The difference between a named insured and Additional named insured could be who pays a million dollar loss. Lately a disturbing contractual trend is emerging whereby those at the top of the food chain, (typically owners), are asking to be named insured on Developer’s and General Contractor’s insurance policies. The attorney’s on the other side of the transaction feel that they are getting better protection and coverage if they are “named insured” versus an “additional insured”. There is also a misconception that if you have “named insured” status you had the right to written notice of cancellation. While true years ago, now the carrier is obligated to make a best effort only to the first “named insured”.
A knowlegable risk manager or insurance consultant would politely suggest the contrary is the reality, with the result quite often being coverage that would ordinarily not be excluded for the very events you are trying to protect, are disclaimed simply because the wrong category of insured is used to list the entity on the Contractor’s policy.
A Brief Discussion on Various Categories of Insured’s :
Named Insured under a Commercial General Liability policy is the person(s) or organization (s) in whose name the policy is written-in general terms, the person(s) or organization(s) that has purchased the coverage. That person or organization will be identified on the declarations page of the policy, in the blank space provided next to “Named Insured”. They may also be referred to throughout the policy as “you” and “your”.
Additional Insured’s are typically other persons, organizations, municipalities, or lenders who do not have named insured status, or automatic insured status that may be added to the commercial general liability policy by means of an additional insured endorsement. For details on which Additional Insured endorsement to useclick here: All Additional Insured Endorsements Are Not The Same. These endorsements are used to extend insured status and confer coverage based upon their business relationship with the Named Insured, or the named insured’s contractual obligation to provide them with insured status under the policy. All of these Additional Insured’s have different rights and duties from those conferred on the policies Named Insured’s which could have a substantial impact on coverage and coverage triggers contingent on what the Category of Insured is.
Automatic Insured’s are people or parties that have “insured status” under the policy, but not named insured status. Under Section II – Who Is An Insured these parties and people are typically defined as follows: ( Consult Section II of Your Policy for Your Carrier’s Definition.)
- The spouse of an Individual Named Insured
- Partners and Joint Ventures in a Named Insured Partnership or Joint Venture. (Note the Joint Venture must be listed as a Named Insured on the policy)
- Members and managers of named insured limited liability company.
- Officers, directors, and stockholders of a named insured corporation or other named insured organizations.
- Trustee of a Named Insured Trust
- Employees and volunteer workers of the named insured business.
- The named insured’s real estate manager
- Any person having proper temporary custody of a deceased named insured’s property.
- The deceased named insured’s legal representative.
Both attorney’s and the insurance brokerage community, sadly too often do not properly categorize insured status on the policy. What everyone overlooks is that the subtle difference between Named Insured and Additional Insured can fail to trigger coverage for the very “named insured’s “ the policy was designed to protect, or fail to trigger coverage for the listed entity because they are improperly categorized within the policy.
A Construction Defect claim is a perfect example of where coverage that would ordinarily apply would be excluded because the category of “Insured Status” was incorrect. If the property owner requests by contract to be listed as a “Named Insured” on the Developer / G.C.’s policy, and a construction defect claim emerges whereby the flashing was incorrectly installed on the façade of the building, resulting in various leaks throughout the building the liability carrier who insured the general contractor/developer will deny coverage under the “your work” doctrine which is a typical exclusion under the general liability policy. Since the owner is now a “Named Insured” as opposed to being the “Additional Insured” the construction defect (flashing) is now considered the owners work, and thus excluded. If they were correctly listed as additional insured’s then the defect would remain the General Contractor’s work, and the additional insured would enjoy coverage. Damage to various categories of property do not apply to an additional insured with respect to owned property (Exclusion J). This preserves coverage for the damage to the additional insured’s property or premise. (This is a simplified scenario that I am using to illustrate a point. There are several contingencies that I won’t bring in as they are superfluous to the point.)
