Words of caution on additional insured agreements: The rules have changed

Additional insured — it’s a standard practice in most industries to require vendors to protect you under their insurance policies. These insurance transfers occur most frequently when hiring companies to do construction, maintenance or security, or if you’re leasing space.

“The concept is if I hire you to do work for me, I don’t want to be liable for you. I don’t want to be responsible for what you may do wrong, so I want you to cover me with your insurance” says Brian Chance, MBA, CPCU, AIC, vice president of Claims and Services at ECBM.

Over the years, the use of additional insured status has expanded to more than it was originally intended. So, the insurance industry responded by reigning in coverage.

Smart Business spoke with Chance about additional insured form changes and what this means for existing and future contracts.

When did the insurance industry change the standard forms? What has been the effect?

In April 2013, the insurance industry tightened how much coverage an additional insured can obtain. The new forms aren’t mandatory, so some carriers are still using older versions. However, if they aren’t using the new forms yet, they will soon try to integrate them in their customary practices.

It’s too soon to say how this is impacting businesses. However, the changes will take many by surprise when they discover they don’t have the coverage they thought they requested as part of a business transaction.

What is the biggest change to additional insured endorsements?

The forms now say the language in your contract or agreement governs the scope, extent and limit of coverage that the additional insured receives. For example, if you hire a roofing contractor, you might require that contractor to have $1 million of coverage and name you as an additional insured. Then, let’s say, the contractor accidentally burns down your neighbor’s $5 million building, and he or she sues you. In the past, you could use additional insured status to not only get the first $1 million but also higher limits through the contractor’s excess policies. Now, your limit is just the $1 million you requested.

Before, your contract requirements may not have been flawless, but you were able to get needed protection anyway. Under the new forms, if you are less than perfect in what you ask for, the policies won’t automatically give you what you really want.

What other changes minimize this coverage?

In addition to limits, another concern is the order the policy pays. If you go through the trouble of obtaining additional insured coverage, you want it to pay claims before your policy does. Your contracts need to require the additional insured coverage to be primary and yours to be excess.

Furthermore, carriers will only grant additional insureds the coverage that state law allows. At last count, 10 states, including Delaware and New York, don’t allow you to be an additional insured for your own negligence under another company’s policy. Those states passed statutes to stop negligent people from transferring the cost of their negligence to business partners. So, if your employee injures an employee of your contractor, that injured employee might sue your company. Before, you could use additional insured status to make the contractor pay for that lawsuit. The new language makes it harder to cherry-pick state law, limiting options when you are negligent.

Does it matter when a contract is signed?

No. You need to address this issue in your new contracts and look at existing contracts. Your existing contracts may not contain the right language to obtain the coverage you think you have under today’s policy forms. This is especially true for long-term contracts like lease agreements.

What’s the takeaway for business owners?

Any business owner who hires someone else or leases property is at risk for problems. You should review contracts and standard agreements with your risk management and insurance adviser to ensure you request the best you can get in your contracts.

It may be difficult to update old contracts, because it opens up negotiations to all terms, not just the insurance piece. You may not be able to act immediately, but if existing agreements are re-opened in the normal course of business, these additional insured insurance changes should be addressed.

Brian Chance, MBA, CPCU, AIC, is vice president of Claims and Services at ECBM. Reach him at (610) 668-7100, ext. 1325 or [email protected].

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