Additional named insured status, correctly understood and properly documented, can be the difference between a significant loss to your company and a small one. Or even no loss at all. But the operative principles are correctly understood and properly documented.
When risk management and company legal departments work together to understand and implement a reasonably disciplined process to secure and document additional insured status, a business will almost always reap meaningful financial and “cost of risk” benefits in the short to medium term. (If the paid claims component of your Total Cost of Risk (TCR) exceeds, on average, $1 million excluding workers compensation payments, you will likely reduce it by at least 20%, and perhaps more).
The basic concept seems straightforward. Your company can be named as an “additional insured” under a policy issued to someone else, thereby securing the benefit of risk transfer that you did not pay for yourself—at least directly.
Nonetheless, the scope, purpose and value of additional insured status are often misunderstood. Some companies that do pursue additional insurance rights from vendors and contractors mistakenly believe that having it relieves them of the need for their own independent policy coverage—an incorrect understanding that may well produce disappointment when a liability event turns out to be inadequately insured. Additional insured status is not a replacement for your own insurance. And on the other side of the coin, some companies wrongly assume that insurers “never pay” on additional insured claims, and therefore see no benefit warranting the effort required to obtain and optimize additional insured status. Both views are unfortunate.
What it really means to be an additional insured
As an additional insured on a third party’s policy, you still need your own policy and the cover it provides. This is because additional insured status doesn’t protect you from liability for your own actions or your own omissions. It protects you from liability imposed on you for the actions or omissions of the third party.
A classic application is so-called “premises liability”. You are the owner of the property where the construction accident occurred. The lawsuit claims that you are responsible for the negligence of the contractor you hired. If you have properly perfected your additional insured status prior to the accident, you may well be able to transfer most—even all—of the ultimate liability to the contractor’s insurance. The savings achieved in that transfer means your bottom line is saved from a hit—and you further benefit from avoiding invasion of your deductible or SIR and the erosion of an aggregate limit under your own coverage—keeping that insurance available for future claims.
And many claims include allegations of negligent acts or omissions by both your company and the third party. Additional insured status is valuable here too. Obviously, it is better to have two insurers available to settle a claim than only one. And, if your legal group—maybe at your suggestion—has negotiated a term in the contractor or vendor agreement providing 1) that you will be named as an additional insured under its pertinent liability policy, and 2) that its policy, and not yours, will be primary and the first to apply in the event of a claim, you can further minimize your ultimate financial exposure.
What it takes to perfect and document your additional insured rights
Some companies may feel it is not worth the effort to secure additional insured status because insurers simply don’t pay claims submitted under it. They are just wrong. Ask any insurer claims department. They don’t like to, of course, and they wish their underwriting departments would be more circumspect in affording it. But they do pay when it is properly secured.
We find that the most common reason that additional insured rights are not correctly secured is that, well, it can be tedious and irritating work to do it right (but it doesn’t really have to be that way), and it requires collaboration between the risk management function and the legal staff addressing commercial contracts for the company.
“Doing it right” means doing it systematically across all contracts that present risk of property damage or bodily injury liability to your enterprise. Not an ad hoc approach looking only to the largest contracts or projects of the company. Risk managers and lawyers know that the $10 thousand, once yearly tank cleaning service may be the vendor agreement that produces the $10 million accident and resulting liability.
The key elements of an effective “additional insured” system are:
- Standardized contract language that the legal and business groups make certain appears in all vendor and contractor agreements. This language, best included in a contract section entitled “Vendor or Contractor Insurance Requirements”, should clearly specify: a) the kind of liability insurance to be maintained by the vendor/contractor; b) the amount of the insurance to be maintained, with an eye to erring on the high side of available insurance; c) the express inclusion of your company as an additional named insured under the vendor or contractor’s policy; d) that the vendor or contractor’s insurance is agreed between you to be primary over any other insurance that might also respond to the liability; and e) that evidence of the existence of the required insurance be furnished in a completed and returned certificate of insurance in the form supplied by you, together with a copy of the actual insurance policy of the vendor which by its terms and/or special endorsement explicitly complies with a), b), c) and, if possible, d) above.
- A process for monitoring the collection and safekeeping of the outstanding certificates and matching policies once they are issued. For companies with large numbers of vendors and contracts, digitization of these documents—or even the entire process—is doable at reasonable expense, and probably essential to real effectiveness. A quality insurance technology provider can lead you in this process, and even manage it on an ongoing basis if you desire.
- Closely aligned to the above point, a method for confirming ongoing compliance over time with the insurance provisions of the agreements. This means a process to update the records at insurance and contract renewal dates so that you know your additional insured status has been properly maintained and is current.
Excellence in risk management entails more than the transfer of risk to your own purchased insurance. By applying discipline and working together, legal departments and their risk management colleagues can nail down secure additional insured status. Every dollar you effectively transfer to a vendor or contractor’s insurance, is a dollar that improves your company’s bottom line. What better way to show your value to the organization?
Joseph W. Bauer is the Principal of Bauer Advising LLC. Bauer Advising offers
independent help to companies in understanding an optimizing their insurance, and facilitates the settlement of large coverage issues. It also assists companies by matching insurance technology resources to risk management and claim management needs. For more about our Technology Resources Matching, read more here.