What is 'Additional Insured' Coverage?
A common clause in an independent or subcontractor agreement is the requirement of an "additional insured" endorsement. A construction contract, especially when a subcontractor is performing for the general contractor, is an example of the type of arrangement that often requires this endorsement. In insurance policies, the term "insured" means a person or organization for whom the insurance company provides coverage and legal defense. When an organization is an additional insured, it provides some coverage for the additional insured in addition to its own insurance. The coverage for the additional insured is limited to the project that is being worked on jointly with the primary insured. In other words, this coverage will not cover the additional insured if that party is working on a separate project that is not related to the primary insured.
For example, assume that General Contractor hires Subcontractor to install the electrical system in a new building. In the contract, GC requires Sub to have GC named as an additional insured on Sub's liability policy. This will protect GC if a lawsuit names him and Sub for an accident involving Sub's work for GC.
Why would an organization want to be an additional insured?
- To have extra liability insurance in case of a serious accident.
- So that its own insurance will not have to pay for an accident that they may not have caused. This may be an underwriting requirement that allows them to get more favorable terms on their own policy.
- To limit its insurance premiums. Having coverage under someone else's policy makes it less likely that its own insurer will have to pay claims. Insurers often reduce premium rates to reflect that.
- Because the other party's insurer will provide it with legal defense.
The Insurance Services Office, which publishes many of the policy forms used by insurers, has several additional insured endorsements (an "endorsement" is a form added to a policy to change its terms.) They all have some common features:
- The additional insured has coverage only for accidents caused at least in part by the mistakes of the business named on the policy (the "named insured") or someone acting on that business's behalf. For example, GC has coverage under Sub's policy only for liability arising out of Sub's work for GC. Sub's insurance will not cover GC for accidents in which Sub was not involved.
- The additional insured is covered only to the extent permitted by state law.
- The additional insured's coverage is limited to what the contract between it and the named insured requires.
- The amount of the additional insured's coverage is either the amount stated in the policy or the amount required by the contract, whichever is less.
Five of ISO's additional insured endorsements apply to contractors:
- One applies to a single person or organization named on the endorsement. It covers the additional insured until the named insured completes its work for him.
- One also applies to a single person or organization named on the endorsement. It covers the additional insured for injuries or damages that result from the named insured's work, but that occur after completion. An example is fire damage resulting from faulty electrical work.
- One automatically covers anyone for whom the named insured is working if the contract between the two requires the coverage.
- One automatically covers anyone, whether or not the named insured is working for him, if a contract requires the coverage.
- One states that the named insured's policy will pay for losses covered by one of the other endorsements before the additional insured's policy will.
Some insurers use their own forms rather than ISO forms. These additional insured endorsements may differ significantly from the ISO endorsements. Contractors should examine them with their insurance agents to understand exactly what coverage they provide.
Additional insured coverage is a standard part of construction projects as well as other subcontract agreements when one party is performing for the other. It's part of winning a job as a subcontractor, and the cost of the insurance requirements should be taken into consideration when bidding on a project. You may have to purchase additional insurance to meet these requirements, and that is where your insurance agent comes in and can help you meet these requirements. This includes pricing the additional costs and addressing any additional issues it will take to secure this coverage.
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