Additional Insured: Not Just a Name

As a business owner, from time to time, you may enter into relationships with businesses, government agencies, other entities, or individuals. These relationships may expose you to risk, such as liability arising from another party’s negligence or faulty/hazardous products.  “Hold harmless” agreements—provisions where one party assumes liability by indemnifying the first party—are a popular way to protect your company against potential liability; however, in many situations, it may be best if you are also covered as an additional insured by an insurance policy owned by that party.

For example, suppose you are doing business as Murray’s Contracting Company, a general contractor, and you enter into a contract with Homestead Development, a high-end building development company, to build 15 new homes. You hire J.J. Electrical Company, a subcontractor, to provide the necessary wiring and other electrical work for the project. To protect you from any claims that may arise from J.J. Electrical Co.’s negligence while working for you, you may want to require J.J. Electrical Co. to list you as the additional insured on its insurance policy.

Remember that your original contract is with Homestead Development. If negligent wiring by J.J. Electrical Co. results in a home fire, Homestead Development would most likely turn to you for compensation. You may possibly be protected from this claim if you are the additional insured under the policy of J.J. Electrical Co., the named insured.

Potential Concerns

As the additional insured under J.J. Electrical Co.’s insurance policy, you may want to be aware of the following four potential concerns:

1. Policy Cancellation. J.J. Electrical Co., or its insurance company, can cancel, adversely change, or refuse to renew the insurance policy at any time without notice to you as the additional insured. To ensure you are properly notified of these types of events, consider requesting an insurance certificate that provides a notice period—generally 30 days. If such notice will not be granted, it makes sense to request that a new certificate is presented periodically until the project or contract is complete.

2. Inadequate Liability Coverage. J.J. Electrical Co.’s liability limits may be insufficient to protect your exposure as the additional insured. Consider requesting limits that will help safeguard your interests. In addition, review your own insurance policy to ensure you have adequate liability coverage. Your status as an additional insured on another’s policy is an extra level of protection; it should not be considered a substitute for the protection you have arranged with your own insurance provider.

3. Excess Policy. An insurance company may deem your coverage as the additional insured under J.J. Electrical Co.’s policy to be in excess of the coverage under your own insurance policy. Thus, your insurance policy would be considered the primary policy for settling claims, and J.J. Electrical Co.’s policy would take effect only after your own policy limits have been exhausted. To limit your exposure, consider requesting an insurance certificate that specifically states J.J. Electrical Co.’s policy is primary with respect to your status as the additional insured.

4. Other Exclusions. Coverage for hazards, such as underground construction, landfill operations, or explosives, may be excluded from J.J. Electrical Co.’s policy and could therefore negate your coverage as the additional insured. To help ensure your interests are properly safeguarded, consider reviewing J.J. Electrical Co.’s policy for inclusion of this type of coverage.

Naming you or your business as the additional insured on another party’s insurance policy can help shield you from liability due to negligence or faulty products. However, it may not necessarily provide you with all the coverage you need. So, if you are listed as the additional insured on another party’s insurance policy, confer with an insurance professional to evaluate your risks and to familiarize yourself with how the policy will respond under various scenarios. Please contact our office with any questions you may have.

 

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