Insurance Advisory Newsletter – Understanding Additional Insured Coverage : January 2025
Understanding Additional Insured:
Customer contracts often require the policy holder to add the customer as additional insured to the service provider’s insurance policy. An additional insured is an individual or entity that is added to an insurance policy of existing entity to extend the coverages provided by the policyholder’s insurance (“Additional Insured”). This allows the Additional Insured to file claims under the insurance policy of existing entity in case they receive any claim in relation to subject matter of the policy. The concept is often used in business contracts and is common in industries such as construction, real estate, and service-based businesses.
Benefits of being added as an Additional Insured:
Risk Mitigation: One of the most important reasons to seek the Additional Insured status is to minimize risk for both parties. By including yourself as an Additional Insured, policyholder provides you with coverage for certain liabilities that could arise from actions of policyholder or its employees, subcontractors, or other agents.
Contractual Obligation: Many contracts, especially in industries such as construction and real estate, require that one party adds another as an Additional Insured. This is often stipulated to ensure that all parties involved in a project are adequately protected against any potential claims or lawsuits. Failing to comply with these contractual obligations can result in breach of contract and potentially serious legal and financial consequences.
Protection Against Legal and Financial Liabilities: Being added as an Additional Insured protects you from the financial consequences of claims arising from the work performed or services provided by the policyholder. This is particularly important when the work involves higher-risk activities, such as construction, where accidents or damages may occur.
Benefits of Cost Savings: In some cases, the Additional Insured status can be a cost-saving measure. If a claim is made against you that is related to the work or actions of the policyholder, the policyholder’s insurance may cover the legal costs, settlements, and judgments, relieving you of these expenses.
Clients Who May Not Have Their Own Coverage: If you do not possess sufficient insurance coverage required for the potential risks, adding yourself as an Additional Insured can protect both of you in the event of a claim.
Do’s and Don’ts for the policyholders before adding an entity as Additional Insured:
Scope of Coverage: Understand what coverage the Additional Insured will have and whether it covers the entity only or its subsidiary, affiliates etc. Ideally only the entity should only be covered.
Your Insurance Policy: Before agreeing to add an Additional Insured, it is essential to ensure that your insurance policy provides the coverage that meets the needs of both parties. If your policy has sufficient coverage limits and is appropriate for the type of work you do, it may be beneficial to add an Additional Insured. However, if your coverage is limited, you might need to adjust your policy before adding an Additional Insured. Once contractually agreed, the verbiage for Additional Insured will be added to the insurance policy as an additional endorsement.
Exclusions and Limitations: Be aware of any exclusions or limitations in your insurance policy that may affect the coverage granted to the Additional Insured.
Legal and Financial Consequences: Adding an Additional Insured may expose your insurance policy to increased claims, which could affect your premiums or your future ability to secure insurance. Ensure that the terms of the Additional Insured arrangement align with your long-term business interests.
Costs of Adding Additional Insureds: There may be an additional cost associated with adding an Additional Insured to your policy. It’s important to evaluate whether this cost is justifiable in terms of the risk transfer and the contractual obligations involved. Discuss these potential costs with your insurance provider to avoid surprises.
While it is important to understand the benefits of granting Additional Insured status, it is equally important to know when and why you should agree to add clients or other entities to your insurance policy. When a client is added as an Additional Insured, the Additional Insured is then granted certain protections under the policyholder’s insurance policy. However, the coverages received are usually more limited and restricted unlike the full-fledged policy of the policyholder.
How Named Insured, Additional Insured and Additional Named Insured are different
Named Insured | Named Insured means actual person or business actually named in the policy. There can be more than one named insured and you can usually find the same on first page of policy document. |
Additional Insured | It is usually referred to a person or business entity added to the policy through an endorsement. In general, endorsements will provide cover to the people or businesses named on them only for claims arising out of the acts or omissions of the primary insureds. |
Additional Named Insured | Additional Named Insured is a person or business that is named somewhere else in the policy. An Additional Named Insured will have the same rights as a “Named Insured” but typically won’t be responsible for the premium |