What is an Additional Insured and Why is Additional Insured Protection So Important?

With new legislation, court rulings, and insurance changes, keeping up with the world of compliance is anything but simple. As for picking risk management priorities, a topic stands out when it comes to keeping a company covered against loss events – additional insured endorsements. Get them right and a company benefits from an added layer of insurance protection. Get them wrong and the costs can be catastrophic. In this five-minute read, our team of insurance experts answers some common questions on how to make sure additional insured endorsements are ready to go when needed most.

What is an Additional Insured Endorsement?

Additional insured endorsements extend coverage from a subcontractor, vendor, or other third party’s insurance policy to another entity, typically the contracting party. The third party, who is the “named insured” or policyholder, will add other entities like a general contractor or property manager as required by the contract to their policy as additional insureds. The additional insured benefits from coverage and rights under the named insured’s policy in the event of a claim. The purpose of additional insured endorsements is to keep the burden of risk closest to those parties most likely to create losses, which typically is third parties contracted to perform the work.

In managing compliance, the first step is issuing a certificate of insurance request from the third party. This verifies that the business has adequate insurance coverage. The second step is requiring an additional insured endorsement, which is an amendment to the third party’s policy conveying coverage upstream.

What is Most Important When it Comes to Additional Insured Endorsements?

Additional insured status relies on the details of the contract. Keep two important things in mind to ensure an additional insured endorsement is in good standing:

• The Contractual Relationship Must Match

Most insurance policies require that the relationship between businesses be disclosed to extend coverage. For an additional insured endorsement to take effect, the contractual relationship and policy relationship must match between upstream and downstream parties.

Let’s use a property management example to illustrate. Best Properties manages Metropolis Mall. Real Good Food, a new restaurant, has decided to lease space in the mall. Best’s lease agreement requires that Real Good Food add the lessor as an additional insured on its general liability policy. To comply, Real Good Food would need to list their relationship with Best as lessor/lessee when setting up the endorsement on its policy. Citing a different relationship, such as franchisor/franchisee, could nullify coverage for Best Properties should a claim arise.  

• Name Non-Signatory Parties as Additional Insureds

Additional insured endorsements require 1) a direct contractual relationship between two parties (signatories) or 2) that the contract specify all parties that must be added to the policy. Without including these details in the contract, the additional insured endorsement may cover only the signatory as an additional insured.

Building on the previous example, Ready Real Estate owns Metropolis Mall. They contracted with Best to manage the property. Best issued the lease to the restaurant. Ready Real Estate and Real Good Food do not have a direct contractual relationship. However, Ready stands to lose a great deal of money should Real Good Food have a kitchen fire that causes thousands of dollars in damage to the building. Therefore, in Best’s lease agreement, the contract specifies that the restaurant must include both Best Properties and Ready Real Estate as additional insureds. Even though Ready is a non-signatory, they gain coverage through Real Good Food’s policy should a loss occur. Without this contractual requirement, they would not.

Do You Have the Certificate of Insurance Tracking Help You Need?

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