Commercial General Liability and the Additional Insured: Do you really have the coverage you need?
What are the pitfalls of being named on a General Liability insurance policy as an Additional Insured?
Naming an Additional Insured:
Many times a business is asked to name another company as an additional insured on their commercial general liability policy while they are engaged in a contractual relationship to perform work or provide a service. For instance, construction contractors and subcontractors routinely enter into this type of scenario.
If you are the company to be added as an additional insured you need to closely examine what protection you are actually deriving from this arrangement. It would be ideal to actually review the general liability insurance policy before entering into a contract. Unfortunately, it does not always work that way in the real world and the policy is often furnished after the fact.
Being named as an additional insured is a relatively simple task. Generally, the underlying contract will require the business performing work for the additional insured to name them as an additional insured on their Commercial General Liability insurance policy.
The performing company should contact his/her insurance agent or broker to have the additional insured named on their policy. This is accomplished by the carrier issuing a Certificate of Insurance, or COI, which names the recipient of the work as an insured on the policy. And voila, the additional insured has coverage.
Obtaining the needed coverage
Whether that coverage includes the work it was intended to cover, is an entirely different matter. A general COI is not sufficient to determine if the actual work to be performed under the contract is covered.
The insurance policy itself is the key to answering this question. You need to thoroughly read the policy, the exclusions and/or the ISO endorsement forms to determine:
- What type or scope of work does the contract require the original named insured to perform?
- Is that specific type of work covered and is it listed in the class code on the policy?
- Or conversely, is it excluded specifically by an endorsement?
If the work being performed is not either specifically included or excluded you need a determination from the broker, carrier or you own counsel to determine whether the work called for in the contract is covered BEFORE any injury or damage arises.
To obtain a true picture of the coverage provided it must be clearly communicated to both the broker and the carrier what type of work the original insured is expected to perform under the contract, preferably in writing. The agent may reasonably assume the insured is continuing to engage in the same business activities as he has in the past, unless you specifically inform the agent that a new work activity or type of work is being added.
For example, you contract with a company to build a shed and shed building is excluded as the work was not performed by the named insured in the past then the exclusion is preventing coverage under the policy. www.thebalance.com/insurance exclusions/.
So the parties need to address the exclusion by having it removed and obtaining an endorsement, supplement, rider or stand-alone policy. This essentially means that you are seeking additional coverage options which will more than likely trigger an increase in premium. You will need to address who is responsible for the cost of additional coverage. Generally this is the named insured or performing company. If this was not contemplated at the time of the original contract, the terms can be negotiated and the contract may be amended by agreement between the parties. Legal advice is highly recommended is this type of situation.
This information is usually conveyed by the named insured performing the work (as an AI cannot change the policy) directly to the broker, who then obtains quotes for coverage from the original Commercial General Liability insurance carrier or a specialty insurance carrier if necessary.
From the named insured’s perspective, although the company may not want to bear the cost of purchasing additional insurance, it certainly benefits them to have the correct coverage in place in the event of a claim.
Other General Concerns:
- The additional insured is not afforded the same level of protection as the named insured. Even though the business is now listed as the AI (Additional Insured) their rights are subordinate to the named insured and you may not have obtained adequate coverage amounts for the exact situation at hand.
- The additional insured is never entitled to more benefits than what the original insured is under their own policy. The additional insured’s recovery cannot exceed the policy limitations, and would need to have excess coverage of its own.
- The AI cannot change or cancel the policy the named insured. Only the named insured can request it.
- The AI can require that they be sent a complete copy of the policy including all endorsements, riders, supplements and exclusions from the carrier or agent directly, and that a notice of any changes made be sent to the AI at their address.
- The named insured has the right to object to furnishing the entire policy to the AI. The alternative is to ask for a copy of the additional insured’s COI and endorsement which specifies the contract work that is being covered rather than a general COI which does not contain this information.
Additionally, in the event of a claim on the policy, the insurance carrier has a general duty to defend the AI in case of a lawsuit, but this obligation is intensely fact specific and varies widely according to the legal jurisdiction and venue and the contractual terms of the insurance policy.
So, while it may be easy to obtain a Certificate of Insurance as an additional insured it takes a lot of attention to detail to determine if you really have the full coverage you intended to obtain.