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Additional Insured Coverage: Do you know what coverage you actually have?

You are the manager of Company ABLE.  You sign an agreement with Company XENON that requires it to provide coverage under its Commercial General Liability Policy (“CGL”) to Company ABLE as an additional insured.  The insurance agent for Company XENON sends you a Certificate of Insurance that shows the limits and type of coverage under Company XENON’s CGL policy, and specifically states that Company ABLE is an additional insured.  What type of coverage does Company ABLE have?

The issue of additional insured coverage comes up in numerous types of contracts between  persons or organizations, including businesses large and small and government entities.  Contracts for services, goods, or rental of real and personal property pose the risk that one party will be liable for the acts or conduct of the other party to the contract.  The requirement that one party provide coverage to the other party as an additional insured lessens the financial risk of loss to the party requesting the coverage, in this example Company ABLE.   However, the question is what protection is provided to Company ABLE as an additional insured.

Does the Certificate of Insurance provide assurance of coverage?

First of all, if you look closely at the Certificate of Insurance you will find language to the effect that the Certificate of Insurance is not a contract and does not amend, extend or alter coverage under the insurance policy.  So can Company ABLE rely on the Certificate of Insurance for coverage as an additional insured?  Based on a recent Minnesota statute, which specifically states that a certificate of insurance does not provide any contractual rights to a third party (someone other than the policyholder), the answer is no. Although there are cases in which Minnesota courts have held that a certificate of insurance binds the insurance company to provide coverage to an additional insured, those cases were decided before the new statute.   Therefore, to be prudent, Company ABLE should require that Company XENON provide a copy of its CGL policy so that Company ABLE can confirm that it has coverage as an additional insured under Company XENON’s policy.

Further, even if the Certificate of Insurance arguably provides a basis for Company ABLE to make a claim as an additional insured, the insurance certificate will not spell out the type or extent of coverage provided to Company ABLE as an additional insured.  Additional insured coverage is added to a CGL policy by endorsement, so Company ABLE should review Company XENON’s policy to determine that there is an additional insured endorsement, and the type and scope of additional insured coverage provided.

It is not unusual for the owner of the CGL policy to object to the request for a copy of the entire policy.  If Company XENON in this example declines to provide a copy of the entire policy, Company ABLE should request a copy of the additional insured endorsement.  Without reviewing the additional insured endorsement, Company ABLE cannot know the extent of coverage that is being provided by Company XENON’s policy.

What does it mean to be an Additional Insured?

An additional insured is a person or organization, in this case Company ABLE, which is provided limited coverage by endorsement to a CGL policy purchased by another person or organization, in this case Company XENON.  Company XENON is the named insured.

When requiring additional insured coverage for Company ABLE, two things that you should keep in mind are that: 1) the status and rights of an additional insured are different than the status of a named insured, and 2) there are several forms of additional insured endorsements so it is important to determine the scope of coverage being provided.

As the named insured Company XENON has more rights under its CGL policy than Company ABLE.   Company XENON has primary coverage for claims arising from its acts or conduct.  Further, Company XENON has rights that include the right to change the policy, to cancel the policy, to return of premium, and to receive notice of cancellation, non-renewal, or material change in the policy.  As an additional insured Company ABLE does not step into the shoes of the named insured Company XENON.  Company ABLE’s rights under the policy are usually limited to the right to receive the benefits of the coverage as described in the additional insured endorsement, and to make a claim directly against Company XENON’s insurance company.  Therefore the contract between Company ABLE and Company XENON should require Company XENON or its CGL insurance company to provide notice to Company ABLE of changes in the CGL policy that affect Company ABLE’s coverage as an additional insured.

a.   Vicarious Liability

As to the scope of coverage provided to Company ABLE, you need to determine what level of coverage is provided by the endorsement to the Company XENON policy.  The most basic level of coverage would protect Company ABLE from exposure to liability for acts or conduct of Company XENON.  This is known as protection from vicarious liability, and many insurance companies seek to limit the coverage for additional insureds to vicarious liability.  Examples where this would apply would be a claim or lawsuit against a general contractor for actions of a subcontractor, a landlord for actions of a tenant, a lender for actions of the borrower, or a lessor for actions of a lessee.  There would not be any coverage for Company ABLE as an additional insured if Company XENON is not involved in the claim.  In that circumstance Company ABLE would need to submit a claim under its own CGL policy.

b.   Joint Liability

A more common scenario, however, is that a claim against Company ABLE would assert that Company ABLE and Company XENON are jointly liable or that both are partially at fault.  You need to decide at the stage of preparing the contract whether to require Company XENON to provide additional insured coverage in this circumstance or whether you are willing to accept additional insured coverage for Company ABLE solely for vicarious liability.  If the contract does not specify the scope of coverage it may be limited to vicarious liability.  Often the scope of additional insured coverage is not specified in the contract, and disputes with insurance companies can arise over the scope of coverage in the additional insured endorsement.

c.    Primary Liability

Although it would not apply to Company ABLE, there are circumstances where the additional insured has primary liability coverage, which is coverage that protects the additional insured against claims arising solely from the additional insured’s own actions.   Primary coverage can be provided to an additional insured where it is acting on behalf of the named insured. For example, members of a club are named as additional insureds on the club’s CGL policy, members of a condominium association are named as additional insureds on the condominium’s CGL policy, or elective or appointed officers of a public corporation are named additional insureds on the public corporation’s policy.

What Limits of Liability Apply to an Additional Insured?

Finally, keep in mind that the coverage that is provided to an additional insured will not expand beyond the coverage provided to the named insured Company XENON, so the limits of liability under the Company XENON policy will apply to claims against Company ABLE as an additional insured.  If a serious claim is brought against Company XENON and Company ABLE that exceeds the limits of Company XENON’s policy, Company ABLE needs to have its own policy in place that will provide excess coverage.

If you have questions or need information regarding additional insured coverage, contact attorney Barbara Ross, a partner at Best & Flanagan LLP and Chair of the firm’s Insurance Practice Group or anyone of the other attorneys in the Insurance  Practice Group.

Best & Flanagan