already has a general insurance policy and is seeking inclusion on the named insured’s policy in order to provide a financial buffer for a specific project or aspect of business. However, many additional insureds discover far too late that their status as additional insureds requires them to apply their own independent, general claim policies first or on a pro rata basis with the named insured’s policy. If seeking additional insured status, a party should avoid this type of contractual language by requesting that the named insured’s policy be applied, in full, before the additional insured’s individual insurance policies can be touched.

  • An additional insured should require explicit wording that applies the policy to any liability connected to presence on their property. Insurers often try to limit the policy coverage to injury or damage specifically caused by an additional insured’s work. Without a clause that warrants broader coverage, an additional insured could be stuck holding a very expensive bill.

  • While an additional insured typically maximizes coverage by mirroring the terms of a named insured, an exception to this rule exists as well. When an additional insured looks to a named insured’s policy for coverage, insurance companies sometimes will argue that the exclusions from coverage are equally applicable to a named insured and any additional insureds.

For instance, many policies refuse to cover claims when the policyholder’s own employees are injured by the employer. Insurance companies have successfully argued that this “employee exclusion” applies to all employers, and all employees, connected with the insurance contract. As a result, an additional insured can be denied coverage for injury to both its own employees and the employees of the named insured. Additional insureds should carefully review the contractual exclusions that exist under the named insured’s policy terms, and clearly define each party’s individual exclusions from coverage.

Conclusions

Thoroughly review both the service agreement and the insurance policies in question before becoming or accepting an additional insured. Each of these documents is capable of creating insurance gaps for an unsuspecting party. The key to avoiding these traps is a clear understanding of each party’s expectations and careful review of those documents to insure that these expectations are accomplished.

ABOUT THE AUTHOR

Gary D. McCollum is an associate in the Torts, Trial and Insurance group in Parker, Poe, Adams & Bernstein’s Charlotte office. Reprinted with permission.

riskVue | The webzine for risk management professionals
July 2004



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