This is the same type of thing as failing to live up to the other terms of the contract—failing to pay the rent, failing to manufacture the goods in a certain way, or failing to complete a job in a certain time frame. They also are breaches of contract that aren't covered by general liability insurance.

 In addition to thinking of indemnification clauses and additional insured requirements in contracts as separate items, there are a number of areas that should be considered before agreeing to name an additional insured on a liability policy. Among them are:

 Direct Access to the Policy

Additional insureds may be given direct access to the named insured's policy for both defense and settlement, a fact that often is overlooked in the haste to negotiate the terms of a contract. An additional insured has the same rights under the policy as other "insureds". They can turn claims arising from additional insured activities directly over to the insurance carrier without consulting with the named insured. That consultation should occur when the decision is made to name the company an additional insured.

Right to Defense

In addition to paying judgments, the additional insured coverage provides defense for claims to which the coverage applies. This means that the insurance carrier does have to defend the additional insured as well as the named insured if both are involved in the same claim. This could require separate defense strategies and sets of counsel, especially if the interests of the named and additional insureds conflict.

 The right to defense is the same for both the named and additional insureds. Defense is provided when there appears to be coverage under the policy and coverage limits still are available.

Dilution of Limits

Judgments against both parties will be paid from the same set of limits. Every time an additional insured is added to a policy the coverage limits are diluted. Instead of the named insured carrying a dedicated $1,000,000 of coverage for each occurrence, it is carrying $1,000,000 per occurrence that it may have to share with all additional insureds that are involved in the claim. This sometimes comes as a shock to the named insured after the claim is turned over to the insurance carrier.

Is the Request Reasonable?

At times it seems as if some companies want to be added as additional insureds as a matter of routine. There should be a legitimate reason behind the request; the coverage should not be granted just because a company asks for it. Often, a party that is in the superior bargaining position automatically requests additional insured status as part of its standard requirements. It is worthwhile to question the request if a logical reason for it is not evident. Companies often will reconsider in the face of legitimate questions. The additional insurance requirement should be viewed as an area of negotiation and not a pre-set requirement.

Proper Flow of Coverage

In general, the party that has control over the work or property provides the primary insurance. As examples, the tenant who is occupying the building usually adds the building owner as additional insured. The manufacturer that is producing the product usually names the vendor as additional insured. The subcontractor who is installing the equipment usually names the contractor or owner as additional insured.

There are exceptions to this coverage hierarchy. However, it is worthwhile to think through the relationship before automatically agreeing to provide additional insured status.

Control of Coverage

The additional insured is at the mercy of the named insured in regard to scope and continuation of coverage. The evidence of additional insured status usually takes the form of a certificate of insurance or a policy endorsement. An additional insured rarely has the opportunity to review the named insured's entire policy and claims history. Aggregate limits may be impaired; limiting endorsements may be attached. Additional insureds probably will not be notified if the policy is canceled.  All of these factors could add up to problems when claims arise and the additional insured turns to the named insured's policy for protection.

Other Insurance

An additional insured may have access to two policies that apply to a claim: the policy on which it is named an additional insured and the policy that covers its general business activities. The company usually wants the policy on which it is an additional insured to be primary when both policies apply. There may be a conflict, however, between the other insurance clauses of the two policies. This could occur if they have identical other insurance clauses or if the clauses contradict one another. With either of these situations, the policies both may contribute to the loss on a pro-rata basis or a court could decide which is primary, which defeats the intention of the insureds.

In order to avoid this problem, the additional insured endorsement should be endorsed as primary. Since this may be difficult to negotiate, the additional insured could ask that its general business liability policy be endorsed as excess to valid coverage under an additional insured endorsement. Either of these methods should result in the additional insured coverage being used as the primary insurer.

Unintended Coverage

The additional insured endorsement should limit the coverage to the extent of the relationship between the named and additional insureds. Standard ISO endorsements do limit it to the applicable relationship, and care should be taken to do the same with additional insured endorsements that are manuscripted for special situations. The coverage should be limited to the specific work being performed, the specific contract requiring the coverage, or the specific relationship being insured (such as tenant-landlord). There are some who believe that the additional insured may be able to tap into the named insured's policy for broader coverage than was intended if the additional insured endorsement is not limited in this way.

Restrictions also should be placed on the amount and length of coverage being provided by the endorsement or more coverage might be provided than was intended. If only $1,000,000 of general liability coverage is required for the additional insured, the endorsement should reflect only that amount of coverage.

In other words, the extent of the additional insured coverage that is provided should be consistent with the breadth of the indemnification clause. 

Too often, requests for additional insured status are handled as just routine activity. They are "processed" by companies entering into contracts and by those who arrange insurance coverage. However, insufficient understanding of what additional insured status means, or a failure to study the reasoning behind the coverage request, can result is a serious misapplication of coverage—or no coverage at all.

Originally published January 30, 2012

Updated March 2, 2020