While it is common to have multiple entities listed as “insureds” on a commercial liability policy, all parties insured by the policy are not treated equally. Therefore, it is critical that this often-overlooked section of the policy be set up properly, says Chris Zito, president of Zito Insurance Agency, Inc.
Smart Business spoke with Zito about what employers need to know about the types of insureds and the very different ways they’re treated in a policy.
What are the types of insureds that could be listed on your insurance policy?
Typically, there are three different types of insureds that may be included on a commercial liability policy: first named insured, additional named insured(s) and additional insured(s).
What exactly is a first named insured?
The first named insured is the entity that has ultimate control of the policy and is afforded unique rights, such as the ability to:
- Change coverage.
- Cancel the policy.
- Receive premium refunds.
- Receive cancellation or non-renewal notices.
- The first named insured also is legally responsible for:
- Paying the policy premiums.
- Filing claims and proof of loss.
- Submitting to a claims interview.
Because of these unique rights and obligations, it is important that the appropriate entity is listed in this position on the policy.
How does an additional named insured differ?
Additional named insureds are entities provided the same coverage as the first named insured, but they do not have the same rights and responsibilities as the first named insured.
What does an additional insured mean and why is it important?
With additional insureds, typically this is an entity unrelated to the first or additional named insured, which has been added to the policy by endorsement in order to satisfy a contractual requirement. Examples are a landlord, lessor of equipment, a higher tier contractor on a construction project, etc.
There are a number of additional insured endorsements used depending on the situation, all of which provide different levels of protection, so it is very important that the correct form is used to meet the intended purpose. Since additional insured are often confused with a named insured, it is important that contracts containing insurance requirements be carefully reviewed — ideally by your insurance agent or broker before signing.
One consideration to be conscious of when adding an additional insured to your policy, is that you are sharing the coverage limits available under your policy with these entities. Depending on how many additional insureds are listed and the nature of the relationship, a review of your coverage limits for adequacy may be in order.
What can be the consequences of a mistake with your insureds?
The schedule of named insureds is an area of the policy commonly overlooked, which can have severe consequences. With the exception of temporary coverage afforded to newly formed or acquired entities in some cases — typically 90 days or less — the insurance carrier is only obligated to provide a defense to entities that are specifically scheduled on the policy.
The type of organization (such as corporation, LLC, partnership or sole proprietor) is also significant because who within the entity is covered and how that company is covered by the policy is, in part, dictated by the type of business structure. It is also important that the legal name of the entity be reviewed for accuracy.
What’s your takeaway for employers?
As with any legal document ‘the devil is in the details,’ so paying proper attention to this particular detail can determine who will be writing the check to the defense attorney in the event that one of your companies is sued.
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