How Insureds and Additional Insureds Impact Your Insurance

APRIL 4, 2023

Understanding who is an insured and who’s an additional insured can have a major financial impact on your policy’s coverage. A review of named and additional insureds on your policy ensures compliance with contracts and prevents uncovered losses.

There are two major categories of insureds under a general liability policy. It is important to understand the distinctions between them, particularly when your business is contractually agreeing to extend insured status to another party:

• Named insureds are individuals or entities to whom the policy is issued. Named insureds typically have more rights and responsibilities than other insureds.
• Additional insureds are third parties that require insured status in conjunction with a business relationship.

Common categories of additional insureds looking for protection under the insured’s policy can include:

• Project owners
• Lessors
• Business partnerships
• Vendors

Additional insureds can be added to policies via endorsements, of which there are many available forms, and they provide different levels of indemnification depending on which is used.

While naming an entity or individual as an insured or additional insured on a general liability policy grants certain rights and responsibilities, a lot of businesses provide or request additional insured status without understanding the risk-transfer or risk-acceptance decisions being made. Therefore, careful consideration is needed when deciding whether to provide additional insured status.

Policyholders should recognize that additional insured status provides the right to defense coverage if the additional insured is pulled into a lawsuit as the result of the named insured’s negligence. Since the additional insured can file claims against the policy, they can also dilute policy limits for the named insured. The number of available additional insured endorsements — and differences in how they extend coverage — means that without careful attention to detail, many agents may not select the most appropriate endorsements to achieve the goals of their clients.

Additional insured status is not a substitute for a well-designed contract. Regardless of the direction of risk transfer, consideration must be given not only to the lines of coverage and limits required, but also to indemnity provisions; waivers of subrogation; liability limitation clauses; and how additional insured status is requested. A single point of failure in the contractual risk transfer process can lead to uncovered losses, imperiling the insured’s financial position.

Example I

USI recently worked with a manufacturer whose vendors were required to be listed as additional insureds for product liability. After reviewing the manufacturer’s contracts and policy, we discovered that they were listing their vendors under the incorrect additional insured endorsement.

In the event of a claim, coverage could be denied — leaving the manufacturer out of compliance with their own contract as well as financially liable for defense costs and any adverse judgment.

Once they became our client, we made sure they had the correct additional insured endorsement, which brought the manufacturer into compliance with their contract and eliminated a gap in coverage up to the policy limit of $2 million.

Example II

A subcontractor was concerned with the risks associated with contractual compliance that required them to provide coverage for both the general contractors and project owners.

USI reviewed their current policies and contracts and saw that their policies didn’t properly address the additional insured requirement, leaving them exposed to an uninsured loss.

USI was able to add the appropriate additional insured endorsement, eliminating exposures to uncovered losses and legal fees up to the policy limit of $1 million.