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Additional Insured Coverage - What is it?

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Businesses work with other businesses, that is the nature of our economy. A contractor builds a house using the work of sub-contractors who provide different services, materials, and labor to the project. The businesses promise to do this work by contract or agreement. All of the different companies may be at the same place at the same time.

How does your business insurance work to protect against the risk of some other company, vendor, or sub-contractor causing damage to people or property of the mutual customer?

This is where the additional insured endorsement comes in. One party will add the other party as an “additional insured” on their commercial liability business insurance policy. Now, this is a general article and the case law pertaining to additional insured coverage and indemnity agreements differs by state and you must work with a competent local attorney and competent insurance professional if your business involves a great deal of work with other businesses involving contracts and agreements. For example, event promoters, construction contractors, commercial landlords, and any business that involves sub-contractors or independent contractors.

By adding an entity to your policy as an additional insured you are protecting that entity against your company’s negligence. By having another entity add your business as an additional insured that company is protecting you against their negligence. Let’s look examples:

You run a construction company. Big General Contracting contracts with your company to lay out all the driveways and side walks on a project. The contract requires you to add Big General Contracting to add them as an additional insured – and, you do. The cement is poured and a visitor slips and falls in a hole in the cement walk. The pedestrian sues your company and Big General Contracting. Your insurance would cover Big General as an additional insured.

Same example above, but your company sub-contracted the side walks to Third Contract Company. Your contract with them requires them to add your company as an additional insured. The fall occurs as a result of Third’s negligence. The pedestrian sues your company and Third. Third’s policy covers your company as an additional insured.

Finally, if the pedestrian sued all three companies, your policy would cover Big General as an additional insured and Third’s policy covers your company as an additional insured. And, if Big General had demanded it by contract, it could very well be that Big General is also an additional insured on Third’s policy.

Additional insured status must be added by certificate and endorsement. That means there is a formal process to follow with your insurer and you must make sure those businesses you work with who claim to have added you have actually done so. Demand to see the actual endorsement and not just “proof” of insurance.

Additional insured status DOES NOT mean the additional insured does not need insurance. It means the additional insured has controlled the risk of others’ negligence and can rely on their own business insurance policy to protect against their negligence.

Additional insured status does not give the same rights under the policy terms as a “named insured” or “insured” and these are technical distinctions that need to be reviewed with local insurance professionals in the context of whatever state is applicable.

Whenever your business enters into a project with another business or contracts with another business on an endeavor follow these four general principals:

  1. Never assume the other business has liability coverage and obtain a certificate of insurance to verify their insurance coverage.
  2. As a part of a written contract, demand a copy of the additional insured endorsement and review it with your insurance professional and legal representative.
  3. Understand what your additional insured coverage status covers and look at your liability policy. There may be gaps in coverage that can be easily fixed (before the relationship starts).
  4. Read the contract requirements and write the contract requirements carefully to make sure your business is not jeopardizing its own coverage in agreeing to add additional insureds and know what you are extending when you agree to add additional insured. Sinilarly, know what you are demanding you’re your business asks for that status from another business on their business insurance policy.

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