Another brief example would be the Contractual Liability carve out. In a typical general liability policy contractual liability is excluded EXCEPT FOR. The policy then adds Contractual Liability back in under the exceptions section of the Coverage A exclusions; notably Part F the definition of “Insured Contract” does NOT apply to additional insured’s; therefore no coverage would apply to liabilities assumed by the Additional Insured in a hold harmless agreement UNLESS it exists within a contract that otherwise qualifies as an “Insured Contract”. Thus if the Owners Entity is a Named Insured on the contractors policy , then the Contract (including Indemnity) would not qualify as an Exception under Part F, which means the initial Contractual Liability exclusion who take hold. Bottom line do NOT add the Owner’s entity as a named insured, period.
Another by product of improper use of “Insured Status” emanates from the “Cross Suits Liability Exclusion” which states if two “Named Insured’s” litigate against one another, no coverage (defense nor indemnification) will be provided. Thus is the owner of a property is listed as a “Named Insured” on the General Contractor’s /Developer’s insurance policy, and they owner brings suit for some reason against the General Contractor, the General Contractor’s insurance coverage would not be triggered because both parties are “Named Insured’s “ on the same insurance policy. Coverage would be disclaimed via the “Cross Suits Exclusion”.
If you have two parties; an owner, and a general contractor, where the owner has required in their written contract that they must be a “named insured” on the general contractors policy; this situation becomes an acute problem if the owner sues the general contractor for whatever the reason. Since they are both named insured’s on the policy, the cross suits exclusion would disclaim coverage for the very general contractor and situation the coverage was purchased for since they are both “named insured’s on the policy. Remember insurance is simply a mechanism to finance risk or a loss. The terms of the contract dictate when funds can and will be released to pay the loss. If coverage is not triggered, then the loss is not transferred or financed, resulting in an on balance sheet loss for the G.C. because they must pay from their own pocket., perhaps the owner as well.
A perfect example of this situation are some of the contracts that were issued by certain city agencies or Non Profits. In certain contracts the Non Profits were requesting in their contracts that they be specifically added as “Named Insured’s” to the insurance policies of the Developer’s and Builders they do their deals with. In speaking with a few of these Non Profits at they stated that “their attorney advised them that they should be listed on the policies as “Named Insured’s”.
One of many pet peeve’s of mine, I do not dispense legal advice as I am not a member of the bar and realize my limitations with respect to my area of practice, I only wish that attorney’s would heed the same advice. Their business is Law, mine is Risk Management & Insurance. What works best for the client is when the two professions collaborate in tandem to achieve the desired result for their client’s.
I know many Metro NY based development companies and general contractors that not only have the language in their contracts but also have the non Profits as well as other entities listed as “named insured” on their corresponding insurance policies leaving a huge gaping hole. If they ever get into direct litigation with one of these Builder Developer’s, the possibility exists that there will be NO pool of capital (insurance) for defense and judgment
provided by those insurance polices thus subjecting both the Non Profit and the firms they do business with uninsured losses.
So What The @#!* DO I Do Now !
Pull your current insurance policy and look at your named insured list. If you don’t have an ownership interest in an “Additional NAMED INSURED” , and there is a possibility of some type of squabble that could result in litigation, then remove them immediately from the policy, irrespective of the contract. Insurance is a pool of capital that you may need access to. That is your number one priority. Simultaneously I would contact the organizations you are removing from your policy, forward them this article and request an addendum to the contract that corrects the insured status so the transaction remains consistent.
A simple rule of thumb, do not list any direct entity of which you do not have an ownership interest in as a “Named Insured” on your insurance policy. The contract itself should not be the sole vehicle to establish “insurable interest”. The second litmus test; if this entity sues me, will the Cross Suits Exclusion, or other insurance contract provisions prevent the policy from being triggered thus excluding coverage whereby it would have existed if the “Insured Status” were different. If the answer to either of those questions is yes, then push back and offer only “additional insured status”.
Lastly run the question past your insurance advisor, if they blink more than three times call me, I will be happy to review this conundrum.
