October 10, 2017

The Additional Insured Language in Your Contract May Matter More Than You Realize.

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Did you know that case law shows there is a significant difference between a sentence requiring you to be listed as an additional insured on the certificate versus you being endorsed to the policy as an additional insured?

For some, this may be a well known fact. But, for others that aren’t as familiar with all of the nuances that come along with insurance language, not knowing the difference can cause big problems for an organization.

In this post, we’ll explore the meaning of contract language when it comes to additional insured status and what to check to ensure your organization is protected every single time, regardless of the nuances that can come along with confusing insurance language. Let’s get started:

A Quick Review of Additional Insured

For starters, let’s first review what we mean by the term “Additional Insured” as this is a key element to understanding the rest of the article. Investopedia defines this often-used insurance term in the following way:

“A type of status associated with insurance policies that provides coverage to other individuals/groups that were not initially named. After endorsement, the additional insured will then be protected under the named insured’s policy and can file a claim in the event that they are sued.”

The article goes on to provide an example:

“For example, a business may ask a contractor to add them as an additional insured in their general liability policy. This is to protect the business in the event of any legal claims arise as a direct result of the contractor’s work/presense.”

There are many reasons an entity may find it advantageous to seek additional insured status, but the most common reasons include (as cited from an article authored by Robyn Anderson):

  1. To fund or reinforce an indemnity obligation;
  2. To prohibit subrogation by the named insured’s insurer against the additional insured for the additional insured’s own fault or negligence;
  3. To directly pay defense costs of the additional insured;
  4. To reduce impact on the loss history for the additional insured.

Now that we’ve covered the basic definition of an additional insured as well as the reasons that an entity would desire this status, let’s explore the common differences and potential outcomes, depending on the state’s ruling of the language.

Even The Slightest Difference in Wording Has Caused Opposite Outcomes

IRMI explains it well in a recent article which states that blanket additional insured endorsements typically require that two main criteria must be satisfied in order to trigger coverage:

  1. There must be a written contract requiring additional insured coverage
  2. The loss must be connected to the named insured’s acts or omissions

The article explains that occasionally, disputes arise regarding the written contract criteria, as it is not always clear whether any contract will do or whether both the named insured and the intended additional insured must be parties to the contract. In fact, this nuance is quite common in the construction industry as it’s a common practice for risk to be transferred “downstream” to subcontractors and others who are hired on for projects. When a problem arises, though, states have ruled in different ways, making it even more confusing for organizations seeking the additional insured status.

IRMI provides an example:

A project owner may enter into a contract with a general contractor that obligates the general contractor and all subcontractors to name the owner as an additional insured on their general liability policies. Even if the general contractor, in turn, requires the subcontractors to name the owner as an additional insured and the subcontractors procure policies containing blanket additional insured endorsements, it is not always clear that the subcontractor’s insurer will be obligated to provide additional insured coverage to the owner due to the absence of a direct contract between those parties.

Because of this confusion, certain states are on opposite sides of the fence as it pertains to whether direct contractual privity is required for additional insured endorsements to be valid. For example, several cases from Connecticut, Maine, and Texas held that contractual privity is NOT required to satisfy certain additional insured endorsements while courts in New York, Illinois, and Louisiana have held that privity IS required where certain additional insured endorsements are involved.

Prevent Additional Insured Oversight

To avoid issues like the above, IRMI stresses the importance that all parties (especially those doing business in jurisdictions that enforce the direct contractual privity requirement) should review their own policies and the policies of any downstream parties to ensure that their additional insured endorsements do not require contractual privity and establish a hierarchy of coverage based on clear policy language.

When it comes to the many nuances of insurance tracking and compliance, it’s important to rely on insurance professionals who are aware of case law and the complexities that even those who have been doing compliance for years may not be aware of—until there’s a problem, of course. Insurance professionals, like those at myCOI, can review additional insured endorsements and all insurance tracking policies and corresponding issues to ensure your organization is always protected, no matter what.

myCOI exists for one reason: to help you handle the everyday tasks of managing certificates of insurance and protecting your company against underinsured claims, costly litigation and failed audits. Their insurance certificate tracking software is an easy-to-use, cloud-based solution developed and supported by a team of insurance professionals and is built on a foundation of insurance industry logic to automate the COI communication process and ensure you remain protected.

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